Helen of Troy Limited — Fiscal 2015 Second-Quarter Form 10-Q Summary
Business context and reporting period
Helen of Troy is a global designer, importer, marketer and distributor of consumer products across Housewares, Healthcare/Home Environment, Nutritional Supplements and Personal Care. The report covers the three and six months ended August 31, 2014. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
The Nutritional Supplements segment was formed through the June 30, 2014 acquisition of Healthy Directions and contributed two months of results. The acquisition added premium vitamins, minerals, supplements and direct-to-consumer capabilities.
Financial performance and key metrics
| Metric | Three months ended Aug. 31, 2014 | Three months ended Aug. 31, 2013 | Change |
|---|---|---|---|
| Net sales | $319.9 million | $319.4 million | Up 0.2% |
| Gross profit | $133.7 million | $123.3 million | Up 8.5% |
| Gross margin | 41.8% | 38.6% | Up 3.2 points |
| Operating income | $24.6 million | $30.4 million | Down 19.0% |
| Operating margin | 7.7% | 9.5% | Down 1.8 points |
| Net income | $18.8 million | $23.3 million | Down 19.2% |
| Diluted EPS | $0.65 | $0.72 | Down $0.07 |
| Metric | Six months ended Aug. 31, 2014 | Six months ended Aug. 31, 2013 | Change |
|---|---|---|---|
| Net sales | $631.7 million | $623.9 million | Up 1.3% |
| Gross profit | $253.3 million | $243.4 million | Up 4.0% |
| Gross margin | 40.1% | 39.0% | Up 1.1 points |
| Operating income | $47.7 million | $51.0 million | Down 6.4% |
| Net income | $35.2 million | $37.7 million | Down 6.6% |
| Diluted EPS | $1.21 | $1.17 | Up $0.04 |
| Adjusted diluted EPS | $2.03 | $2.03 | Flat |
Second-quarter SG&A increased 17.5% to $109.1 million, or 34.1% of sales versus 29.1% previously. Drivers included the higher-cost Nutritional Supplements segment, $3.61 million of Healthy Directions acquisition expenses, increased marketing spending and weaker operating leverage. Interest expense rose 82.4% to $4.0 million due to substantially higher borrowings.
- Housewares sales declined 0.8% in the quarter but increased 2.0% for the six-month period.
- Healthcare/Home Environment sales declined 5.1% in the quarter but increased 3.9% year to date.
- Nutritional Supplements contributed $24.6 million of sales and $0.1 million of operating income for two months.
- Personal Care sales declined 14.4% in the quarter and 12.8% year to date; six-month operating income fell 43.6%.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $18.0 million for the first six months, down from $57.1 million, primarily because of higher inventory and payments associated with former CEO succession obligations.
- Investing cash flow was an outflow of $199.6 million, including the $195.9 million Healthy Directions acquisition and $3.7 million of capital and intangible asset expenditures.
- Financing cash flow was an inflow of $136.3 million, reflecting $640.9 million of credit-line borrowings, $152.0 million of repayments, $76.9 million of long-term debt repayments and $273.6 million of share repurchases.
- Cash and cash equivalents declined to $24.7 million from $70.0 million at February 28, 2014.
- Inventory increased to $351.8 million from $289.3 million at February 28, 2014. Working capital was negative $133.9 million and the current ratio was 0.8:1.
- At August 31, 2014, the company had $488.9 million outstanding under its $570 million unsecured revolving facility, $1.3 million of letters of credit and $79.8 million of borrowing availability. The facility terminates December 30, 2015.
- Total debt included $488.9 million of revolving debt, $35.7 million of MBFC debt and $80.0 million of fixed-rate senior notes. Debt agreements were in compliance at the reporting date.
Material changes, outlook and risks
The principal strategic change was the Healthy Directions acquisition, funded with cash and debt. The related credit agreement amendment increased revolving capacity from $375 million to $570 million and raised the maximum leverage covenant to 3.25:1. The company also repurchased 4.17 million shares for approximately $278.3 million during the first six months, materially reducing weighted-average shares outstanding.
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management cited weak summer retail conditions, cautious consumers, lower store traffic, promotional pressure, competitive product launches, weather-sensitive demand and the shift toward internet sales. Internet-based customer sales grew approximately 35% in the quarter and 14% year to date, representing approximately 9% of consolidated sales in each period.
Unusual items included a $9.0 million non-cash impairment charge on Personal Care trademarks, $3.61 million of acquisition-related expenses and a $2.07 million tax benefit from resolving a foreign uncertain tax position. The filing also identifies risks from leverage and limited liquidity, floating interest rates, foreign exchange exposure, Chinese sourcing costs, Venezuelan currency uncertainty, retail concentration, supply-chain disruption, and regulatory, product-liability and reputational risks related to nutritional supplements.
The company believes operating cash flow and available financing will be sufficient for foreseeable needs, but its liquidity metrics weakened substantially following the acquisition and share repurchases. Contractual obligations totaled $520.3 million, including $289.4 million due within one year; uncertain tax liabilities of $11.0 million were excluded because payment timing could not be reliably estimated.
Most important facts for investors to verify
- Whether Personal Care sales and margins stabilize after the 14.4% quarterly decline and additional impairment charge.
- Healthy Directions’ post-acquisition revenue, profitability, integration progress and ability to generate expected synergies.
- Revolving debt reduction, covenant headroom, refinancing needs before the December 2015 facility maturity and exposure to higher floating rates.
- Inventory normalization and conversion of earnings into operating cash flow.
- The sustainability of reported EPS benefits from the 4.17 million-share repurchase and the company’s remaining $265.4 million repurchase authorization.
- Potential effects of Chinese currency and input-cost inflation, Venezuelan devaluation, foreign exchange movements and weather-sensitive demand.
- Regulatory compliance, product quality, product-liability exposure and consumer perception in the Nutritional Supplements segment.
- The impact of the new revenue-recognition standard, effective for the company beginning in fiscal 2018; the filing states that its eventual effect was still under evaluation.