Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2018
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..... to …..
Commission file number: 001-14669
HELEN OF TROY LIMITED
(Exact name of registrant as specified in its charter)
Bermuda
74-2692550
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
Clarendon House
2 Church Street
Hamilton, Bermuda
(Address of principal executive offices)
1 Helen of Troy Plaza
El Paso, Texas
79912
(Registrant’s United States Mailing Address)
(Zip Code)
(915) 225-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at July 5, 2018
Common Shares, $0.10 par value, per share
26,342,986 shares
HELEN OF TROY LIMITED AND SUBSIDIARIES
FORM 10‐Q
TABLE OF CONTENTS
PAGE
PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Note 1 - Basis of Presentation and Related Information
Note 2 - New Accounting Pronouncements
Note 3 - Revenue Recognition
Note 4 - Discontinued Operations
Note 5 - Supplemental Balance Sheet Information
Note 6 - Goodwill and Intangible Assets
Note 7 - Share-Based Compensation Plans
Note 8 - Repurchase of Helen of Troy Common Stock
Note 9 - Restructuring Plan
Note 10 - Commitments and Contingencies
Note 11 - Long-Term Debt
Note 12 - Fair Value
Note 13 - Financial Instruments and Risk Management
Note 14 - Segment Information
Note 15 - Income Taxes
Note 16 - Earnings Per Share
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART 2.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
SIGNATURES
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (Unaudited)
May 31,
February 28,
(in thousands, except shares and par value)
2018
Assets
Assets, current:
Cash and cash equivalents
$
16,929
20,738
Receivables - principally trade, less allowances of $1,703 and $2,912
255,674
Inventory
256,268
Prepaid expenses and other current assets
13,831
Income taxes receivable
1,266
349
Total assets, current
543,968
Property and equipment, net of accumulated depreciation of $118,971 and $115,202
123,619
Goodwill
602,320
Other intangible assets, net of accumulated amortization of $171,474 and $167,354
298,915
Deferred tax assets, net
13,476
Other assets, net of accumulated amortization of $2,045 and $2,022
20,676
Total assets
1,602,974
1,623,717
Liabilities and Stockholders' Equity
Liabilities, current:
Accounts payable, principally trade
125,805
129,341
Accrued expenses and other current liabilities
131,174
168,261
Long-term debt, current maturities
1,884
Total liabilities, current
258,863
Long-term debt, excluding current maturities
298,239
287,985
Deferred tax liabilities, net
7,561
7,096
Other liabilities, noncurrent
14,614
14,691
Total liabilities
579,277
Commitments and contingencies
Stockholders' equity:
Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued
-
Common stock, $0.10 par. Authorized 50,000,000 shares; 26,317,046 and 26,575,634 shares
issued and outstanding
2,629
2,658
Additional paid in capital
233,783
230,676
Accumulated other comprehensive income
4,068
631
Retained earnings
783,217
780,494
Total stockholders' equity
1,023,697
Total liabilities and stockholders' equity
See accompanying notes to condensed consolidated financial statements.
2
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended May 31,
(in thousands, except per share data)
2017
Sales revenue, net
354,679
325,491
Cost of goods sold
208,121
193,921
Gross profit
146,558
131,570
Selling, general and administrative expense ("SG&A")
101,506
96,987
Asset impairment charges
4,000
Restructuring charges
1,725
Operating income
43,327
30,583
Nonoperating income, net
75
166
Interest expense
(2,687)
(3,725)
Income before income tax
40,715
27,024
Income tax expense (benefit)
2,542
(284)
Income from continuing operations
38,173
27,308
Loss from discontinued operations, net of tax
(381)
(21,440)
Net income
37,792
5,868
Earnings (loss) per share - basic:
Continuing operations
1.44
1.01
Discontinued operations
(0.01)
(0.79)
Total earnings per share - basic
1.42
0.22
Earnings (loss) per share - diluted:
1.43
1.00
Total earnings per share - diluted
Weighted average shares of common stock used in
computing earnings per share:
Basic
26,521
27,076
Diluted
26,614
27,245
3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Before
Tax (Expense)
Net of
(in thousands)
Tax
Benefit
(2,542)
284
Loss from discontinued operations
(484)
103
(33,931)
12,491
40,231
(2,439)
(6,907)
12,775
Other comprehensive income
Cash flow hedge activity - interest rate swap
Changes in fair market value
(61)
15
(46)
Adoption of ASU No. 2018-02
150
Subtotal
165
104
Cash flow hedge activity - foreign currency contracts
4,576
(622)
3,954
(2,245)
316
(1,929)
Settlements reclassified to income
(687)
64
(623)
(302)
54
(248)
3,889
(556)
3,333
(2,547)
370
(2,177)
Total other comprehensive income (loss)
3,828
(391)
3,437
Comprehensive income (loss)
44,059
(2,830)
41,229
(9,454)
13,145
3,691
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Cash provided by operating activities:
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization
7,982
8,341
Amortization of financing costs
255
210
Provision for doubtful receivables
369
32
Non-cash share-based compensation
6,324
3,138
Non-cash intangible asset impairment charges
Loss (gain) on the sale or disposal of property and equipment
(10)
Deferred income taxes and tax credits
3,098
(768)
Changes in operating capital, net of effects of acquisition of businesses:
Receivables
19,522
21,921
Inventories
(4,757)
(24,072)
(2,344)
(679)
Other assets and liabilities, net
305
(2,901)
Accounts payable
(3,536)
25,365
(35,253)
(20,713)
Accrued income taxes
(1,259)
(1,336)
Net cash provided by operating activities - continuing operations
28,911
39,836
Net cash provided (used) by operating activities - discontinued operations
1,907
Net cash provided by operating activities
28,530
41,743
Cash used by investing activities:
Capital and intangible asset expenditures
(4,182)
(4,082)
Proceeds from the sale of property and equipment
13
Net cash used by investing activities - continuing operations
(4,069)
Net cash used by investing activities - discontinued operations
(8,945)
Net cash used by investing activities
(13,014)
Cash used by financing activities:
Proceeds from line of credit
161,200
131,200
Repayment of line of credit
(149,300)
(157,600)
Repayment of long-term debt
(1,900)
(5,700)
Proceeds from share issuances under share-based compensation plans
3,391
3,580
Payment of tax obligations resulting from cashless share award settlements
(4,481)
(6,788)
Payments for repurchases of common stock
(37,067)
Net cash used by financing activities - continuing operations
(28,157)
(35,308)
Net cash used by financing activities - discontinued operations
Net cash used by financing activities
Net decrease in cash and cash equivalents
(3,809)
(6,579)
Cash and cash equivalents, beginning balance
23,087
Cash and cash equivalents, ending balance
16,508
Less: Cash and cash equivalents of discontinued operations, ending balance
(598)
Cash and cash equivalents of continuing operations, ending balance
17,106
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
May 31, 2018
The accompanying condensed consolidated financial statements contain all adjustments (consisting of of normal recurring adjustments) necessary to present fairly our consolidated financial position as of May 31, 2018 and February 28, 2018, and the results of our consolidated operations for the interim periods presented. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2018, and our other reports on file with the Securities and Exchange Commission (the “SEC”).
When used in these notes, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries. We refer to our common shares, par value $0.10 per share, as “common stock.” References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to United States (“U.S.”) generally accepted accounting principles. References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have three segments: Housewares, Health & Home, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation tools and storage containers; cleaning, bath and garden tools and accessories; infant and toddler care products; and insulated beverage and food containers. The Health & Home segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our Beauty segment products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid-, solid- and powder-based personal care and grooming products.
On December 20, 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The results of the Nutritional Supplements operations have been reported as discontinued operations for all periods presented in the consolidated financial statements. For more information, see Note 4 to these condensed consolidated financial statements. All other notes present results from continuing operations.
Our business is seasonal due to different calendar events, holidays and seasonal weather patterns. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results may differ materially from those estimates.
Our condensed consolidated financial statements are prepared in U.S. Dollars. All intercompany
6
accounts and transactions are eliminated in consolidation.
We have reclassified, combined or separately disclosed certain amounts in the prior years’ condensed consolidated financial statements and accompanying footnotes to conform with the current period’s presentation, including reclassifications for discontinued operations (see Note 4) and the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (see Notes 2 and 3).
Note 2 – New Accounting Pronouncements
Not Yet Adopted
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities (Topic 815), which amends and simplifies hedge accounting with the intent of better aligning financial reporting for hedging relationships with an entity's risk management activities. The ASU is effective for us March 1, 2019. We are currently evaluating the impact this guidance may have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The ASU must be adopted using a modified retrospective transition and requires the new guidance to be applied at the beginning of the earliest comparative period presented. The ASU is effective for us on March 1, 2019. We are currently evaluating the impact this guidance may have on our consolidated financial statements.
There have been no other accounting pronouncements issued but not yet adopted, which are expected to have a material impact on our consolidated financial statements.
Adopted
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (Topic 718). This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
In January 2017, the FASB, issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance provides for a single-step quantitative test to identify and measure impairment, requiring an entity to recognize an impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. Adoption of this guidance in the first quarter of fiscal 2018 did not have a material impact on our consolidated financial statements.
7
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra–Entity Asset Transfers of Assets Other Than Inventory (Topic 740). ASU 2016-16 amends accounting guidance for intra-entity transfers of assets other than inventory to require the recognition of taxes when the transfer occurs. The amendment was effective for us on March 1, 2018. A modified retrospective approach is required for transition to the new guidance, with a cumulative-effect adjustment consisting of the net impact from (1) the write-off of any unamortized expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any valuation allowance. The new guidance does not include any specific new disclosure requirements. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a framework for revenue recognition that replaces most existing GAAP revenue recognition guidance. We adopted the guidance in the first quarter of fiscal 2019. See Note 3 for a further discussion regarding the impact of adoption of this guidance on our consolidated financial statements.
Note 3 – Revenue Recognition
We adopted the provisions of ASU 2014-09 in the first quarter of fiscal 2019, and we elected to adopt the standard using the retrospective method. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our revenue is primarily generated from the sale of non-customized consumer products to customers. Revenue is recognized when control of, and title to, the product sold transfers to the customer. Therefore, the timing and amount of revenue recognized is not materially impacted by the new guidance. We have thus concluded that the adoption of the guidance did not have a material impact on our consolidated financial statements. The provisions of the new guidance do however impact the classification of certain consideration paid to our customers. We therefore, have reclassified an immaterial amount of such payments from SG&A to a reduction of net sales revenue for all periods presented. Also, in accordance with the guidance, we reclassified an immaterial amount of estimated sales returns from a reduction of receivables to accrued expenses and other current liabilities for all periods presented. We have elected to adopt the guidance using the full restrospective method.
We measure revenue as the amount of consideration for which we expect to be entitled, in exchange for transferring goods. Certain customers may receive cash incentives such as customer discounts (including volume or trade discounts), advertising discounts and other customer-related programs which are accounted for as variable consideration. In some cases, we apply judgment, such as contractual rates and historical payment trends, when estimating variable consideration. In accordance with the guidance, most variable consideration is classified as a reduction to net sales.
Sales taxes and other similar taxes are excluded from revenue. We elected to account for shipping and handling activities as a fulfillment cost as permitted by the guidance. We do not have unsatisfied performance obligations since our performance obligations are satisfied at a single point in time.
8
The effect of the adoption of ASU 2014-09 on the condensed consolidated financial statements is as follows:
Before Reclassification
After Reclassification
Balance Sheet (in thousands)
Reclassification
Receivables (1)
273,168
2,397
275,565
Accrued expenses and other current liabilities (1)
Three Months
Ended May 31,
Statement of Income (in thousands)
Sales revenue, net (1)
327,986
(2,495)
SG&A (1)
99,482
(1)
Reflects amounts from continuing operations.
Note 4 – Discontinued Operations
On December 20, 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The Nutritional Supplements segment sold premium branded doctor formulated nutritional supplements, skincare and pain relief products through highly targeted catalog and other printed collateral mailings, online and direct response print, radio and television media.
The purchase price from the sale is comprised of $46.0 million in cash, which was paid at closing, and a supplemental payment with a target value of $25.0 million, payable on or before August 1, 2019. The final amount of the supplemental payment may be adjusted up or down based on the performance of Healthy Directions through February 28, 2018. In conjunction with the sale of the business, we have agreed to provide certain transition services for up to an eighteen-month period following the closing of the transaction.
There were no balance sheet amounts related to discontinued operations for either period presented. The results of operations associated with discontinued operations are presented in the following table:
31,619
9,236
22,383
24,200
Asset impairment charges (1)
32,000
Operating loss
(33,817)
Gain (loss) on sale before income tax (2)
(114)
Loss before income tax
Income tax benefit
9
Includes pre-tax goodwill impairment charges of $26.0 million and indefinite-lived trademark impairment charges of $6.0 million during the first quarter of fiscal 2018. Total after tax asset impairment charges were $19.6 million for the first quarter of fiscal 2018.
(2)
Includes adjustments recorded in the first quarter of fiscal 2019 to the initial estimated gain on sale before income tax recorded in the fourth quarter of fiscal 2018.
Note 5 – Supplemental Balance Sheet Information
PROPERTY AND EQUIPMENT
Estimated
Useful Lives
(Years)
Land
12,800
Building and improvements
40
107,176
106,870
Computer, furniture and other equipment
80,581
79,657
Tools, molds and other production equipment
10
33,761
33,466
Construction in progress
8,272
5,912
Property and equipment, gross
242,590
238,705
Less accumulated depreciation
(118,971)
(115,202)
Property and equipment, net
123,503
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued compensation, benefits and payroll taxes
18,490
37,666
Accrued sales discounts and allowances
27,860
28,311
Accrued sales returns
23,169
24,842
Accrued advertising
28,077
25,324
Accrued legal fees and settlements
996
17,243
Other
32,582
34,875
Total accrued expenses and other current liabilities
OTHER LIABILITIES, NONCURRENT
Deferred compensation liability
5,650
6,736
Liability for uncertain tax positions
3,008
3,349
Other liabilities
5,956
4,606
Total other liabilities, noncurrent
Note 6 – Goodwill and Intangible Assets
Impairment Testing during the first quarter of Fiscal 2018 – During the first quarter of fiscal 2018, we performed interim impairment testing for a certain brand in our Beauty segment due to a revised financial projection. As a result of our testing, we recorded a non-cash asset impairment charge of $4.0 million ($3.6 million after tax).
The following table summarizes the carrying amounts and accumulated amortization for all intangible assets by segment as of the end of the periods presented:
February 28, 2018
Gross
Cumulative
Carrying
Accumulated
Net Book
Amount
Impairments
Amortization
Value
Housewares:
282,056
Trademarks - indefinite
134,200
Other intangibles - finite
40,932
(18,007)
22,925
40,828
(17,530)
23,298
457,188
439,181
457,084
439,554
Health & Home:
284,913
54,000
Licenses - finite
15,300
(15,300)
Licenses - indefinite
7,400
117,602
(79,832)
37,770
117,586
(77,128)
40,458
479,215
(95,132)
384,083
479,199
(92,428)
386,771
Beauty:
81,841
(46,490)
35,351
30,407
Trademarks - finite
(98)
52
(97)
53
10,300
13,696
(12,245)
1,451
(12,166)
1,530
46,402
(45,992)
410
(45,133)
1,269
182,796
(58,335)
77,971
(57,396)
78,910
Total
1,119,199
(171,474)
901,235
1,119,079
(167,354)
905,235
The following table summarizes the amortization expense attributable to intangible assets recorded in SG&A in the condensed consolidated statements of income for the periods shown below, as well as our estimated amortization expense for fiscal 2019 through 2024.
Aggregate Amortization Expense (in thousands)
For the three months ended
4,120
May 31, 2017
4,847
Estimated Amortization Expense (in thousands)
Fiscal 2019
14,039
Fiscal 2020
12,428
Fiscal 2021
10,383
Fiscal 2022
4,078
Fiscal 2023
4,050
Fiscal 2024
3,678
Note 7 – Share-Based Compensation Plans
We have equity awards outstanding under several share-based compensation plans. During the three months ended May 31, 2018, we had the following share-based compensation activity:
·
We issued 1,379 shares to non-employee Board members with a total grant date fair value of $0.1 million and a share price of $89.10.
We granted time-vested restricted stock units (“RSUs”) and performance-based stock units (“PSUs”) that may be settled for 70,141 and 76,064 shares of common stock with average fair values at the grant dates of $86.23 and $86.24 per unit, respectively.
Employee RSUs for 36,411 shares vested and settled with a total fair value at settlement of $3.2 million and an average share price of $89.09. Employee PSUs for 99,038 shares vested and settled with a total grant date fair value of $9.0 million, and an average share price of $90.80.
11
Employees exercised stock options to purchase 43,767 shares of common stock.
We recorded the following share-based compensation expense in SG&A for the periods shown below:
Stock options
308
539
Directors stock compensation
175
200
Performance based and other stock awards
5,571
2,459
Employee stock purchase plan
322
Share-based compensation expense
6,376
3,198
Less income tax benefits
(270)
(490)
Share-based compensation expense, net of income tax benefits
6,106
2,708
Impact of share-based compensation on earnings per share from continuing operations:
0.23
0.10
Note 8 – Repurchase of Helen of Troy Common Stock
On May 10, 2017, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The authorization is effective for a period of three years and replaced our existing repurchase authorization, of which approximately $82 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of May 31, 2018, our repurchase authorization allowed for the purchase of $286.5 million of common stock.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the equity holder can be paid for by having the equity holder tender back to the Company a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares.
The following table summarizes our share repurchase activity for the periods shown:
(in thousands, except share and per share data)
Common stock repurchased on the open market:
Number of shares
407,025
Aggregate value of shares
37,067
Average price per share
91.07
Common stock received in connection with share-based compensation:
49,595
70,707
4,481
6,788
90.36
95.99
12
Note 9 – Restructuring Plan
In October 2017, we announced that we had approved a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance of primarily the Beauty and former Nutritional Supplements segments. Project Refuel includes a reduction-in-force and the elimination of certain contracts and operating expenses. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $8.0 to $10.0 million over the duration of the plan. We estimate the plan will be completed by the first quarter of fiscal 2020, and now expect to incur total restructuring charges in the range of approximately $4.0 to $5.5 million during the period of the plan. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management, are revised periodically and restructuring amounts are recognized as incurred.
During the first quarter of fiscal 2019, we made cash restructuring payments of $1.1 million and had a remaining liability of $1.3 million as of May 31, 2018.
We incurred $1.7 million of pre-tax restructuring charges during the first quarter of fiscal 2019, related primarily to employee severance and termination benefits, mostly for shared service supply chain initiatives. Program to date, we have incurred $3.5 million of pre-tax restructuring costs related to employee severance and termination benefits and contract termination costs.
Note 10 – Commitments and Contingencies
Thermometer Patent Litigation – In January 2016, a jury ruled against us in a case that involved claims by Exergen Corporation. The case involved the alleged patent infringement related to two forehead thermometer models sold by our subsidiary, Kaz USA, Inc., in the United States. As a result of the jury verdict, we recorded a charge in fiscal 2016 including legal fees and other related expenses, of $17.8 million (before and after tax). In June 2016, certain post-trial motions were concluded with Exergen Corporation being awarded an additional $1.5 million of pre-judgment compensation. We accrued this additional amount in May 2016. In July 2016, we appealed the judgment to the United States Court of Appeals for the Federal Circuit. In March 2018, the Federal Circuit issued a decision, which reversed the district court’s verdict of infringement of one of the two patents at issue and remanded the damage award for a determination by the district court of the impact the reversal of infringement has on the damage award. Following the remand, we entered into a settlement agreement, filed a Stipulation of Dismissal with Prejudice and made a settlement payment of $15.0 million on May 31, 2018.
Other Matters – We are involved in various other legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. Notes 5, 11, 12 and 13 to these condensed consolidated financial statements provide additional information regarding certain of our significant commitments and contingencies.
Note 11 – Long-Term Debt
We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provided for an unsecured total revolving commitment of $1 billion as of May 31, 2018. The commitment under the Credit Agreement terminates on December 7, 2021. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time. We also incur loan commitment fees and letter of credit fees under the Credit
Agreement. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. As of May 31, 2018, the outstanding revolving loan principal balance was $281.3 million (excluding prepaid financing fees) and the face amount of outstanding letters of credit was $7.1 million. For the three-months ended May 31, 2018, borrowings under the Credit Agreement incurred interest charges at rates ranging from 2.8% to 5.0%. For the three-months ended May 31, 2017, borrowings under the Credit Agreement incurred interest charges at rates ranging from 2.3% to 4.5%. As of May 31, 2018, the amount available for borrowings under the Credit Agreement was $711.6 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur. As of May 31, 2018, these covenants effectively limited our ability to incur more than $547.2 million of additional debt from all sources, including our Credit Agreement, or $731.1 million in the event a qualified acquisition is consummated.
The following table summarizes our long-term debt as of the end of the periods shown:
LONG-TERM DEBT
Original
Date
Interest
(dollars in thousands)
Borrowed
Rates
Matures
Mississippi Business Finance Corporation Loan (the "MBFC Loan") (1)
03/13
Floating
03/23
22,323
24,219
Credit Agreement (2)
01/15
12/21
277,800
265,650
Total long-term debt
300,123
289,869
Less current maturities of long-term debt
(1,884)
_____________________
The MBFC Loan is unsecured with an original balance of $37.6 million and interest set and payable quarterly at a Base Rate, plus a margin of up to 1.0%, or applicable LIBOR plus a margin of up to 2.0%, as determined by the interest rate elected and the Leverage Ratio. The loan is subject to holder’s call on or after March 1, 2018. The loan can be prepaid without penalty. The remaining principal balance is payable as follows: $1.9 million annually on March 1, 2019 through 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
Floating interest rates are hedged with an interest rate swap to effectively fix interest rates on $100 million of the outstanding principal balance under the Credit Agreement. Notes 12 and 13 to these condensed consolidated financial statements provide additional information regarding the interest rate swap.
At May 31, 2018 and February 28, 2018, our long-term debt has floating interest rates, and its book value approximates its fair value.
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain financial covenants, including maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms is defined in the various agreements). Our debt agreements also contain other customary covenants. We were in compliance with the terms of these agreements as of May 31, 2018.
Note 12 – Fair Value
We classify our various assets and liabilities recorded or reported at fair value under a hierarchy prescribed by GAAP that prioritizes inputs to fair value measurement techniques into three broad levels:
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
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Level 2:
Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3:
Unobservable inputs that reflect the reporting entity’s own assumptions.
Assets and liabilities subject to classification are classified upon acquisition. When circumstances dictate the transfer of an asset or liability to a different level, our policy is to recognize the transfer at the beginning of the reporting period in which the event resulting in the transfer occurred.
The following tables present the fair value of our financial assets and liabilities measured on a recurring basis as of the end of the periods shown:
Fair Values at
(Level 2) (1)
Assets:
Money market accounts
1,795
Interest rate swap
2,420
Foreign currency contracts
2,709
6,924
Liabilities:
Floating rate debt
361
300,484
1,107
2,481
642
4,230
2,606
292,475
Our financial assets and liabilities are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable.
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturity of these items.
We use derivatives for hedging purposes and our derivatives are primarily interest rate swaps, foreign currency contracts and cross-currency debt swaps. See Notes 11 and 13 to these condensed consolidated financial statements for more information on our hedging activities.
We classify our floating rate debt as a Level 2 item because the estimation of the fair market value requires the use of a discount rate based upon current market rates of interest for obligations with comparable remaining terms. Such comparable rates are considered significant other observable
market inputs. The book value of the floating rate debt approximates its fair value as of the reporting date.
Our other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 items. These assets are measured at fair value on a non-recurring basis as part of our impairment testing. Note 6 to these condensed consolidated financial statements contains additional information regarding impairment testing and related intangible asset impairments.
Note 13 – Financial Instruments and Risk Management
Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the three-months ended May 31, 2018 and 2017, approximately 14% and 13% of our net sales revenue was in foreign currencies, respectively. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars.
In our condensed consolidated statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses are recognized in SG&A. For the three-months ended May 31, 2018 and 2017, we recorded net foreign exchange gains (losses), including the impact of foreign currency hedges and cross-currency debt swaps of ($1.6) million and $0.6 million in SG&A, respectively. We recorded gains of $0.3 million and $0.1 million in income tax expense for the three months ended May 31, 2018 and 2017, respectively. We hedge against certain foreign currency exchange rate risk by using a series of forward contracts designated as cash flow hedges and mark-to-market derivatives to manage the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.
Interest Rate Risk - Interest on our outstanding debt as of May 31, 2018 is based on floating interest rates. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. Floating interest rates are hedged with an interest rate swap to effectively fix interest rates on $100.0 million of the outstanding principal balance under the Credit Agreement, which totaled $281.3 million as of May 31, 2018 (excluding prepaid financing fees).
The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:
Prepaid
Accrued
Expenses
Final
and Other
Hedge
Settlement
Notional
Current
Liabilities,
Derivatives designated as hedging instruments
Type
Liabilities
Non-current
Foreign currency contracts - sell Euro
Cash flow
07/2019
€
29,500
1,181
128
Foreign currency contracts - sell Canadian Dollars
06/2019
21,250
579
18
Foreign currency contracts - sell Pounds
£
17,500
591
102
Foreign currency contracts - sell Mexican Pesos
09/2018
20,000
99
12/2021
100,000
415
2,005
2,865
2,253
Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro
4/2020
5,280
Foreign currency contracts - cross-currency debt swaps - Pound
6,395
16
Total fair value
2,264
38,000
1,320
27,750
378
101
04/2019
19,500
56
513
05/2018
1,942
2,201
1,833
Foreign currency contracts - cross-currency debt swap - Euro
208
565
773
922
These are foreign currency contracts for which we have not elected hedge accounting. We refer to them as “cross-currency debt swaps”. They, in effect, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements.
The following table summarizes the pre-tax effect of derivative instruments for the periods shown:
Gain (Loss)
Gain (Loss) Reclassified from
Recognized in OCI
Accumulated Other Comprehensive
Gain (Loss) Recognized
(effective portion)
Income (Loss) into Income
As Income
Location
Currency contracts - cash flow hedges
SG&A
687
302
Interest rate swaps - cash flow hedges
Cross-currency debt swaps - principal
423
(549)
Cross-currency debt swaps - interest
Interest Expense
74
4,515
572
We expect pre-tax net gains of $2.9 million associated with foreign currency contracts currently reported in accumulated other comprehensive income, to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle.
Counterparty Credit Risk - Financial instruments, including foreign currency contracts and cross currency debt swaps, expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk by only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. Although our theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, we believe that the risk of incurring credit losses is remote.
Note 14 – Segment Information
The following tables present segment information included in continuing operations for the periods shown:
THREE MONTHS ENDED MAY 31
Housewares
Health & Home
Beauty
117,303
163,431
73,945
17
760
358
607
22,183
19,657
1,487
1,654
2,189
339
4,182
1,484
4,148
2,350
98,665
148,289
78,537
Operating income (loss)
17,936
14,244
(1,597)
2,491
1,113
478
4,082
1,427
4,138
2,776
We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, restructuring charges, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income (loss) is directly associated with the segment, plus shared service and corporate overhead expenses that are allocable to the segment. We have reallocated corporate overhead that was previously allocated to our former Nutritional Supplements segment. We do not allocate nonoperating income and expense, including interest or income taxes, to operating segments.
Note 15 – Income Taxes
Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Among other changes, the Tax Act lowered the U.S. corporate income tax rate from 35% to 21% and established a modified territorial system requiring mandatory deemed repatriation tax on undistributed earnings of certain foreign subsidiaries. The Tax Act also has an impact on certain executive compensation that is no longer deductible.
For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions and other items. We considered the provisions of the Tax Act in calculating the estimated annual effective tax rate.
We continue to apply the guidance in Staff Accounting Bulletin No. 118 (“SAB 118”) and as of May 31, 2018, we have not completed the accounting for all the tax effects enacted under Tax Act. The Company made reasonable estimates of those effects during fiscal 2018 and in the first quarter of fiscal 2019. We will continue to refine our estimates as additional guidance and information becomes available.
For the three months ended May 31, 2018, income tax expense as a percentage of income before income tax was 6.2%. Income tax benefit as a percentage of income before income tax was 1.1% for the same period last year. Income taxes for the three months ended May 31, 2018 includes a $0.3 million benefit from the recognition of excess tax benefits from share-based compensation settlements and exercises and a $0.8 million benefit from the lapse of the statute of limitations related to an uncertain tax position. Income taxes for the three months ended May 31, 2017 included a $2.5 million benefit from the recognition of excess tax benefits from share-based compensation settlements and
exercises and a $0.6 million benefit from the lapse of the statute of limitations related to an uncertain tax position.
During fiscal 2017, we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. We believe we have accurately reported our taxable income and are vigorously protesting the assessment through administrative processes with the state. We believe it is unlikely that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
Note 16 – Earnings per Share
We compute basic earnings per share using the weighted average number of shares of common stock
outstanding during the period. We compute diluted earnings per share using the weighted average
number of shares of common stock outstanding plus the effect of dilutive securities. Dilutive securities at any given point in time may consist of outstanding options to purchase common stock and issued and contingently issuable unvested RSUs and PSUs. See Note 7 to these condensed consolidated financial statements for more information regarding RSUs, PSUs and other performance based stock awards. Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive.
The following table presents our weighted average basic and diluted shares for the periods shown:
Weighted average shares outstanding, basic
Incremental shares from share-based compensation arrangements
93
169
Weighted average shares outstanding, diluted
Dilutive securities, stock options
138
253
Dilutive securities, unvested or unsettled stock awards
79
Antidilutive securities
511
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis (“MD&A”) contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk” and “Information Regarding Forward-Looking Statements” in this report and “Risk Factors” in the Company’s most recent annual report on Form 10-K for the fiscal year ended February 28, 2018 (“Form 10-K”) and its other filings with the Securities and Exchange Commission (the “SEC”). This discussion should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1. of this report. When used in the MD&A, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries. Throughout MD&A, we refer to our Leadership Brands, which are brands that have number-one and number-two positions in their respective categories and include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, and Hot Tools.
Throughout MD&A, we refer to certain measures used by management to evaluate financial performance. We also may refer to a number of financial measures that are not defined under GAAP, but have corresponding GAAP-based measures. Where non-GAAP measures appear, we provide tables reconciling these to their corresponding GAAP-based measures and refer to a discussion of their use. We believe these measures provide investors with important information that is useful in understanding our business results and trends.
OVERVIEW
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global consumer products company offering creative products and solutions for our customers through a diversified portfolio of well-recognized and widely-trusted brands. We have built leading market positions through new product innovation, product quality and competitive pricing. We currently operate in three segments consisting of Housewares, Health & Home, and Beauty. In fiscal 2015, we launched a transformational strategy to improve the performance of our business segments and strengthen our shared service capabilities. We believe we continue to make progress on achieving our strategic objectives.
On December 20, 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. Following the sale, we no longer consolidate our former Nutritional Supplements segment's operating results. Unless otherwise indicated, all results presented are from continuing operations.
Significant Trends Impacting the Business
Foreign Currency Exchange Rate Fluctuations
Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates from transactions that are denominated in a currency other than our reporting currency (the U.S. Dollar). The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso. For the three months ended May 31, 2018, changes in foreign currency exchange rates had a favorable impact on consolidated U.S. Dollar reported net sales revenue of approximately $3.5 million, or 1.1%.
Consumer Spending and Changes in Shopping Preferences
Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy, as approximately 74% and 77% of our net sales
20
were from U.S. shipments for the three months ended May 31, 2018 and 2017, respectively. Additionally, the shift in consumer shopping preferences to online or multichannel shopping experiences has shifted the concentration of our sales. For the first quarter of fiscal 2019, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 16% of our total consolidated net sales revenue and grew approximately 30% compared to the same period last year. With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. For the 2017-2018 season, fall and winter weather was unseasonably cold and cough/cold/flu incidence was significantly higher than the 2016-2017 season, which was a below average season.
First Quarter Fiscal 2019 Financial Results
Consolidated net sales revenue increased 9.0%, or $29.2 million, to $354.7 million for the three months ended May 31, 2018, compared to $325.5 million for the same period last year.
Consolidated operating income was $43.3 million for the three months ended May 31, 2018, compared to $30.6 million in the same period last year. Consolidated operating income for the three months ended May 31, 2018, includes pre-tax restructuring charges of $1.7 million. Consolidated operating income for the three months ended May 31, 2017 included a pre-tax non-cash asset impairment charge of $4.0 million.
Consolidated adjusted operating income increased 30.4%, or $12.9 million, to $55.5 million for the three months ended May 31, 2018, compared to $42.6 million in the same period last year. Consolidated adjusted operating margin increased 2.5 percentage points to 15.6% of consolidated net sales revenue for the three months ended May 31, 2018, compared to 13.1% in the same period last year.
Income from continuing operations was $38.2 million for the three months ended May 31, 2018, compared to $27.3 million for the same period last year. Diluted earnings per share (“EPS”) from continuing operations was $1.43 for the three months ended May 31, 2018, compared to $1.00 in the same period last year.
Adjusted income from continuing operations increased 30.1% to $49.8 million for the three months ended May 31, 2018, compared to $38.3 million in the same period last year. Adjusted diluted EPS from continuing operations increased 32.6% to $1.87 for the three months ended May 31, 2018, compared to $1.41 in the same period last year.
Loss from discontinued operations, net of tax, was ($0.4) million for the first three months ended May 31, 2018, compared to ($21.4) million in the same period last year. Diluted loss per share from discontinued operations was ($0.01) for the three months ended May 31, 2018 compared to ($0.79) for the three months ended May 31, 2017.
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Net income was $37.8 million for the three months ended May 31, 2018 compared to $5.9 million for the three months ended May 31, 2017. Diluted EPS was $1.42 for the three months ended May 31, 2018 compared to $0.22 for the three months ended May 31, 2017.
Adjusted operating income, adjusted operating margin, adjusted income from continuing operations, and adjusted diluted EPS from continuing operations, as discussed above and on the pages that follow, are non‐GAAP financial measures as contemplated by SEC Regulation G, Rule 100. These measures are discussed further and reconciled to their applicable GAAP based measures contained in this MD&A on pages 25, 28 and 29.
RESULTS OF OPERATIONS
The following table provides selected operating data, in U.S. Dollars, as a percentage of net sales
revenue, and as a year-over-year percentage change.
% of Sales Revenue, net
(In thousands)
$ Change
% Change
Sales revenue by segment, net
18,638
18.9
%
15,142
10.2
(4,592)
(5.8)
Total sales revenue, net
29,188
9.0
14,200
7.3
58.7
59.6
14,988
11.4
Selling, general and administrative expense ("SGA")
4,519
4.7
(4,000)
*
0.5
12,744
41.7
(91)
(54.8)
0.1
1,038
(27.9)
13,691
50.7
11.5
8.3
2,826
10,865
39.8
Loss from discontinued operations (1)
21,059
(98.2)
31,924
544.0
10.7
1.8
During fiscal 2018, we divested our Nutritional Supplements segment, which is reported as discontinued operations for all periods presented. For more information see Note 4 to the accompanying condensed consolidated financial statements.
* Calculation is not meaningful
Comparison of First Quarter Fiscal 2019 to First Quarter Fiscal 2018
Consolidated and Segment Net Sales
The following table summarizes the impact that core business, foreign exchange and acquisitions, as applicable, had on our net sales revenue by segment:
First quarter of fiscal 2018 sales revenue, net
Core business growth (decline)
18,246
12,383
(4,898)
25,731
Impact of foreign currency
392
2,759
306
3,457
Change in sales revenue, net
First quarter of fiscal 2019 sales revenue, net
Total net sales revenue growth
Core business
(6.2)
0.4
In the above table, core business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the
22
impact that foreign currency had on reported net sales. Net sales revenue from internally developed brands or product lines is considered core business activity.
Consolidated Net Sales Revenue
Consolidated net sales revenue increased $29.2 million, or 9.0%, to $354.7 million for the three months ended May 31, 2018, compared to $325.5 million for the same period last year. The increase was primarily driven by:
a core business increase of $25.7 million, or 7.9%, primarily due to growth in international sales, new product introductions, an increase in domestic brick and mortar sales and strong growth in online sales; and
the favorable impact from foreign currency fluctuations of approximately $3.5 million, or 1.1%.
These factors were partially offset by lower brick and mortar sales in our Beauty segment.
Segment Net Sales Revenue
Net sales revenue in the Housewares segment increased $18.6 million, or 18.9%, to $117.3 million for the three months ended May 31, 2018, compared to $98.7 million for the same period last year. Growth was primarily driven by a core business increase of $18.2 million, or 18.5%, due to incremental distribution with existing domestic customers, an increase in online sales, new product introductions for both the Hydro Flask and OXO brands, an increase in sales into the club channel, and international growth. Segment net sales also benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.4 million, or 0.4%. These factors were partially offset by lower store traffic and soft consumer spending at certain traditional brick and mortar retailers.
Net sales revenue in the Health & Home segment increased $15.1 million, or 10.2%, to $163.4 million for the three months ended May 31, 2018, compared to $148.3 million for the same period last year. Growth was primarily driven by a core business increase of $12.4 million, or 8.4%, primarily due to expanded international distribution and higher online sales. Segment net sales also benefitted from the favorable impact of net foreign currency fluctuations of approximately $2.8 million, or 1.9%. These factors were partially offset by the unfavorable comparative impact from the retail fill-in of a new product introduction in the same period last year.
Net sales revenue in the Beauty segment decreased 5.8% to $73.9 million for the three months ended May 31, 2018, compared to $78.5 million for the same period last year. The change was primarily driven by a core business decline of $4.9 million, or 6.2%, reflecting a decline in brick and mortar sales, which more than offset growth in the online channel. Segment net sales were also impacted by the unfavorable comparison from the retail fill-in of new product introductions in the same period last year and the rationalization of certain brands and products. Segment net sales were favorably impacted by net foreign currency fluctuations of approximately $0.3 million, or 0.4%.
Consolidated Gross Profit Margin
Consolidated gross profit for the three months ended May 31, 2018 increased 0.9 percentage points to 41.3%, compared to 40.4% for the same period last year. The increase in consolidated gross profit margin is primarily due to favorable product mix, growth in our Leadership Brands and the favorable impact of net foreign currency fluctuations. These factors were partially offset by unfavorable channel mix and an increase in promotional programs.
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Consolidated SG&A
Consolidated SG&A ratio decreased 1.2 percentage points to 28.6% for the three months ended May 31, 2018, compared to 29.8% for the same period last year. The decrease in consolidated SG&A ratio is primarily due to:
improved distribution and logistics efficiency;
lower legal expense;
lower amortization expense;
lower media advertising expense; and
the impact that higher overall net sales had on operating leverage.
These factors were partially offset by:
higher personnel and share-based compensation expense; and
the unfavorable comparative impact of foreign currency exchange and forward contract settlements.
Asset Impairment Charges
First Quarter of Fiscal 2019
We perform annual impairment testing each fiscal year during the fourth quarter and interim impairment testing, if necessary. We did not record any impairment charges during the first quarter of fiscal 2019.
First Quarter of Fiscal 2018
During the first quarter of fiscal 2018, we performed interim impairment testing for a certain brand in our Beauty segment, due to a revised financial projection. As a result of our testing, we recorded a non-cash asset impairment charge of $4.0 million ($3.6 million after tax).
Operating income (loss), operating margin, adjusted operating income (non-GAAP), and adjusted operating margin (non-GAAP) by segment
In order to provide a better understanding of the comparative impact of certain items on operating income, the tables that follow report the comparative before tax impact of non‐cash asset impairment charges, restructuring charges, amortization of intangible assets, and non‐cash share‐based compensation, as applicable, on operating income and operating margin for each segment and in total for the periods covered below. Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. These measures are discussed further in this MD&A on page 29.
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Three Months Ended May 31, 2018
Operating income, as reported (GAAP)
12.0
2.0
12.2
0.6
0.2
0.8
22,943
19.6
20,015
2,094
2.8
45,052
12.7
Amortization of intangible assets
474
2,704
1.7
943
1.3
4,121
1.2
1,986
2,326
1.4
2,012
2.7
Adjusted operating income (non-GAAP)
25,403
21.7
25,045
15.3
5,049
6.8
55,497
15.6
Three Months Ended May 31, 2017
Operating income (loss), as reported (GAAP)
18.2
9.6
(2.0)
9.4
5.1
2,403
3.1
34,583
10.6
644
0.7
2,786
1.9
1,418
4,848
1.5
971
1.0
1,128
1,039
19,551
19.8
18,158
4,860
6.2
42,569
13.1
Consolidated
Consolidated operating income was $43.3 million, or 12.2% of net sales, compared to $30.6 million, or 9.4% of net sales, for the same period last year. The three months ended May 31, 2018 includes pre-tax restructuring charges of $1.7 million related to Project Refuel, with no comparable charges in the same period last year. Consolidated operating income for the three months ended May 31, 2017 included a pre-tax non-cash asset impairment charge of $4.0 million. The effect of these items favorably impacted the year-over-year comparison of operating margin by 0.7 percentage points. The remaining improvement in consolidated operating margin primarily reflects:
a higher mix of Leadership Brand sales at a higher operating margin;
lower media advertising expense;
improved distribution and logistics efficiency; and
These factors were partially offset by higher personnel and share-based compensation expense, and the unfavorable comparative impact of foreign currency exchange and forward contract settlements.
Consolidated adjusted operating income increased 30.4% to $55.5 million, or 15.6% of net sales, compared to $42.6 million, or 13.1% of net sales, in the same period last year.
The Housewares segment’s operating income was $22.2 million, or 18.9% of segment net sales, compared to $17.9 million, or 18.2% of segment net sales, for the same period last year. The 0.7 percentage point increase in segment operating margin is primarily due to:
a higher mix of Hydro Flask sales at a higher operating margin;
lower overall advertising expense;
the favorable impact of increased operating leverage from net sales growth.
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These factors were partially offset by the unfavorable margin impact of sales into the club channel and the impact of restructuring charges of $0.8 million.
Segment adjusted operating income increased 29.9% to $25.4 million, or 21.7% of segment net sales, compared to $19.6 million, or 19.8% of segment net sales, in the same period last year.
The Health & Home segment’s operating income was $19.7 million, or 12.0% of segment net sales, compared to $14.2 million, or 9.6% of segment net sales in the same period last year. The 2.4 percentage point increase in segment operating margin is primarily due to:
a favorable margin mix;
increased operating leverage from net sales growth.
higher personnel and share-based compensation expense;
the unfavorable comparative impact of foreign currency exchange and forward contract settlements;
restructuring charges of $0.4 million; and
higher product liability expense.
Segment adjusted operating income increased 37.9% to $25.0 million, or 15.3% of segment net sales, compared to $18.2 million, or 12.2% of segment net sales, in the same period last year.
The Beauty segment’s operating income was $1.5 million, or 2.0% of segment net sales, compared to an operating loss of $(1.6) million, or (2.0)% of segment net sales, in the same period last year. The 4.0 percentage point increase in segment operating margin is primarily due to:
the favorable comparative impact of an asset impairment charge of $4.0 million during the same period last year;
cost savings from Project Refuel.
pre-tax restructuring charges of $0.6 million; and
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Segment adjusted operating income increased 3.9% to $5.0 million, or 6.8% of segment net sales, compared to $4.9 million, or 6.2% of segment net sales, in the same period last year.
Interest expense was $2.7 million for the three months ended May 31, 2018, compared to $3.7 million in the same period last year. The decrease in interest expense was primarily due to lower average levels of debt, partially offset by higher average interest rates compared to last year.
Income Tax Expense
The year-over-year comparison of our effective tax rates is impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. Our effective tax rate is also impacted by the Tax Cuts and Jobs Act (“the Tax Act”) enacted into law on December 22, 2017. Please see Note 15 of the accompanying condensed consolidated financial statements for a further discussion of the Tax Act.
For the three months ended May 31, 2018, income tax expense as a percentage of income before income tax was 6.2%, which includes tax benefits totaling $1.1 million from the lapse in the statute of limitations related to uncertain tax positions and share-based compensation settlements and exercises. Income tax benefit as a percentage of income before income tax was 1.1% for the same period last year, which includes tax benefits totaling $3.1 million from the lapse in the statute of limitations related to uncertain tax positions and share-based compensation settlements and exercises.
During fiscal 2017 we received an assessment from a state tax authority which adjusted taxable income
applicable to the particular state resulting from interpretations of certain state income tax provisions
applicable to our legal structure. We believe we have accurately reported our taxable income and are
vigorously protesting the assessment through administrative processes with the state. We believe it is unlikely that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
Income from continuing operations, diluted EPS from continuing operations, adjusted income from continuing operations (non-GAAP), and adjusted diluted EPS from continuing operations (non-GAAP)
In order to provide a better understanding of the impact of certain items on our income and EPS from continuing operations, the analysis that follows reports the comparative after tax impact of non‐cash asset impairment charges, restructuring charges, amortization of intangible assets, and non‐cash share‐based compensation, as applicable, on income from continuing operations, and basic and diluted EPS from continuing operations for the periods covered below.
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Income From Continuing Operations
Diluted EPS
Before Tax
Net of Tax
As reported (GAAP)
1.53
142
1,583
0.06
0.01
42,440
2,684
39,756
1.59
1.49
135
3,986
0.15
269
6,055
0.24
Adjusted (non-GAAP)
52,885
3,088
49,797
1.99
0.12
1.87
Weighted average shares of common stock used in computing diluted EPS
418
3,582
0.02
0.13
31,024
134
30,890
1.14
1.13
249
4,599
0.18
0.17
2,799
39,010
722
38,288
0.03
1.41
_________________
Our income from continuing operations was $38.2 million for the three months ended May 31, 2018 compared to $27.3 million for the same period last year. Our diluted EPS from continuing operations was $1.43 for the three months ended May 31, 2018 compared to $1.00 for the same period last year.
Adjusted income from continuing operations increased $11.5 million, or 30.1%, to $49.8 million for the three months ended May 31, 2018 compared to $38.3 million the same period last year. Adjusted diluted EPS from continuing operations increased 32.6% to $1.87 for the three months ended May 31, 2018 compared to $1.41 for the same period last year. Adjusted diluted EPS increased primarily due to the impact of higher adjusted operating income in all three of our business segments, lower interest expense and lower weighted average diluted shares outstanding compared to the same period last year.
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Explanation of Non-GAAP Financial Measures
The tables contained in this MD&A, under the headings “Operating income, operating margin, adjusted
operating income (non-GAAP) and adjusted operating margin (non-GAAP) by segment” and “Income from continuing operations, diluted EPS from continuing operations, adjusted income from continuing
operations (non-GAAP), and adjusted diluted EPS from continuing operations (non-GAAP),” respectively, report operating income, operating margin, income from continuing operations and diluted earnings per share from continuing operations without the impact of non-cash asset impairment charges, restructuring charges, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The preceding table reconciles these measures to their corresponding GAAP-based measures presented in our condensed consolidated statements of income. We believe that adjusted operating income, adjusted operating margin, adjusted income from continuing operations and adjusted diluted EPS from continuing operations provide useful information to management and investors regarding financial and business trends relating to our financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with our financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on net income and earnings per share. We also believe that these non-GAAP measures facilitate a more direct comparison of our performance to our competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of our continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in our GAAP financial results in the near future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of our activities. Our adjusted operating income, adjusted operating margin, adjusted income from continuing operations and adjusted diluted EPS from continuing operations are not prepared in accordance with GAAP, are not an alternative to GAAP financial information and may be calculated differently than non-GAAP financial information disclosed by other companies. Accordingly, undue reliance should not be placed on non-GAAP information.
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Financial Condition, Liquidity and Capital Resources
Selected measures of our liquidity and capital resources are shown for the periods below :
Accounts Receivable Turnover (Days)(1)
62.6
60.4
Inventory Turnover (Times)(1)
Working Capital (in thousands)
285,105
261,322
Current Ratio
2.1:1
1.9:1
Ending Debt to Ending Equity Ratio
44.3
Return on Average Equity(1)
Accounts receivable turnover, inventory turnover and return on average equity computations use 12 month trailing net sales revenue, cost of goods sold or net income components as required by the particular measure. The current and four prior quarters' ending balances of accounts receivable, inventory and equity are used for the purposes of computing the average balance component as required by the particular measure.
We rely principally on cash flow from operations and borrowings under our credit facility to finance our operations, acquisitions, and capital expenditures. We believe our cash flows from operations and availability under our credit facility are sufficient to meet our working capital and capital expenditure needs.
Operating Activities
Operating activities from continuing operations provided net cash of $28.9 million for the three months ended May 31, 2018 compared to $39.8 million last year. The decrease was primarily driven by a dispute settlement payment of $15 million and the timing of accounts payable fluctuations, partially offset by a reduction in inventory.
Accounts receivable decreased $19.9 million to $255.7 million as of May 31, 2018, compared to $275.6 million at the end of fiscal 2018. Accounts receivable turnover was 62.6 days and 60.4 days at May 31, 2018 and 2017, respectively.
Inventory decreased $4.8 million to $256.3 million as of May 31, 2018, compared to $251.5 million at the end of fiscal 2018. Inventory turnover was 3.1 times at May 31, 2018, compared to 2.8 times at May 31, 2017.
Investing Activities
Investing activities from continuing operations used $4.2 million of cash for the three months ended May 31, 2018, compared to $4.1 million in the same period last year. We spent $2.0 million on computers, furniture and other equipment and $2.1 million on tools, molds and other capital improvements for the three months ended May 31, 2018.
Financing Activities
Financing activities from continuing operations used $28.2 million of cash during the three months ended May 31, 2018, compared to $35.3 million in the same period last year. Highlights of those activities follow:
we had draws of $161.2 million against our credit agreement;
we repaid $149.3 million drawn against our credit agreement;
we repaid $1.9 million of our long-term debt;
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we received $3.4 million of cash from employees exercising stock options and participating in our employee stock purchase plan;
we paid $4.5 million in tax obligations resulting from cashless share award settlements; and
we repurchased $37.1 million of our common stock in the open market.
Credit and Other Debt Agreements
Credit Agreement
We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $1 billion as of May 31, 2018. The commitment under the Credit Agreement terminates on December 7, 2021. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time. We also incur loan commitment and letter of credit fees under the Credit Agreement. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. As of May 31, 2018, the outstanding revolving loan principal balance was $281.3 million (excluding prepaid financing fees) and the balance of outstanding letters of credit was $7.1 million. As of May 31, 2018, the amount available for borrowings under the Credit Agreement was $711.6 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur. As of May 31, 2018, these covenants effectively limited our ability to incur more than $547.2 million of additional debt from all sources, including our Credit Agreement, or $731.1 million in the event a qualified acquisition is consummated.
Other Debt Agreements
We also have an aggregate principal balance of $22.4 million (excluding prepaid financing fees) under a loan agreement with the Mississippi Business Finance Corporation (the “MBFC Loan”) as of May 31, 2018. The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. The remaining loan balance is payable as follows: $1.9 million annually on March 1, 2019 through 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and several subsidiaries. Our debt agreements require the maintenance of certain key financial covenants, defined in the table below. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt agreements. The commitments of the lenders to make loans to us under the Credit Agreement are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the Credit Agreement.
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The table below provides the formulas currently in effect for certain key financial covenants as defined under our debt agreements:
Applicable Financial Covenant
Credit Agreement and MBFC Loan
Minimum Consolidated Net Worth
None
EBIT (1)
÷
Interest Coverage Ratio
Interest Expense (1)
Minimum Required: 3.00 to 1.00
Total Current and Long Term Debt (2)
Maximum Leverage Ratio
[EBITDA (1) + Pro Forma Effect of Acquisitions]
Maximum Currently Allowed: 3.50 to 1.00 (3)
Key Definitions:
EBIT:
Earnings Before Non-Cash Charges, Interest Expense and Taxes
EBITDA:
EBIT + Depreciation and Amortization Expense + Share Based Compensation
Pro Forma Effect of Acquisitions:
For any acquisition, pre-acquisition EBITDA of the acquired business is included so that the EBITDA of the acquired business included in the computation equals its twelve month trailing total.
Notes:
(1) Computed using totals for the latest reported four consecutive fiscal quarters.
(2) Computed using the ending balances as of the latest reported fiscal quarter.
(3) In the event a qualified acquisition is consummated, the maximum leverage ratio is 4.25 to 1.00.
Contractual Obligations
Our contractual obligations and commercial commitments in effect as of May 31, 2018, were :
2019
2020
2021
2022
2023
After
1 year
2 years
3 years
4 years
5 years
303,707
1,900
283,200
14,807
Long-term incentive plan payouts
11,840
5,412
4,786
1,642
Interest on floating rate debt (1)
31,681
8,913
8,857
8,800
4,783
328
Open purchase orders
262,137
Long-term purchase commitments
862
Minimum royalty payments
48,113
12,629
13,004
9,713
9,055
3,712
Advertising and promotional
40,797
16,002
6,298
6,439
6,527
5,531
Operating leases
67,754
5,849
4,688
5,304
5,664
5,018
41,231
Capital spending commitments
4,062
Total contractual obligations (2)
770,953
317,766
39,533
33,798
309,229
29,396
We estimate our future obligations for interest on our floating rate debt by assuming the weighted average interest rates in effect on each floating rate debt obligation at May 31, 2018 remain constant into the future. This is an estimate, as actual rates will vary over time. In addition, for the Credit Agreement, we assume that the balance outstanding as of May 31, 2018 remains the same for the remaining term of the agreement. The actual balance outstanding under our Credit Agreement may fluctuate significantly in future periods, depending on the availability of cash flow from operations and future investing and financing considerations.
In addition to the contractual obligations and commercial commitments in the table above, as of May 31, 2018, we have recorded total provisions for our uncertain tax positions totaling $3.6 million. We are unable to reliably estimate the timing of most of the future payments, if any, related to uncertain tax positions. Therefore, we have excluded these tax liabilities from the table above.
Off-Balance Sheet Arrangements
We have no existing activities involving special purpose entities or off-balance sheet financing.
Current and Future Capital Needs
We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we continue to evaluate acquisition opportunities on a regular basis. We may finance acquisition activity with available cash, the issuance of shares of common stock, additional debt, or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition. We may also elect to repurchase additional shares of common stock up to the balance of our current authorization through May 2020, subject to limitations contained in our debt agreements and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of May 31, 2018, the amount of cash and cash equivalents held by our foreign subsidiaries was $15.6 million, of which, an immaterial amount was held in foreign countries where the funds may not be readily convertible into other currencies.
New Accounting Guidance
For information on recently adopted and issued accounting pronouncements, see Note 2 to the accompanying condensed consolidated financial statements.
Information Regarding Forward-Looking Statements
Certain written and oral statements in this Form 10-Q may constitute "forward-looking statements" as
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defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the Securities and Exchange Commission (the "SEC"), in press releases, and in certain other oral and written presentations. Generally, the words "anticipates", "believes", "expects", "plans", "may", "will", "should", "seeks", "estimates", "project", "predict", "potential", "continue", "intends", and other similar words identify forward-looking statements. All statements that address operating results, events or developments that may occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report and that are otherwise described from time to time in our SEC reports as filed. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.
Such risks are not limited to, but may include:
our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;
the costs of complying with the business demands and requirements of large sophisticated customers;
our relationships with key customers and licensors;
our dependence on the strength of retail economies and vulnerabilities to any prolonged economic downturn;
our dependence on sales to several large customers and the risks associated with any loss or substantial decline in sales to top customers;
expectations regarding any proposed restructurings;
expectations regarding recent and future acquisitions or divestitures, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses or separate divested businesses;
circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets;
the retention and recruitment of key personnel;
foreign currency exchange rate fluctuations;
disruptions in U.S., U.K., Eurozone, and other international credit markets;
risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors;
our dependence on foreign sources of supply and foreign manufacturing, and associated operational risks including, but not limited to, long lead times, consistent local labor availability and capacity, and timely availability of sufficient shipping carrier capacity;
the impact of changing costs of raw materials, labor and energy on cost of goods sold and certain operating expenses;
the geographic concentration and peak season capacity of certain U.S. distribution facilities increases our exposure to significant shipping disruptions and added shipping and storage costs;
our projections of product demand, sales and net income are highly subjective in nature and future sales and net income could vary in a material amount from such projections;
the risks associated with the use of trademarks licensed from and to third parties;
our ability to develop and introduce a continuing stream of new products to meet changing consumer preferences;
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trade barriers, exchange controls, expropriations, and other risks associated with U.S. and foreign operations;
the risks to our liquidity as a result of changes to capital market conditions and other constraints or events that impose constraints on our cash resources and ability to operate our business;
the costs, complexity and challenges of upgrading and managing our global information systems;
the risks associated with information security breaches;
the risks associated with product recalls, product liability, other claims, and related litigation against us;
the risks associated with accounting for tax positions, tax audits and related disputes with taxing authorities;
the risks of potential changes in laws in the U.S. or abroad, including tax laws, regulations or treaties, employment and health insurance laws and regulations, laws relating to environmental policy, personal data, financial regulation, transportation policy and infrastructure policy along with the costs and complexities of compliance with such laws; and
our ability to continue to avoid classification as a controlled foreign corporation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. Additional information regarding risk management activities can be found in Note 13 to the accompanying condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), maintains disclosure controls and procedures as defined in Rules 13a-15(e) under the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended May 31, 2018. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of May 31, 2018, the end of the period covered by this quarterly report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In connection with the evaluation described above, we identified no change in our internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act that occurred during our fiscal quarter ended May 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 31, 2018, we settled a patent infringement dispute related to two forehead thermometer models sold by our subsidiary, Kaz USA, Inc., in the United States and made a settlement payment of $15 million, which was accrued in prior periods along with related legal fees and other costs. See Note 10 to the accompanying condensed consolidated financial statements for further discussion.
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
The ownership of our common stock involves a number of risks and uncertainties. When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. “Risk Factors” of our annual report on Form 10-K for the fiscal year ended February 28, 2018. Since the filing of our annual report on Form 10-K, there have been no material changes in our risk factors from those disclosed therein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 10, 2017, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The new authorization is effective for a period of three years and replaced our existing repurchase authorization of which approximately $82 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of May 31, 2018, our repurchase authorization allowed for the purchase of $286.5 million of common stock.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to the amounts due. Net exercises are accounted for as a purchase and retirement of shares.
36
Period
Total Number ofShares Purchased
Average PricePaid per Share
Total Number ofShares Purchased as Part of Publicly Announced Plansor Programs
Maximum Dollar Value ofShares that MayYet be PurchasedUnder the Plansor Programs(in thousands)
March 1 through March 31, 2018
12,654
89.10
326,896
April 1 through April 30, 2018
57
87.00
326,891
May 1 through May 31, 2018
443,909
91.05
286,473
456,620
90.99
37
n
ITEM 6.
EXHIBITS
(a)
10.1
Second amendment, Assumption, Consent and Ratification Agreement, dated effective as of March 1, 2018, by and among Helen of Troy Limited, a Bermuda Company, Helen of Troy Texas Corporation, a Texas Corporation, Helen of Troy L.P., a Texas Limited Partnership, the guarantors party thereto, Bank of America, N.S., as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K, file and with the Securities Exchange Commission on March 7, 2018).
31.1*
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**
Joint certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *
XBRL Instance Document
101.SCH *
XBRL Taxonomy Extension Schema
101.CAL *
XBRL Taxonomy Extension Calculation Linkbase
101.DEF *
XBRL Taxonomy Extension Definition Linkbase
101.LAB *
XBRL Taxonomy Extension Label Linkbase
101.PRE *
XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.
** Furnished herewith.
38
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: July 10, 2018
/s/ Julien R. Mininberg
Julien R. Mininberg
Chief Executive Officer,
Director and Principal Executive Officer
/s/ Brian L. Grass
Brian L. Grass
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
39