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 Housewares, Health & Home, Nutritional Supplements and Beauty. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2017, the third quarter of fiscal 2018. The third quarter is historically the company’s highest-sales and highest-operating-income period.
Key Financial Metrics
| Metric | Three Months 2017 | Three Months 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Net sales | $453.0 million | $444.4 million | $1,191.1 million | $1,160.5 million |
| Gross profit | $201.8 million | $194.2 million | $526.2 million | $509.6 million |
| Gross margin | 44.5% | 43.7% | 44.2% | 43.9% |
| Operating income (loss) | $(15.6) million | $63.3 million | $1.2 million | $123.7 million |
| Net income (loss) | $(30.4) million | $57.6 million | $(15.6) million | $105.0 million |
| Diluted EPS | $(1.12) | $2.07 | $(0.58) | $3.74 |
| Adjusted operating income | $79.0 million | $73.4 million | $173.1 million | $165.9 million |
| Adjusted operating margin | 17.4% | 16.5% | 14.5% | 14.3% |
| Adjusted diluted EPS | $2.52 | $2.37 | $5.55 | $4.95 |
Reported operating results were heavily affected by non-cash impairment charges, restructuring costs and, for the nine-month period, a Toys “R” Us bankruptcy charge. Adjusted measures exclude selected charges and are non-GAAP measures.
- Segment sales: Third-quarter sales increased 2.6% in Housewares to $128.0 million and 6.2% in Health & Home to $191.0 million, while Nutritional Supplements declined 8.8% to $29.3 million and Beauty declined 2.8% to $104.7 million.
- Cash flow: Operating activities generated $107.6 million in the first nine months, compared with $139.1 million in the prior-year period. Capital and intangible-asset expenditures were $19.9 million.
- Cash and working capital: Cash and equivalents were $21.2 million at November 30, 2017. Working capital was $263.5 million and the current ratio was 1.7:1.
- Debt: Total debt was $426.2 million, including $382.0 million under the revolving credit agreement. The company had $606.4 million of revolver availability, subject to $7.6 million of outstanding letters of credit and covenant limitations.
- Balance sheet: Receivables increased to $302.4 million from $229.9 million at fiscal year-end; inventory was $285.6 million. Goodwill and other intangible assets declined substantially following impairment charges.
- Share repurchases: The company repurchased approximately 311,000 shares for $29.2 million during the first nine months. Approximately $364.9 million remained available under the authorization at November 30, 2017.
Material Changes Versus the Prior Comparable Period
- Sales grew 1.9% in the quarter and 2.6% year to date, primarily from online sales, new products, expanded distribution, international growth and favorable foreign exchange.
- Gross margin improved by 0.8 percentage points in the quarter and 0.3 percentage points year to date, supported by product mix, Leadership Brand growth and foreign exchange.
- Reported operating income declined sharply because of $82.2 million of third-quarter impairment charges and $1.3 million of restructuring charges. Year-to-date impairment charges totaled $136.3 million, compared with $7.4 million in the prior-year period.
- Nutritional Supplements was the principal area of deterioration. Year-to-date sales fell 8.9%, and segment operating loss was $138.4 million, including $132.3 million of impairment charges.
- Health & Home operating income increased to $50.2 million year to date from $39.2 million, while Housewares operating income increased to $71.6 million from $69.0 million. Beauty operating income declined to $17.9 million from $22.2 million.
- Operating cash flow decreased by $31.5 million, principally reflecting higher receivables and changes in accounts payable and other operating balances.
Guidance, Outlook, Risks and Unusual Items
- Strategic divestiture: On December 20, 2017, the company sold Healthy Directions and its subsidiaries, comprising the Nutritional Supplements segment, for $46 million in cash plus a supplemental payment targeted at $25 million, subject to performance and working-capital adjustments. The transaction was not reflected in the November 30 financial statements.
- Project Refuel: The restructuring plan targets approximately $8.0 million of annualized profit improvements and is expected to be completed by the first quarter of fiscal 2020. Estimated total restructuring charges are $3.2 million to $4.8 million; $1.3 million had been incurred through November 30, 2017.
- Tax reform: The December 2017 U.S. Tax Cuts and Jobs Act was expected to affect deferred tax assets and liabilities and impose tax on certain foreign earnings. The company expected to recognize the impact in the fourth quarter of fiscal 2018; the filing does not provide a clear final amount.
- Impairment risk: Further impairment charges or losses could result from strategic changes or the divestiture of Nutritional Supplements. The filing states that the amount of any future charge cannot be projected.
- Operating risks: Key risks include discretionary consumer spending, dependence on large retailers, retail traffic shifts to online channels, foreign exchange, foreign manufacturing and supply-chain disruption, product liability and recalls, weather and cough/cold/flu season variability, changing input costs, information systems and cybersecurity, and tax matters.
- Debt and interest-rate risk: Most debt carried floating rates, although a $100 million interest-rate swap effectively fixed a portion of the revolving debt through December 2021. The company was in compliance with debt covenants at November 30, 2017.
- Legal matters: The company continued to appeal the Exergen thermometer patent judgment. Management stated that other legal claims were not expected to have a material adverse effect, although loss contingencies involve uncertainty.
- Formal guidance: The filing does not provide a clear consolidated sales or EPS guidance range.
Important Facts Investors Should Verify
- Final proceeds from the Nutritional Supplements divestiture, including the supplemental payment and working-capital adjustment.
- Whether further impairment, restructuring or divestiture-related charges will be recorded.
- The fourth-quarter impact of U.S. tax reform and the timing of the expected $52.8 million tax benefit related to prior impairment charges.
- Cash conversion and receivables collection, given the increase in receivables and decline in operating cash flow.
- Debt repayment requirements, covenant headroom and exposure to floating interest rates.
- Sustainability of adjusted earnings growth after excluding impairment, restructuring, amortization, share-based compensation and other unusual items.
- Recovery prospects for Beauty and Nutritional Supplements and continued growth in Housewares, Health & Home and online channels.