Business Context and Reporting Period
Helen of Troy Limited is a global designer, importer and distributor of consumer products across Personal Care, Housewares and Healthcare/Home Environment. This unaudited Form 10-Q covers the three and nine months ended November 30, 2011, within the fiscal year ending February 29, 2012. The Healthcare/Home Environment segment reflects the Kaz acquisition completed December 31, 2010; therefore, year-over-year consolidated comparisons are materially acquisition-driven.
Key Financial Metrics
| Metric | Three months ended Nov. 30, 2011 | Year-over-year change | Nine months ended Nov. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $338.8 million | 65.3% | $887.7 million | 64.4% |
| Gross profit | $133.2 million | 43.6% | $355.4 million | 44.8% |
| Gross margin | 39.3% | Down 5.9 points | 40.0% | Down 5.5 points |
| Operating income | $41.8 million | 32.6% | $102.8 million | 25.5% |
| Operating margin | 12.3% | Down 3.1 points | 11.6% | Down 3.6 points |
| Net income | $32.9 million | 21.5% | $81.1 million | 17.6% |
| Diluted EPS | $1.04 | Up from $0.86 | $2.56 | Up from $2.20 |
| Cash flow from operations | Not separately provided | Not applicable | $56.2 million | Up from $33.6 million |
SG&A was $91.4 million for the quarter and $252.5 million year to date. SG&A declined to 27.0% and 28.5% of sales, respectively, compared with 29.9% and 30.2% in the prior comparable periods. Interest expense increased to $3.0 million for the quarter and $9.7 million year to date, primarily because of debt used to finance Kaz.
At November 30, 2011, cash and cash equivalents were $35.4 million, working capital was $229.3 million, and the current ratio was 1.7:1. Receivables were $229.2 million and inventory was $251.8 million. Total debt was $248.0 million, consisting of $70.0 million under the revolving credit facility, $3.0 million of current long-term debt and $175.0 million of noncurrent long-term debt.
Material Changes Versus the Prior Comparable Period
- Kaz contributed $128.6 million of quarterly sales and $322.7 million of nine-month sales, accounting for most of the consolidated revenue increase. On a pro forma basis, Healthcare/Home Environment sales increased 3.5% for the quarter and 3.2% year to date.
- Core-business sales increased 2.5% for the quarter and 3.4% year to date. Personal Care sales increased 1.7% and 2.4%, while Housewares sales increased 4.7% and 9.8%, respectively.
- Gross margin contracted principally because Healthcare/Home Environment has a lower gross margin than the other segments. Promotional discounts and product-cost increases also pressured the quarter.
- Quarterly operating income declined in Personal Care by 8.1% and in Housewares by 13.4%, despite higher sales, reflecting promotional activity, product-cost inflation and foreign-exchange effects. Healthcare/Home Environment generated $13.5 million of quarterly operating income and $20.7 million year to date.
- Cash flow from operations improved by $22.6 million year to date, but receivables and inventory increased by $40.8 million and $34.5 million, respectively, from February 28, 2011, reflecting seasonal business patterns.
- The Company repaid $53.0 million of long-term debt during the first nine months. Cash and investment resources also changed materially: all mutual funds were liquidated and the remaining auction-rate securities were sold for approximately 96% of par, leaving no investments reported at November 30, 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expects a significant portion of Healthcare/Home Environment operating income to be generated in the second half of the fiscal year because of Kaz's seasonality. The filing does not provide a clear consolidated earnings or revenue guidance figure.
- Management expects Housewares annual sales growth to remain in the mid-to-high single digits in fiscal 2012, while cautioning that growth may not sustain prior levels.
- Management remains cautious about gross margins because of China-related currency appreciation, raw-material and inbound-transportation cost variability, promotional discounts and transportation costs.
- The Company continues to upgrade its enterprise resource planning system and integrate Kaz and its supply chain. Execution problems could cause supply disruptions, late deliveries, order cancellations, lost product placement or charge-backs.
- On December 30, 2011, after the reporting date, the Company acquired PUR Water Purification Products for $160.0 million in cash, financed with new revolving-credit borrowings. The acquisition was assigned to Healthcare/Home Environment, and purchase accounting was incomplete when the filing was prepared.
- On December 15, 2011, the revolving-credit commitment was increased from $150.0 million to $250.0 million. As of November 30, the Company had $79.7 million of availability under the prior facility; after giving pro forma effect to PUR and the amendment, estimated additional debt capacity was approximately $195.4 million.
- The Company recorded a $9.1 million net increase in unrecognized tax benefits and an $11.2 million net increase in goodwill during the quarter, primarily related to Kaz pre-acquisition tax positions. Kaz tax examinations and proposed adjustments remain ongoing.
- Debt agreements contain leverage, interest-coverage and net-worth covenants and restrict certain additional debt, dividends and share repurchases. The Company was in compliance at November 30, 2011.
- Key risks include consumer and retail weakness, foreign-currency exposure, dependence on foreign manufacturing and China sourcing, raw-material inflation, leverage and interest-rate risk, acquisition integration, ERP implementation, tax audits, customer and licensor concentration, and potential impairment of goodwill and intangible assets.
Most Important Facts for Investors to Verify
- Assess the sustainability of reported growth after separating Kaz and other acquisition-related revenue from organic performance.
- Monitor whether gross-margin pressure from Kaz, promotions, currency and input costs persists after the PUR acquisition.
- Reconcile post-closing debt, interest expense, liquidity and covenant capacity after the $160.0 million PUR financing.
- Review the final purchase-price allocation, goodwill and intangible-asset amortization recorded for PUR.
- Track Kaz tax audits, the $9.1 million increase in unrecognized tax benefits and any resulting cash-tax exposure.
- Evaluate working-capital requirements, particularly the growth in receivables and inventory relative to operating cash flow.
- Confirm management’s subsequent fiscal-year revenue and earnings guidance, which is not clearly quantified in this filing.