HELEN OF TROY LTD annual report, FY2018

Helen of Troy Limited Form 10-K Summary

Business context and reporting period

Helen of Troy Limited is a Bermuda-based global consumer products company operating in Housewares, Health & Home, and Beauty. Key brands include OXO, Hydro Flask, Honeywell, Braun, PUR, Vicks, and Hot Tools. The filing reports the fiscal year ended February 28, 2018; the request references “2017 Q4,” but the filing is an annual report and separately provides unaudited fourth-quarter data.

On December 20, 2017, the company divested Healthy Directions and its Nutritional Supplements segment. That business is presented as discontinued operations for all periods. Continuing operations therefore exclude Nutritional Supplements.

Financial performance and liquidity

Metric	Fiscal 2018	Fiscal 2017	Change
Net sales	$1,489.7 million	$1,406.7 million	+5.9%
Gross profit	$622.1 million	$582.6 million	+6.8%
Gross margin	41.8%	41.4%	+0.4 points
Operating income	$169.1 million	$169.7 million	-0.4%
Operating margin	11.3%	12.1%	-0.8 points
Income from continuing operations	$128.9 million	$144.3 million	-10.7%
Diluted EPS from continuing operations	$4.73	$5.17	-8.5%
Net income	$44.4 million	$140.7 million	-68.4%
Diluted total EPS	$1.63	$5.04	-67.7%
Operating cash flow from continuing operations	$218.6 million	$212.5 million	+2.9%

Adjusted operating income, a non-GAAP measure, increased to $223.9 million from $209.9 million, and adjusted operating margin increased to 15.0% from 14.9%. Adjusted diluted EPS from continuing operations increased to $7.24 from $6.49. These measures exclude selected impairment, restructuring, litigation, tax, amortization, and share-based compensation items and should not replace GAAP results.

Housewares sales increased 9.5% to $457.8 million, supported by Hydro Flask, OXO, online sales, distribution gains, and new products.
Health & Home sales increased 7.9% to $682.6 million, benefiting from a stronger cough, cold and flu season, colder weather, online growth, and additional distribution.
Beauty sales declined 1.8% to $349.3 million, primarily because of weakness in personal care, partly offset by appliance growth.
Accounts receivable rose to $273.2 million from $229.4 million, while inventory declined to $251.5 million from $280.9 million.
Working capital was $258.2 million versus $267.9 million, and the current ratio was 1.9:1 versus 2.0:1.
Cash and cash equivalents were $20.7 million at year-end, compared with $23.8 million from continuing operations at the prior year-end.
Capital and intangible asset expenditures were $13.6 million, compared with $15.5 million in fiscal 2017.

Debt, liquidity, and capital allocation

Total debt was $289.9 million at February 28, 2018, including $269.4 million outstanding under the revolving credit agreement and approximately $24.3 million under the MBFC Loan. Long-term debt excluding current maturities was $288.0 million.
The company had a $1.0 billion unsecured revolving credit commitment, with $723.5 million available after outstanding borrowings and letters of credit.
The credit agreement matures on December 7, 2021. Debt is primarily floating-rate; an interest-rate swap effectively fixes rates on $100.0 million of credit-agreement borrowings.
The company reported compliance with its debt covenants. The agreements require a minimum interest coverage ratio of 3.00:1 and permit a maximum leverage ratio of 3.50:1, subject to defined calculations and conditions.
Financing activities used $262.2 million in fiscal 2018, including $197.0 million of net debt repayments and $73.1 million of share repurchases and related share retirements.
The board authorized up to $400 million of repurchases through May 2020; $328.0 million remained available at February 28, 2018. The company pays no cash dividend.

Material changes versus the prior comparable period

Sales growth accelerated to 5.9% from 1.0%, with core business growth of $71.7 million and a favorable foreign-currency effect of approximately $5.2 million.
Gross margin improved modestly, but GAAP operating income was essentially flat because fiscal 2018 included $15.4 million of Beauty trademark impairment charges, a $3.6 million Toys “R” Us bankruptcy charge, and $1.9 million of restructuring charges.
Income from continuing operations declined despite sales growth, primarily because of the unusual charges and a $17.9 million provisional tax expense related to the Tax Cuts and Jobs Act.
Total net income fell sharply because discontinued operations recorded an $84.4 million after-tax loss, including $83.5 million of after-tax impairment charges associated with Healthy Directions, partially offset by a gain on sale.
Fiscal 2018 included a full year of Hydro Flask results, compared with approximately eleven and one-half months in fiscal 2017.
Net debt decreased materially from the prior year, with long-term debt declining from $461.2 million to $288.0 million and the ending debt-to-equity ratio declining from 47.6% to 28.6%.

Guidance, outlook, management commentary, risks, and unusual items

Management expects Project Refuel to generate approximately $8.0 million of annualized profit improvements over the plan’s duration. The plan is expected to be completed by the first quarter of fiscal 2020, with total restructuring charges estimated at $3.2 million to $4.8 million; $1.9 million was recorded in fiscal 2018.
Management expects the Tax Act to reduce the ongoing annual effective tax rate by approximately one percentage point, primarily from the lower U.S. corporate tax rate. The fiscal 2018 tax impact was provisional and could be revised during fiscal 2019.
Management believes operating cash flow and available financing will fund foreseeable liquidity needs, including working capital, inventory, potential acquisitions, and possible additional share repurchases.
Online-related sales represented approximately 15% of consolidated sales, up from 12% in fiscal 2017, and grew more than 30%. Traditional brick-and-mortar retail remained pressured by lower store traffic and soft consumer spending.
Approximately 79% of sales were generated from U.S. shipments. Walmart represented approximately 15% of fiscal 2018 sales, Amazon approximately 13%, and the top five customers approximately 45%.
Approximately 74% of finished goods were manufactured in the Far East, primarily China. Key exposures include tariffs and trade barriers, supplier and logistics disruptions, raw-material and energy costs, and Renminbi appreciation.
Other material risks include customer concentration, retailer pricing and inventory demands, seasonality and weather, foreign-currency and floating-interest-rate exposure, licensed-trademark dependence, product liability and recalls, cybersecurity, tax uncertainty, goodwill and intangible-asset impairment, and dependence on third-party manufacturers and distribution facilities.
The company disclosed ongoing patent litigation involving Exergen. In March 2018, an appellate court reversed infringement findings on one of two patents and remanded the damages determination; the company had not adjusted its reserve because the outcome remained uncertain.
The company had $681.4 million of contractual obligations, including debt, interest, purchase orders, royalties, advertising, leases, and capital commitments. Uncertain tax positions were excluded because payment timing could not be reliably estimated.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that internal control was effective as of February 28, 2018.

Most important facts for investors to verify

Confirm the effect of the Healthy Directions divestiture, including the $25.0 million supplemental payment targeted for payment by August 1, 2019 and its performance-based adjustment.
Assess whether Beauty can recover from declining personal-care sales and whether additional trademark impairment charges are possible.
Reconcile GAAP earnings with adjusted results and separately evaluate the recurring versus unusual nature of impairment, restructuring, Toys “R” Us, tax-reform, amortization, and share-based compensation charges.
Monitor debt covenant compliance, floating-rate exposure, credit-facility availability, and the effect of further share repurchases on liquidity.
Evaluate customer concentration and the sustainability of Walmart, Amazon, online-channel, and broader e-commerce growth.
Review the status and potential financial effect of the Exergen patent litigation and other product-liability, recall, tax, and regulatory matters.
Test the sensitivity of margins and cash flow to China sourcing concentration, tariffs, the Chinese Renminbi, freight costs, and foreign-currency movements.
Confirm the final accounting for the Tax Act and any fiscal 2019 revisions to the provisional $17.9 million tax expense.