Helen of Troy Limited — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Helen of Troy is a global designer, importer, marketer and distributor of branded consumer products across Personal Care, Housewares and Healthcare / Home Environment. The filing covers the fiscal year ended February 29, 2012, with comparative fiscal years 2011 and 2010. The company sells in approximately 84 countries, with 77% of fiscal 2012 revenue generated in the United States.
Fiscal 2012 includes a full year of Kaz operations and two months of PUR operations. PUR was acquired from Procter & Gamble on December 30, 2011 for a net cash purchase price of $160.0 million and added water-filtration products to the Healthcare / Home Environment segment.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales revenue | $1,181.7 million | $777.0 million | +52.1% |
| Gross profit | $478.5 million | $349.2 million | +37.0% |
| Gross margin | 40.5% | 44.9% | -4.4 percentage points |
| Operating income | $139.4 million | $111.7 million | +24.7% |
| Operating margin | 11.8% | 14.4% | -2.6 percentage points |
| Net income | $110.4 million | $93.3 million | +18.3% |
| Diluted EPS | $3.48 | $2.98 | +$0.50 |
| Cash flow from operations | $103.9 million | $87.4 million | +$16.5 million |
| Capital and intangible expenditures | $16.1 million | $4.6 million | +$11.4 million |
SG&A increased to $339.1 million but declined to 28.7% of revenue from 30.3%. Interest expense increased to $12.9 million from $9.7 million, principally because of acquisition-related debt. The effective tax rate increased to 12.5% from 9.1%, largely because Kaz and PUR increased the proportion of U.S. taxable income.
Fiscal 2012 fourth-quarter revenue was $294.0 million, gross profit was $123.1 million and net income was $29.3 million, compared with fourth-quarter fiscal 2011 revenue of $237.1 million, gross profit of $103.8 million and net income of $24.4 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $21.8 million, compared with $27.2 million at fiscal 2011 year-end; $2.7 million was restricted cash held in Venezuela.
- Working capital was $109.6 million and the current ratio was 1.3:1, compared with $121.5 million and 1.4:1, respectively.
- Revolving credit borrowings were $171.1 million. The amended revolving facility provides up to $250.0 million and had $78.6 million of borrowing availability at year-end.
- Long-term debt was $178.0 million, including $3.0 million of current maturities. Total debt was approximately 43.8% of ending equity.
- The company was in compliance with its debt covenants. Debt agreements effectively limited additional borrowing to approximately $254.4 million and restricted dividends, share repurchases, additional debt, liens and certain acquisitions.
- The company stated that operating cash flow and available financing should provide sufficient resources for foreseeable liquidity needs. No cash dividends have been paid, and management intended to pay no dividend in fiscal 2013.
Material changes versus the prior comparable period
- Revenue growth was primarily acquisition-driven: acquisitions contributed $385.7 million of the $404.6 million year-over-year increase, while core business revenue increased $18.9 million.
- Kaz contributed a full fiscal year of revenue versus two months in fiscal 2011; PUR contributed $21.4 million during its first two months.
- Personal Care revenue increased 1.1% to $496.6 million, while operating income declined 1.9% to $62.2 million due primarily to higher promotional allowances and product costs.
- Housewares revenue increased 9.6% to $237.4 million, but operating income declined 2.5% to $44.9 million because of higher cost of goods sold.
- Healthcare / Home Environment revenue increased to $447.7 million from $69.1 million, although comparability is limited because fiscal 2011 included only two months of Kaz operations. Segment operating income increased to $32.4 million from $4.5 million.
- Gross margin contracted because Healthcare / Home Environment has lower margins and because product, raw-material, fuel and inbound transportation costs increased.
- Inventory increased $28.9 million to $246.1 million, partly because of planned inventory accumulation before the ERP upgrade and weaker-than-expected fourth-quarter shipments.
- No asset impairment charges were recorded in fiscal 2012, compared with $2.2 million in fiscal 2011.
Outlook, management commentary, risks and unusual items
Management was modestly optimistic about fiscal 2013 but remained cautious because of fuel and transportation costs, foreign-exchange uncertainty, potential Euro zone credit issues, raw-material cost variability, weak housing markets and uncertain international consumer demand. Management expected Housewares revenue growth in the mid- to high-single digits but was cautious about improving consolidated gross margin or SG&A ratios.
- Integration of Kaz and PUR remained a major execution priority, including ERP migration, European operations consolidation, supply-chain integration and realization of anticipated synergies.
- The company relies heavily on third-party manufacturing, principally in China; approximately 78% of fiscal 2012 cost of goods sold was manufactured by Far East vendors. Renminbi appreciation, labor shortages, inflation, tariffs and shipping disruptions could pressure margins and product availability.
- Approximately 72% of consolidated gross sales volume shipped from the Southaven, Mississippi and Memphis, Tennessee facilities, which operate near capacity during peak periods.
- Wal-Mart represented approximately 20% of revenue, Target 11% and the top five customers approximately 44%. Most major-customer relationships do not require minimum purchases.
- Goodwill and other intangible assets totaled $829.5 million, or approximately 58% of total assets. Future impairment charges remain possible if acquired businesses fail to meet projected revenue or profitability assumptions.
- Contractual obligations totaled $540.5 million, including debt, interest, open purchase orders, minimum royalties, advertising commitments, leases and capital spending. Uncertain tax positions of $13.2 million were excluded because payment timing could not be reliably estimated.
- The company maintained an effective internal control system, and Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
- The fourth quarter included the PUR acquisition and related financing. Fiscal 2011’s fourth quarter included $1.66 million of asset impairments; fiscal 2010’s fourth quarter included a $1.26 million Venezuelan currency devaluation charge.
Important facts for investors to verify
- Assess organic growth separately from acquisition-driven growth and evaluate full-year Kaz and PUR results on a comparable basis.
- Monitor whether gross-margin pressure from product costs, the lower-margin Healthcare / Home Environment segment and freight costs persists.
- Review debt maturities, revolving-credit usage, covenant headroom and the company’s ability to finance further acquisitions.
- Evaluate inventory levels, fourth-quarter shipment weakness and distribution-center capacity constraints.
- Review goodwill and intangible-asset carrying values, especially those recorded for Kaz and PUR, and the assumptions used in impairment testing.
- Track customer concentration, licensed-brand dependence and potential changes in major-retailer purchasing or pricing practices.
- Review tax audits, the $13.2 million uncertain-tax-position liability and the effect of acquisitions on future effective tax rates.