Helen of Troy Limited: Fiscal 2013 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended November 30, 2012; filed January 9, 2013. Financial statements are unaudited and presented in thousands of U.S. dollars unless otherwise noted.
Business Context
Helen of Troy designs, imports, markets and distributes consumer products through three segments: Personal Care, Housewares, and Healthcare/Home Environment. The Healthcare/Home Environment segment includes the PUR water-filtration business acquired from Procter & Gamble on December 30, 2011 for a net cash purchase price of approximately $160 million.
Key Financial Metrics
| Metric | Three Months 2012 | Three Months 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Net sales | $374.6 million | $338.8 million | $962.2 million | $887.7 million |
| Gross profit | $148.5 million | $133.2 million | $386.6 million | $355.4 million |
| Gross margin | 39.6% | 39.3% | 40.2% | 40.0% |
| Operating income | $47.1 million | $41.8 million | $109.0 million | $102.8 million |
| Operating margin | 12.6% | 12.3% | 11.3% | 11.6% |
| Net income | $37.7 million | $32.9 million | $84.2 million | $81.1 million |
| Diluted EPS | $1.18 | $1.04 | $2.64 | $2.56 |
- Segment sales: Third-quarter Personal Care sales were $148.6 million, Housewares $67.8 million, and Healthcare/Home Environment $158.2 million. Nine-month sales were $378.6 million, $192.6 million, and $391.1 million, respectively.
- Cash flow: Operating activities provided $24.3 million for the first nine months, versus $56.2 million in the prior-year period. Investing activities used $5.6 million and financing activities used $24.4 million.
- Liquidity: Cash and equivalents were $16.1 million at November 30, 2012, down from $21.8 million at February 29, 2012. Working capital was $217.0 million and the current ratio was 1.6:1.
- Debt: The company had $143.4 million outstanding under its $250 million unsecured revolving facility, with approximately $106.2 million available after letters of credit. Long-term debt was $175.0 million. Total debt was approximately $318.4 million.
- Balance sheet: Receivables were $258.1 million and inventory was $306.3 million at November 30, 2012, compared with $195.3 million and $246.1 million, respectively, at February 29, 2012.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 10.6%; nine-month sales increased 8.4%. PUR contributed $28.1 million of third-quarter sales and $78.6 million of nine-month sales.
- Third-quarter Housewares sales increased 10.7%, while Healthcare/Home Environment sales increased 23.0%. Personal Care sales were essentially flat, declining 0.2%.
- For the nine-month period, Personal Care sales declined 2.2%, Housewares increased 8.2%, and Healthcare/Home Environment increased 21.2%.
- Third-quarter operating income increased 12.5% and net income increased 14.7%. Nine-month operating income increased 6.0%, while net income increased 3.8%.
- Gross margins improved modestly, but SG&A increased to 27.1% of sales in the quarter and 28.8% year to date, versus 27.0% and 28.5%, respectively.
- Operating cash flow declined substantially because of higher receivables and inventory. Inventory turnover decreased to 2.7 times from 3.0 times.
- Healthcare/Home Environment third-quarter operating income declined 16.3%, primarily because of product-packaging litigation costs and higher allocated corporate and shared-function costs, partly offset by PUR.
- The company began allocating substantially more shared corporate and operating costs to Healthcare/Home Environment: $4.25 million in the quarter and $12.47 million year to date, versus $1.51 million and $4.52 million in the prior-year periods.
Outlook, Risks and Unusual Items
- Management remained cautious about the remainder of fiscal 2013 because of weak consumer demand, promotional pressure, soft retail takeaway, shelf-placement challenges, supplier cost inflation and economic uncertainty in the United States, Europe and Latin America.
- Product costs may increase because of potential appreciation of the Chinese renminbi and higher labor and commodity costs in China. The company relies heavily on third-party manufacturing, particularly in China.
- The company reported $16.2 million of liabilities for uncertain tax positions and cannot reliably estimate the timing of any related payments.
- The company accrued $11.4 million through nine months for the CEO’s performance-based compensation, including cash, restricted stock, life-insurance policy value and performance-based restricted stock units. Future fiscal 2014 and 2015 performance awards could materially affect SG&A and net income.
- Debt agreements impose leverage, interest-coverage and net-worth covenants and restrict certain additional debt, asset sales, investments, dividends and share repurchases. The company was in compliance at November 30, 2012 and estimated that approximately $249.1 million of additional debt capacity remained under the agreements.
- Foreign-currency exposure affected results; approximately 18% of quarterly sales and 17% of year-to-date sales were denominated in foreign currencies. The company uses forward contracts, currency swaps and an interest-rate swap for hedging.
- In December 2012, the company committed to approximately $37 million for a new 1.3 million-square-foot distribution facility in Olive Branch, Mississippi, expected to become operational in the third quarter of fiscal 2014. Funding is expected from operating cash flow, the revolving facility and new long-term debt.
- Management stated that ordinary-course legal proceedings are not expected to have a material adverse effect. No goodwill or indefinite-lived intangible-asset impairment was recorded in fiscal 2013 testing.
Facts Investors Should Verify
- Whether elevated receivables and inventory convert to cash and whether operating cash flow recovers after the seasonal buildup.
- The sustainability of PUR’s sales and profitability contribution after transitional supply agreements phase out during fiscal 2014.
- Healthcare/Home Environment profitability after litigation costs and increased shared-cost allocations.
- Compliance with debt covenants, refinancing requirements for the $75 million note due June 2014, and funding for the new distribution facility.
- The effect of promotional activity, retail shelf placement, supplier constraints, China-related cost inflation and foreign-currency movements on margins.
- The ultimate amount and timing of uncertain tax-position payments and performance-based executive compensation.