HELEN OF TROY LTD annual report, FY2013

Helen of Troy Limited — Form 10-K Summary

Reporting period: Fiscal year ended February 28, 2013. The filing also presents unaudited fourth-quarter data for the quarter ended February 28, 2013; the supplied metadata reference to “2012 Q4” does not match the filing period.

Business Context

Helen of Troy is a Bermuda-based global designer, importer, marketer and distributor of branded consumer products. Its three segments are Personal Care, Housewares, and Healthcare/Home Environment. Products are sold through mass merchants, drugstores, warehouse clubs, specialty retailers, e-commerce channels and distributors in approximately 80 countries. The United States represented 78.7% of fiscal 2013 net sales.

Fiscal 2013 included a full year of PUR operations, acquired from Procter & Gamble on December 30, 2011 for approximately $160.0 million. The acquisition was funded with short-term debt.

Financial Performance and Key Metrics

Metric	Fiscal 2013	Fiscal 2012	Change
Net sales	$1,288.3 million	$1,181.7 million	+9.0%
Gross profit	$518.2 million	$478.5 million	+8.3%
Gross margin	40.2%	40.5%	-0.3 percentage points
Operating income	$148.8 million	$139.4 million	+6.7%
Operating margin	11.5%	11.8%	-0.3 percentage points
Net income	$115.7 million	$110.4 million	+4.8%
Diluted EPS	$3.62	$3.48	+4.0%
Net cash from operations	$87.6 million	$103.9 million	Down $16.3 million

Segment sales: Personal Care declined 1.2% to $490.6 million; Housewares increased 9.1% to $259.0 million; Healthcare/Home Environment increased 20.3% to $538.7 million.
PUR contributed $86.7 million of incremental fiscal 2013 sales, or 7.3 percentage points of consolidated growth. Core business contributed $19.9 million, or 1.7 percentage points.
SG&A increased 8.9% to $369.4 million but remained 28.7% of sales.
Interest expense increased 3.3% to $13.3 million. The effective tax rate rose to 14.6% from 12.5%, primarily because acquisitions increased the proportion of U.S. taxable income.
Capital and intangible asset expenditures were $14.7 million. Investing activities used $13.9 million, compared with $152.0 million in fiscal 2012, which included the PUR acquisition.

Liquidity, Debt and Financial Position

Cash and cash equivalents were $12.8 million, including $2.2 million of restricted Venezuelan cash.
Working capital increased to $236.5 million from $109.6 million, and the current ratio improved to 1.8:1 from 1.3:1.
Accounts receivable increased to $219.7 million and inventory increased to $280.9 million. Inventory turnover declined to 2.7 times from 2.9 times.
Total debt at February 28, 2013 consisted of $82.0 million drawn under a $250.0 million revolving facility, $20.0 million of current maturities and $155.0 million of long-term debt. Revolver availability was $167.7 million after outstanding letters of credit.
Senior debt included $75.0 million due June 2014 and $100.0 million of 3.90% fixed-rate notes due January 2018. Debt agreements impose leverage, interest coverage, net worth, dividend and share-repurchase restrictions. The company reported compliance with its covenants.
Management stated that operating cash flow and available financing were expected to fund foreseeable needs, including $20.0 million annual principal payments beginning January 2014 and the $75.0 million maturity due in June 2014.

Material Changes Versus the Prior Comparable Period

Growth was primarily acquisition-driven: fiscal 2013 was the first full year of PUR operations, whereas fiscal 2012 included only two months.
Personal Care sales and operating income declined modestly because of weak retail conditions, competitive promotions, retailer product rationalization and unfavorable currency effects.
Housewares delivered higher sales and operating income, supported by dry food storage, bathroom accessories, salad preparation, infant and toddler products, warehouse-club growth and pricing.
Healthcare/Home Environment benefited from PUR, stronger thermometer and pharmacy humidifier demand, and favorable cough/cold/flu conditions, but faced seasonal inventory, pricing and shelf-placement pressures.
Gross and operating margins contracted slightly because of product-cost increases, currency effects and the lower-margin mix associated with Healthcare/Home Environment.
Operating cash flow declined as receivables and inventories increased, including PUR inventory purchases and pre-season appliance inventory buildup.
Debt was reduced materially from the prior year, with the revolving balance declining from $171.1 million to $82.0 million.

Outlook, Commentary, Risks and Unusual Items

The company expected Housewares sales growth in the mid-single digits in fiscal 2014, while cautioning that gross-margin improvement could be difficult because of sourcing, raw-material, fuel and transportation costs.
A new approximately $38.0 million, 1.3 million-square-foot distribution facility in Olive Branch, Mississippi was under construction. Healthcare/Home Environment operations were expected to move during the third quarter of fiscal 2014, with Personal Care appliance operations moving in early fiscal 2015.
The Healthcare/Home Environment segment was expected to migrate to the company’s upgraded global ERP system during the latter half of fiscal 2014. Transition, software and staffing issues could disrupt shipments or increase costs.
CEO performance-based compensation expense was $15.3 million in fiscal 2013. Illustrative, non-forecast pro forma expense was $23.1 million for fiscal 2014 and $43.0 million for fiscal 2015, assuming specified conditions; actual expense may differ materially.
The company recorded a $1.4 million unfavorable foreign-exchange impact in fourth-quarter fiscal 2013 following Venezuela’s currency devaluation. The filing states that no other non-routine fourth-quarter transactions were material.
Material risks include customer concentration, dependence on third-party manufacturers and Chinese sourcing, retailer pricing power, inventory and demand-forecast risk, distribution concentration, foreign currency exposure, debt covenants and refinancing needs, licensed-brand dependence, impairment of goodwill and intangible assets, tax audits, ERP implementation, cybersecurity and economic weakness.
Wal-Mart represented approximately 19% of fiscal 2013 sales, Target approximately 11%, and the top five customers approximately 42%. The company generally has no minimum-purchase commitments from major customers.
Goodwill and other intangible assets totaled $808.9 million, or approximately 55% of total assets. No impairment charges were recorded in fiscal 2013, but future impairment testing depends on projections and market conditions.
Contractual obligations totaled $587.3 million, including $280.4 million due within one year. The company also reported $15.8 million of uncertain tax positions with no reliably estimable payment timing.
Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.

Most Important Facts for Investors to Verify

Whether post-acquisition PUR growth is translating into sustainable organic sales and earnings growth.
The timing, final cost and operating benefits of the Olive Branch distribution facility and Healthcare/Home Environment ERP migration.
Inventory normalization, working-capital conversion and the causes of lower operating cash flow.
Refinancing or repayment plans for the $75.0 million debt maturity in June 2014 and compliance with debt covenants.
The effect of retailer concentration, pricing demands, promotional activity and private-label competition on margins.
Exposure to Chinese manufacturing costs, raw materials, transportation, foreign exchange and additional Venezuelan currency restrictions.
The sensitivity of goodwill and indefinite-lived intangible assets to weaker sales, margins or valuation assumptions.
Actual CEO incentive compensation expense versus the illustrative fiscal 2014 and 2015 amounts.
Potential outcomes of U.S., Hungarian and other tax audits and the $15.8 million uncertain-tax-position reserve.