Helen of Troy Limited — Form 10-Q Summary
Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-based global designer, importer, marketer and distributor of consumer products across four segments: Housewares, Health & Home, Nutritional Supplements and Beauty. The filing reports the unaudited quarter ended May 31, 2016, the first quarter of fiscal 2017, compared with the quarter ended May 31, 2015. The business is seasonal, with historically higher sales and operating income in the fiscal third quarter.
On March 18, 2016, the Company acquired Hydro Flask for approximately $209.26 million in cash. Hydro Flask contributed approximately $14.37 million of revenue and $2.62 million of net income during approximately two and a half months of the quarter and is reported in Housewares.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales revenue | $347.94 million | $345.35 million | 0.8% increase |
| Gross profit | $152.43 million | $143.32 million | 6.4% increase |
| Gross margin | 43.8% | 41.5% | +2.3 percentage points |
| SG&A | $122.13 million | $113.78 million | 7.3% increase |
| Operating income | $22.90 million | $26.54 million | 13.7% decrease |
| Operating margin | 6.6% | 7.7% | -1.1 percentage points |
| Net income | $19.03 million | $20.41 million | 6.8% decrease |
| Diluted EPS | $0.68 | $0.70 | Decrease of $0.02 |
| Cash flow from operations | $41.74 million | $37.82 million | Increase of $3.92 million |
Adjusted operating income was $44.58 million, or a 12.8% adjusted operating margin, compared with $38.42 million and 11.1% in the prior-year quarter. Adjusted income was $35.88 million and adjusted diluted EPS was $1.27, compared with $30.70 million and $1.06, respectively. These are non-GAAP measures and exclude specified impairment, litigation, amortization and share-based compensation items.
At May 31, 2016, cash and cash equivalents were $23.12 million, compared with $225.80 million at February 29, 2016. Current assets were $560.41 million and current liabilities were $277.39 million, producing working capital of $283.02 million and a current ratio of 2.0:1.
Total debt was $587.49 million, including $562.95 million of long-term debt excluding current maturities. The Company had a $650 million unsecured revolving credit commitment, $521.20 million of revolving borrowings, $1.50 million of outstanding letters of credit and $127.30 million of borrowing availability. The Company was in compliance with its debt covenants at May 31, 2016.
Investing activities used $214.41 million, primarily reflecting the $209.26 million Hydro Flask acquisition. Financing activities used $30.01 million, including net repayments under the credit agreement and $3.80 million of other long-term debt repayment. Ending debt-to-equity was 61.4%, compared with 46.6% in the prior-year comparison.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue was broadly flat because Hydro Flask and other acquisitions offset a 3.6% decline in core business revenue.
- Housewares revenue increased 29.8% to $84.60 million, including $14.37 million from Hydro Flask and $5.05 million of core growth. Segment operating income increased 38.6% to $15.50 million.
- Health & Home revenue increased 2.3% to $146.36 million, and operating income increased 14.1% to $9.60 million.
- Nutritional Supplements revenue declined 8.9% to $35.94 million. Segment operating income fell to a $5.27 million loss from income of $2.62 million, including a $5.00 million non-cash impairment charge.
- Beauty revenue declined 17.0% to $81.04 million, and operating income declined 29.1% to $3.07 million. The decline reflected foreign exchange, Venezuela, foot-care category weakness and retailer inventory adjustments.
- Gross margin improved due primarily to product mix, product rationalization, Hydro Flask accretion and lower product costs. SG&A increased to 35.1% of revenue from 32.9%, reflecting higher share-based compensation, patent litigation costs and weaker operating leverage.
- Operating income included $7.40 million of non-cash intangible impairment charges versus $3.00 million in the prior-year quarter, and a $1.47 million patent litigation charge.
- Interest expense increased to $3.65 million from $2.89 million because of higher debt balances, partly offset by lower average interest rates.
- The effective tax rate declined to 1.9% from 14.2%, primarily because of a $1.40 million benefit from resolving uncertain tax positions and a $1.10 million benefit from recognizing share-based compensation tax benefits in the income statement.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide a clear quantitative revenue, earnings or margin guidance target. Management expects Housewares growth to be supported by new products, category expansion, additional shelf space, internet and specialty distribution, and international distribution gains. The Company expects operating cash flow and available financing sources to fund foreseeable liquidity needs, while continuing to evaluate acquisitions and potential share repurchases subject to debt restrictions and business conditions.
- Venezuela adopted the DICOM exchange rate during the quarter. Venezuelan revenue declined to $0.23 million from $4.11 million, and operating income changed from $1.58 million of income to a $0.10 million loss. Management expects Venezuelan U.S.-dollar reported results to remain immaterial absent changes in the exchange system.
- The Company faces foreign-exchange exposure, particularly from the Chinese Renminbi, Mexican Peso, British Pound, Euro and Venezuelan Bolivar. Approximately 14% of quarterly revenue was denominated in foreign currencies.
- The Company recorded a $7.40 million non-cash impairment charge related to brand assets and trademarks in Beauty and Nutritional Supplements. Future deterioration in brand performance or outlook could result in additional impairments.
- Exergen Corporation obtained an additional $1.47 million of pre-judgment compensation in a patent dispute concerning forehead thermometers. Helen of Troy accrued the amount and appealed the judgment to the Federal Circuit on July 6, 2016.
- Debt is primarily floating-rate, creating exposure to higher interest rates. Debt agreements include leverage, interest coverage and net worth covenants, restrictions on additional debt and limitations on dividends and share repurchases.
- The Company depends substantially on discretionary consumer demand, major retail customers, foreign manufacturing and supply chains, seasonal demand, new product launches and the health of U.S. and international retail markets.
- Management identified no material changes to internal control over financial reporting and concluded that disclosure controls and procedures were effective as of May 31, 2016.
Important Facts for Investors to Verify
- Whether Hydro Flask sustains its reported margin profile and delivers the expected growth and integration benefits.
- Whether the core business can return to positive sales growth after the 3.6% year-over-year decline.
- The causes and durability of weakness in Nutritional Supplements and Beauty, including impairment risk.
- Cash generation, inventory growth and remaining borrowing capacity following the Hydro Flask acquisition.
- Compliance with debt covenants and the effect of floating interest rates on future interest expense.
- Developments in the Exergen patent appeal and any additional litigation exposure.
- Further Venezuelan currency changes and foreign-exchange effects on revenue, margins and cash flows.
- The sustainability of the unusually low 1.9% effective tax rate, including the impact of discrete tax benefits and the Company’s international tax structure.