Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy is a global designer, marketer and distributor of consumer products across four segments: Housewares, Healthcare/Home Environment, Nutritional Supplements and Beauty. The filing covers the three months ended May 31, 2015, the first quarter of fiscal 2016, compared with the three months ended May 31, 2014. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
The quarter included three months of Healthy Directions operations, acquired June 30, 2014, and two months of Vicks VapoSteam operations, acquired March 31, 2015.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales revenue | $345.3 million | $311.8 million | Up 10.8% |
| Gross profit | $143.3 million | $119.5 million | Up 19.9% |
| Gross margin | 41.5% | 38.3% | Up 3.2 points |
| SG&A expense | $113.8 million | $87.4 million | Up 30.2% |
| Operating income | $26.5 million | $23.1 million | Up 14.8% |
| Operating margin | 7.7% | 7.4% | Up 0.3 points |
| Net income | $20.4 million | $16.4 million | Up 24.5% |
| Diluted EPS | $0.70 | $0.55 | Up $0.15 |
| Operating cash flow | $37.5 million | $3.0 million | Up $34.5 million |
Adjusted operating income was $38.4 million, or an 11.1% adjusted operating margin, compared with $38.7 million and 12.4% in the prior-year quarter. Adjusted net income was $30.7 million versus $30.8 million, while adjusted diluted EPS increased to $1.06 from $1.04, primarily because of fewer diluted shares.
At May 31, 2015, cash and cash equivalents were $15.3 million, accounts receivable were $210.0 million and inventory was $299.3 million. Working capital was $297.3 million and the current ratio was 2.1 to 1.
Total debt was $438.8 million, including $345.0 million outstanding under the revolving credit facility, $60.0 million of senior notes and $33.8 million of MBFC debt. The company had $304.2 million of unused borrowing availability, subject to approximately $0.8 million of outstanding letters of credit. The company reported compliance with its debt covenants.
Segment performance and material changes
- Housewares: Revenue declined 2.4% to $65.2 million and operating income declined 14.2% to $11.2 million. Results reflected customer order timing, retailer inventory adjustments, lower closeout shipments and higher investments in new categories and advertising.
- Healthcare/Home Environment: Revenue increased 0.4% to $143.0 million and operating income declined 3.4% to $8.4 million. Foreign exchange reduced reported revenue by approximately $5.2 million. The VapoSteam acquisition contributed approximately $0.7 million of revenue.
- Nutritional Supplements: Healthy Directions contributed $39.4 million of revenue and $2.6 million of operating income, a 6.6% margin. The segment incurred $0.7 million of shared-service and corporate overhead allocations.
- Beauty: Revenue declined 4.7% to $97.7 million, while operating income increased to $4.3 million from $1.4 million. The comparison benefited from lower impairment charges, partly offset by foreign exchange, port disruption, retailer inventory adjustments and growth investments.
Core business revenue declined $6.5 million, or 2.1%. Acquisitions added $40.1 million of revenue, consisting of $39.4 million from Healthy Directions and $0.7 million from VapoSteam. Foreign currency movements reduced consolidated reported revenue by approximately $7.7 million.
Cash flow, liquidity and unusual items
- Operating cash flow improved primarily because of working-capital timing, including lower receivables and higher accounts payable.
- Investing cash flow used $45.5 million, including $42.8 million for the VapoSteam acquisition and $2.7 million for capital and intangible asset expenditures.
- Financing activities provided $10.9 million. The company drew $121.5 million and repaid $114.0 million under its revolving credit facility, repaid $1.9 million of other debt and received $5.0 million from employee option exercises and related tax benefits.
- The company recorded a $3.0 million non-cash impairment charge, or $2.7 million after tax, for a Beauty segment trademark. The prior-year quarter included a $9.0 million impairment charge.
- Gross margin benefited by approximately 4.0 percentage points from the Healthy Directions and VapoSteam acquisitions; core-business gross margin declined 0.8 percentage points, principally because of foreign exchange.
Outlook, management commentary and risks
Management expects VapoSteam to be accretive to fiscal 2016 EPS, but noted that the business is highly seasonal and its first-quarter revenue is not indicative of annualized performance. Management expects the OXO On premium kitchen-electrics line to begin shipping to retail stores in the second half of fiscal 2016. The transition of Nutritional Supplements fulfillment operations to the Southaven, Mississippi distribution facility was expected to be completed in the third quarter of fiscal 2016.
Management believes cash flows from operations and available financing will be sufficient for foreseeable liquidity needs. The company may pursue additional acquisitions and may repurchase shares under its remaining $265.4 million authorization, subject to debt covenants and business conditions. No shares were repurchased during the quarter.
Key risks include foreign-exchange volatility, higher interest rates on predominantly floating-rate debt, dependence on foreign manufacturing and shipping capacity, port and distribution disruptions, retailer concentration and order timing, consumer demand, acquisition integration, impairment of goodwill and intangible assets, product liability and regulatory risks in Nutritional Supplements, Venezuelan currency and governmental uncertainty, and compliance with debt covenants. The company reported no material changes to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- Separate acquisition-driven growth from core-business performance, particularly the $39.4 million Healthy Directions contribution.
- Assess the sustainability of the 41.5% consolidated gross margin after acquisition mix effects and foreign-exchange impacts.
- Monitor leverage, floating-rate exposure, covenant headroom and the $304.2 million of stated revolving-credit availability.
- Evaluate whether customer order timing, retailer inventory adjustments and the West Coast port disruption reverse in subsequent quarters.
- Review the assumptions supporting Beauty trademark valuations and the risk of further impairment charges.
- Track integration of Healthy Directions and VapoSteam, including fulfillment-transition execution and seasonal performance.
- Consider the non-GAAP adjustments when comparing adjusted results with GAAP earnings and other companies.