Helen of Troy Limited — Fiscal 2016 Second-Quarter Form 10-Q
Business context and reporting period
Helen of Troy designs, imports, markets and distributes branded consumer products through four segments: Housewares, Healthcare/Home Environment, Nutritional Supplements and Beauty. The filing covers the three and six months ended August 31, 2015, with comparisons to the corresponding periods ended August 31, 2014. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
Financial performance and key metrics
| Metric | Three months ended August 31, 2015 | Year-over-year change | Six months ended August 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $369.1 million | +15.4% | $714.5 million | +13.1% |
| Gross profit | $148.0 million | +10.7% | $291.3 million | +15.0% |
| Gross margin | 40.1% | Down 1.7 points | 40.8% | Up 0.7 points |
| Operating income | $32.4 million | +31.8% | $59.0 million | +23.6% |
| Operating margin | 8.8% | Up 1.1 points | 8.3% | Up 0.7 points |
| Net income | $24.5 million | +29.8% | $44.9 million | +27.3% |
| Diluted EPS | $0.84 | +$0.19 | $1.54 | +$0.33 |
| Adjusted diluted EPS | $1.12 | From $0.99 | $2.17 | From $2.03 |
Six-month operating cash flow was $51.6 million, compared with $18.0 million in the prior-year period. Investing cash flow used $48.7 million, including $42.8 million for the Vicks VapoSteam acquisition. Financing activities provided $4.2 million after debt activity and $50.0 million of common-stock repurchases. Cash and cash equivalents were $19.4 million at August 31, 2015.
At August 31, 2015, current assets were $633.9 million and current liabilities were $311.1 million, producing working capital of $322.9 million and a current ratio of approximately 2.0 to 1. Total debt was $479.3 million, including $23.8 million of current maturities, versus $433.2 million at February 28, 2015. The company had a $650 million unsecured revolving commitment, $385.5 million drawn, $1.5 million of letters of credit outstanding and approximately $263.0 million of stated borrowing availability, subject to a practical debt-incurrence limitation of $260.84 million. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth benefited from the Healthy Directions and Vicks VapoSteam acquisitions. Core-business sales increased 10.9% in the quarter and 4.5% for the six-month period.
- Healthy Directions contributed $38.0 million of second-quarter sales and $77.5 million for six months; comparability is limited because the prior-year periods included only two months of operations.
- Vicks VapoSteam, acquired March 31, 2015 for approximately $42.8 million, contributed $0.8 million of second-quarter sales and $1.5 million for six months.
- Foreign-currency movements reduced reported sales by approximately $8.6 million in the quarter and $16.4 million for six months. The company also recorded $2.1 million of year-to-date foreign-exchange losses in SG&A.
- Second-quarter gross margin declined because of currency effects and less favorable product and channel mix. Six-month gross margin improved primarily because of the Nutritional Supplements segment.
- SG&A increased 5.9% in the quarter but rose 16.7% for six months; the six-month SG&A ratio increased to 32.1% from 31.1%.
- The company recorded a $3.0 million non-cash impairment charge in the first quarter against a Beauty trademark, compared with a $9.0 million charge in the prior-year period.
- Interest expense declined to $2.5 million for the quarter and $5.4 million for six months, reflecting more favorable borrowing rates and lower average debt.
- The effective tax rate increased to 18.2% for the quarter and 16.4% for six months, partly because the prior-year period included a $2.07 million benefit from resolving an uncertain tax position.
- In August 2015, the company repurchased 556,591 shares for $50.0 million at an average price of $89.83 per share. Remaining repurchase authorization was approximately $215.3 million at August 31, 2015.
Guidance, outlook, commentary and risks
- No specific consolidated revenue or earnings guidance is provided in the filing.
- Management expected Housewares growth to normalize to the mid-single digits for the remainder of fiscal 2016 and did not expect meaningful full-year sales growth in Beauty.
- Management stated that Beauty had been reorganized to eliminate overlapping functions, improve scale and focus on consumer-centric innovation.
- The OXO On premium kitchen-electrics line began shipping in September 2015. Nutritional Supplements order fulfillment had been substantially transitioned to the company’s Southaven, Mississippi distribution facility.
- Management believed operating cash flows and available financing would fund foreseeable liquidity needs, including seasonal inventory purchases, receivables and potential acquisitions. The company may continue share repurchases, subject to debt covenants and business conditions.
- Key risks include foreign-exchange volatility, the August 2015 Chinese Renminbi devaluation, floating-rate debt exposure, leverage and covenant restrictions, dependence on foreign manufacturing and shipping capacity, retail and discretionary consumer demand, seasonal weather, acquisition integration, product liability and regulatory risks for supplements, potential intangible-asset impairments, Venezuelan currency controls and tax disputes.
- At August 31, 2015, the company had $896.5 million of disclosed contractual obligations, including debt, purchase orders, royalties, advertising, leases and interest. Uncertain tax liabilities of approximately $9.8 million were excluded because payment timing could not be reliably estimated.
- Management reported no material adverse effect expected from ordinary-course legal proceedings, effective disclosure controls, and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether acquisition-driven sales growth, particularly from Healthy Directions and VapoSteam, translates into sustainable organic growth.
- Whether currency pressure, product mix and higher investment spending continue to compress gross and operating margins.
- The company’s ability to reduce or manage the $479.3 million debt balance while remaining within leverage and other covenant limits.
- Seasonal inventory levels and operating cash conversion ahead of the peak fiscal third quarter.
- Beauty segment stabilization and the potential for additional impairment charges against goodwill or intangible assets.
- The effect of Chinese and other foreign-currency movements on sourcing costs, reported revenue and earnings.
- Future capital allocation among acquisitions, debt repayment and the remaining share-repurchase authorization.