Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy Limited is a global designer, importer, marketer and distributor of branded consumer products across Personal Care, Housewares and Healthcare/Home Environment. This filing covers the three and six months ended August 31, 2012, the second quarter and first half of fiscal 2013. The financial statements are unaudited and amounts are in thousands of U.S. dollars unless otherwise noted.
The Healthcare/Home Environment segment includes the PUR water-filtration business acquired from Procter & Gamble on December 30, 2011 for a net cash purchase price of $160 million.
Key financial metrics
| Metric | Three months ended Aug. 31, 2012 | Six months ended Aug. 31, 2012 |
|---|---|---|
| Net sales | $287.4 million | $587.6 million |
| Gross profit | $117.0 million | $238.2 million |
| Gross margin | 40.7% | 40.5% |
| Operating income | $30.8 million | $62.0 million |
| Operating margin | 10.7% | 10.5% |
| Net income | $23.0 million | $46.4 million |
| Diluted EPS | $0.72 | $1.46 |
| Operating cash flow | Not separately provided | $10.8 million |
For the six months, cash used in investing activities was $5.0 million and cash used in financing activities was $5.8 million. Cash and cash equivalents were $21.8 million at August 31, 2012, compared with $21.8 million at February 29, 2012.
At August 31, 2012, current assets were $574.1 million and current liabilities were $401.1 million, producing working capital of $173.1 million and a current ratio of 1.4:1. Inventory was $318.7 million, up from $246.1 million at fiscal year-end. Accounts receivable were $208.3 million.
Total debt was approximately $336.0 million, consisting of $161.0 million drawn under a $250.0 million revolving facility and $175.0 million of senior notes. Revolver availability was $88.4 million after outstanding letters of credit. Debt agreements limited additional borrowing capacity from all sources to an estimated $237.6 million. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Six-month sales increased 7.1% to $587.6 million, while three-month sales increased 3.6% to $287.4 million.
- Growth was primarily acquisition-driven: PUR contributed $26.3 million of second-quarter sales and $50.5 million of year-to-date sales. Core business sales declined 5.9% in the quarter and 2.2% year to date.
- Personal Care sales declined 2.5% in the quarter and 3.4% year to date. Housewares sales increased 1.1% and 6.9%, respectively. Healthcare/Home Environment sales increased 12.4% and 20.0%, respectively, including PUR.
- Gross margin increased 0.2 percentage points in the quarter and was unchanged year to date. Product cost increases and currency effects were offset in part by PUR's favorable margin contribution.
- SG&A increased 5.2% in the quarter and 9.3% year to date, rising to 30.0% of sales from 29.5% and 29.4%, respectively. Drivers included higher media advertising, PUR transition-service fees, incentive compensation, ERP-related depreciation and PUR amortization.
- Operating income increased 1.6% in both periods, but net income declined 2.6% in the quarter and 3.6% year to date. Higher effective tax rates were the principal factor, at 17.2% and 16.5% versus 10.7% and 10.4% in the prior-year periods.
- Operating cash flow fell to $10.8 million from $29.3 million, primarily due to working-capital timing and the purchase of PUR inventory from Procter & Gamble.
- Year-to-date Personal Care operating income fell 23.4%, while Healthcare/Home Environment operating income increased 107.8%, primarily because of PUR. Segment cost allocations also changed, including additional allocations to Healthcare/Home Environment.
Outlook, risks and unusual items
Management stated that U.S. retail conditions had begun to improve modestly, but remained cautious because of weak consumer confidence, limited job growth, potential tax increases and government spending cuts, European and Latin American recessionary conditions, promotional pressure, soft retail takeaway, shelf-placement challenges and supplier cost inflation. No specific consolidated earnings or sales guidance figures are provided in the filing text.
- Personal Care remains exposed to weak consumer spending, competitive promotions, retailer inventory reductions, supplier availability issues and foreign-exchange effects.
- Healthcare/Home Environment core sales were pressured by high retailer inventories following a warm winter and mild cold-and-flu season, lost shelf placement and foreign currency effects.
- Inventory levels increased substantially because of PUR inventory purchases, weak seasonal demand and advance ordering ahead of Chinese New Year factory holidays.
- The company depends heavily on suppliers and manufacturers in China and other foreign locations. Renminbi appreciation, labor and commodity inflation, shipping disruptions and supply-chain constraints could pressure margins.
- Approximately 16% of sales were denominated in foreign currencies. The company uses foreign-currency and interest-rate hedges, but remains exposed to unhedged movements.
- The $75.0 million floating-rate senior notes are hedged to an effective fixed rate of 6.01%; the $161.0 million revolver remains exposed to short-term interest-rate changes.
- Goodwill and indefinite-lived intangible asset testing produced no impairment charges in the first quarter of fiscal 2013. Goodwill and other intangible assets totaled $818.9 million net at August 31, 2012.
- Contractual obligations totaled $603.2 million, including $208.7 million of open purchase orders, $94.6 million of minimum royalties and $70.0 million of advertising and promotional commitments. Uncertain tax positions of $13.4 million were excluded because payment timing could not be estimated.
- The company accrued $5.0 million in cash and $1.05 million in restricted shares for the CEO's fiscal 2013 annual bonus, $1.06 million for a life-insurance bonus and $0.55 million for performance RSUs. Future performance-based compensation could materially affect SG&A and net income.
- Legal claims are described as arising in the ordinary course, with management stating that they are not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material changes in internal control.
Most important facts for an investor to verify
- Whether PUR-generated growth can offset continuing declines in the company's core businesses, particularly Personal Care and legacy Healthcare/Home Environment products.
- Inventory normalization, retailer sell-through and the risk of markdowns or working-capital pressure.
- Future effective tax rates following the acquisitions and the geographic mix of taxable income.
- Revolver utilization, covenant headroom, refinancing needs for the $75 million notes due in 2014 and other debt maturities through 2018.
- Margin sensitivity to Chinese sourcing costs, freight, promotional activity and foreign-exchange movements.
- Achievement of management's stated performance goals and the resulting CEO incentive compensation expense.
- Whether goodwill and intangible asset carrying values remain supportable if retail conditions or acquisition performance weaken.