Helen of Troy Limited — Q1 FY2013 Form 10-Q Summary
Business context and reporting period
Helen of Troy Limited is a global designer, importer, marketer and distributor of consumer products across Personal Care, Housewares and Healthcare/Home Environment. The filing covers the three months ended May 31, 2012, compared with the three months ended May 31, 2011. The financial statements are unaudited and reported in thousands of U.S. dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $300.21 million | $271.47 million | +10.6% |
| Gross profit | $121.15 million | $109.91 million | +10.2% |
| Gross margin | 40.4% | 40.5% | -0.1 percentage point |
| SG&A | $90.00 million | $79.26 million | +13.6% |
| Operating income | $31.15 million | $30.65 million | +1.6% |
| Operating margin | 10.4% | 11.3% | -0.9 percentage point |
| Net income | $23.47 million | $24.61 million | -4.6% |
| Diluted EPS | $0.74 | $0.78 | Down $0.04 |
| Cash flow from operations | $9.02 million | $4.42 million | +$4.60 million |
Cash and cash equivalents were $20.88 million at May 31, 2012, compared with $21.85 million at February 29, 2012. Working capital was $143.20 million and the current ratio was 1.4:1. Inventory increased to $259.99 million from $246.14 million at fiscal year-end, partly reflecting weaker Healthcare/Home Environment shipments following a warm winter and mild cold-and-flu season.
Total debt was approximately $336.00 million, comprising $158.00 million outstanding under the revolving credit facility and $178.00 million of senior notes. The revolver had a $250.00 million commitment, $91.65 million of borrowing availability and a December 2015 termination date. The company was in compliance with all debt covenants and reported capacity to incur an estimated $251.80 million of additional debt, subject to covenant limitations.
Investing activities used $2.62 million, including $3.37 million of capital and intangible-asset expenditures. Financing activities used $7.36 million, reflecting $59.95 million of revolver borrowings, $73.05 million of repayments and $5.54 million from stock-option exercises and related tax benefits.
Material changes versus the prior comparable period
- Healthcare/Home Environment sales increased 27.8% to $122.41 million, including $24.29 million from the PUR water-filtration business acquired from Procter & Gamble on December 30, 2011.
- Housewares sales increased 13.8% to $60.25 million, partly due to seasonal closeout sales, new products, price increases and expanded distribution.
- Personal Care sales declined 4.2% to $117.55 million, driven by weak retail conditions, competitive promotions, product availability issues and foreign-currency effects.
- PUR contributed 8.9 percentage points of consolidated sales growth; core business contributed 1.6 percentage points.
- Personal Care operating income fell 40.2% to $11.88 million. Housewares operating income rose 3.8% to $11.28 million, while Healthcare/Home Environment operating income increased to $7.99 million from a $0.06 million loss.
- SG&A rose to 30.0% of sales from 29.2%, reflecting higher advertising, PUR transition-service fees, incentive compensation, ERP-related depreciation, PUR amortization and foreign-exchange losses.
- The effective tax rate increased to 15.7% from 10.1%, primarily because acquisitions increased the proportion of taxable income earned in higher-tax jurisdictions.
Outlook, commentary, risks and unusual items
Management remained cautious about the balance of fiscal 2013 because of weak consumer sentiment, slowing economic growth, European recessionary conditions, promotional pricing, supplier cost pressure and uncertainty in retail demand. Management indicated that Housewares growth should normalize to mid- to high-single digits after the quarter’s closeout activity, which concentrated some sales earlier than usual.
The PUR acquisition was funded entirely with short-term debt and introduced transition-service and supply arrangements with P&G. Management expects to acquire remaining PUR inventory from P&G when certain services end in the second quarter of fiscal 2013. No goodwill or indefinite-lived intangible-asset impairment was recorded in the quarter.
Key exposures include foreign-exchange volatility, China sourcing and potential increases in labor, commodity and transportation costs, supply-chain disruption, retailer concentration, product demand and promotional pressure, acquisition integration, leverage and covenant restrictions, information-system upgrades, tax audits and potential impairment of goodwill and intangible assets. The company reported no material change to previously disclosed risk factors and no legal matter expected to materially affect financial position, results or liquidity.
The company reported no formal quantitative earnings or sales guidance in the filing. It stated that operating cash flow and available financing are expected to fund foreseeable liquidity needs, while noting that future acquisition activity, share repurchases and performance-based executive compensation could affect cash requirements and earnings.
Investor verification points
- Verify the sustainability of PUR’s contribution to sales, margins and cash flow after transition services end.
- Monitor Personal Care demand, supplier availability, promotional intensity and recovery in consumer sentiment.
- Assess inventory levels and potential markdown or working-capital pressure, particularly in Healthcare/Home Environment.
- Review revolver utilization, upcoming senior-note maturities, interest-rate exposure and covenant headroom.
- Evaluate the effect of higher SG&A, amortization, advertising and performance-based compensation on future margins.
- Track foreign-currency movements and China-related sourcing costs, including the effectiveness and valuation of hedging instruments.
- Review the $619.90 million of disclosed contractual obligations and the $13.28 million liability for uncertain tax positions, for which payment timing was not reliably estimable.