Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy is a Bermuda-based global designer, marketer, importer and distributor of consumer products across four segments: Housewares, Health & Home, Nutritional Supplements and Beauty. The filing covers the three and nine months ended November 30, 2016, the third quarter and first nine months of fiscal 2017. The third fiscal quarter is historically the company’s strongest seasonal period. Hydro Flask, acquired March 18, 2016, is included in Housewares.
Financial performance and key metrics
| Metric | Three months ended Nov. 30, 2016 | Three months ended Nov. 30, 2015 | Nine months ended Nov. 30, 2016 | Nine months ended Nov. 30, 2015 |
|---|---|---|---|---|
| Net sales | $444.4 million | $445.5 million | $1,160.5 million | $1,160.0 million |
| Gross profit / margin | $194.2 million / 43.7% | $182.5 million / 41.0% | $509.6 million / 43.9% | $473.8 million / 40.8% |
| Operating income / margin | $63.3 million / 14.2% | $55.6 million / 12.5% | $123.7 million / 10.7% | $114.6 million / 9.9% |
| Net income | $57.6 million | $46.8 million | $105.0 million | $91.6 million |
| Diluted EPS | $2.07 | $1.63 | $3.74 | $3.17 |
- Quarterly sales declined 0.2%, while year-to-date sales were essentially flat. Core-business sales declined 8.0% in the quarter and 6.7% year to date, offset primarily by Hydro Flask acquisition revenue.
- Quarterly SG&A increased 3.2% to $130.9 million, or 29.5% of sales, from 28.5% previously. Year-to-date SG&A increased 6.3% to $378.5 million, or 32.6% of sales.
- Quarterly adjusted operating margin was 16.5%, compared with 16.0%; year-to-date adjusted operating margin was 14.3%, compared with 13.0%. Adjusted diluted EPS was $2.37 for the quarter and $4.95 year to date.
- Net cash provided by operating activities was $139.1 million year to date, compared with $73.7 million in the prior-year period. Capital and intangible asset expenditures were $15.0 million.
- Investing cash use was $224.2 million, including $209.3 million paid for Hydro Flask. Financing cash use was $123.9 million, including $75.0 million of common-stock repurchases.
Segment performance
| Segment | Q3 2016 sales | Year-over-year change | Q3 operating income |
|---|---|---|---|
| Housewares | $124.7 million | +42.0% | $29.2 million |
| Health & Home | $179.8 million | -3.5% | $20.2 million |
| Nutritional Supplements | $32.2 million | -14.2% | $(0.1) million |
| Beauty | $107.7 million | -19.5% | $14.0 million |
Housewares growth was driven by Hydro Flask and modest core-business growth. Health & Home was affected by weaker humidifier demand, carryover retailer inventory and reduced hot/cold therapy activity, partly offset by PUR filtration and air purification. Nutritional Supplements declined because of lower volumes, lower order values, promotional pricing and the transition from offline and print-based sales to online channels. Beauty remained pressured by retail inventory rationalization, weaker store traffic, competitive conditions, category de-emphasis and Venezuela-related effects.
Liquidity, debt and financial position
- Cash and cash equivalents were $16.8 million at November 30, 2016, compared with $225.8 million at February 29, 2016.
- Current assets were $620.1 million and current liabilities were $327.5 million, producing working capital of $292.6 million and a current ratio of 1.9:1.
- Total debt was $564.9 million, consisting principally of $495.3 million under the revolving credit agreement, $39.7 million of 3.90% Senior Notes and $29.9 million under the MBFC Loan. Debt-to-equity was 57.7%, compared with 48.6% at the prior-year comparable period.
- At November 30, 2016, the revolving facility had a $650 million commitment, $498.1 million outstanding, $1.5 million of letters of credit and $150.4 million available. The company was in compliance with its debt covenants.
- On December 7, 2016, the revolving commitment was increased to $1.0 billion, maturity was extended to December 7, 2021, and acquisition-related leverage provisions were revised.
Material changes, outlook and unusual items
- Hydro Flask contributed $34.3 million of quarterly sales and $77.8 million of year-to-date sales, including $10.7 million and $22.4 million of net income, respectively. The acquisition cost approximately $209.3 million in cash.
- The company recorded $7.4 million of non-cash trademark impairment charges year to date, including $5.0 million in Nutritional Supplements and $2.4 million in Beauty. It also recorded a $1.47 million patent litigation charge related to the Exergen matter.
- Income tax rates declined to 3.7% for the quarter and 7.0% year to date, versus 11.8% and 14.1%, respectively. The decrease reflected tax-return finalization benefits, resolution of uncertain tax positions, share-based compensation tax benefits and jurisdictional mix.
- Venezuela was remeasured using the DICOM exchange rate. Venezuelan sales declined to $0.16 million in the quarter and $0.53 million year to date, from $7.20 million and $17.24 million, respectively. Management expects U.S.-dollar reported Venezuelan results to remain immaterial, subject to further government or currency changes.
- Management expects continued long-term Housewares growth from new products, category expansion, internet sales and distribution gains. It expects challenging Beauty conditions for the balance of fiscal 2017 and noted that a mild winter and weak cough, cold and flu season could reduce Health & Home replenishment orders.
- No specific quantitative earnings or revenue guidance is provided in the filing. Management states that operating cash flow and available financing are expected to fund foreseeable liquidity needs, while acquisitions and additional share repurchases remain possible subject to financing and covenant restrictions.
Principal risks and contingencies
- Foreign-exchange exposure, particularly involving the Chinese Renminbi, British Pound, Latin American currencies and the Venezuelan Bolivar, may materially affect reported results and margins.
- Approximately 80% of fiscal 2016 sales came from U.S. shipments; discretionary consumer demand, retail weakness, internet-driven channel disruption and retailer inventory rationalization remain significant risks.
- The company relies heavily on foreign manufacturing and supply chains, particularly in China, creating risks from tariffs, labor, shipping capacity, lead times and product costs.
- Floating-rate debt represented approximately $528.1 million of outstanding debt, exposing the company to higher interest expense if short-term rates rise.
- The Exergen patent judgment remains under appeal. The company accrued an additional $1.47 million during fiscal 2017 after a prior fiscal 2016 charge of approximately $17.83 million.
- Goodwill and intangible assets totaled approximately $1.13 billion net at November 30, 2016. Further impairment charges could result if brand performance or growth expectations deteriorate.
Important facts for investors to verify
- Whether Hydro Flask growth and margins offset continuing core-business sales declines after acquisition comparisons normalize.
- Whether Beauty and Nutritional Supplements stabilize, including the effectiveness of Beauty rationalization and the Nutritional Supplements shift to online channels.
- Fourth-quarter impairment testing results and any additional impact on goodwill or indefinite-lived trademarks.
- Cash generation, working-capital requirements and debt reduction after the Hydro Flask acquisition and $75 million share repurchase.
- Compliance with revised leverage and other debt covenants following the December 2016 credit agreement amendment.
- Future developments in Venezuela, foreign exchange rates, the winter weather and cold/flu season, and the Exergen appeal.