Helen of Troy(HELE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Net sales increased due to acquisitions, but operating and net income declined, while total assets and long-term debt rose Financial Performance Summary | Financial Metric | Three Months Ended Aug 31, 2022 | Three Months Ended Aug 31, 2021 | | :--- | :--- | :--- | | Net Sales Revenue ($M) | $521.4 | $475.2 | | Gross Profit ($M) | $221.4 | $210.6 | | Operating Income ($M) | $46.9 | $67.3 | | Net Income ($M) | $30.7 | $51.3 | | Diluted EPS | $1.28 | $2.11 | Balance Sheet Summary | Balance Sheet Item | August 31, 2022 | February 28, 2022 | | :--- | :--- | :--- | | Total Current Assets ($M) | $1,237.8 | $1,082.1 | | Total Assets ($M) | $3,225.2 | $2,823.5 | | Total Current Liabilities ($M) | $583.1 | $602.7 | | Long-Term Debt ($M) | $1,148.9 | $811.3 | | Total Stockholders' Equity ($M) | $1,398.3 | $1,327.3 | Cash Flow Summary | Cash Flow Metric (Six Months Ended) | August 31, 2022 | August 31, 2021 | | :--- | :--- | :--- | | Net Cash Used by Operating Activities ($M) | ($75.5) | ($58.3) | | Net Cash (Used) Provided by Investing Activities ($M) | ($258.9) | $24.0 | | Net Cash Provided by Financing Activities ($M) | $340.6 | $21.0 | Note 4 - Acquisitions Details the acquisition of Curlsmith for $149.7 million and Osprey for $409.3 million - Completed the acquisition of Curlsmith on April 22, 2022, for a total purchase consideration of $149.7 million in cash[31] - Completed the acquisition of Osprey on December 29, 2021, for a total purchase consideration of $409.3 million in cash[39] Note 8 - Restructuring Plan Outlines 'Project Pegasus' to improve efficiency and reduce costs, targeting $75-85 million in profit improvements - Initiated a global restructuring plan, "Project Pegasus," intended to improve efficiency and reduce costs[51] - Project Pegasus targets annualized pre-tax operating profit improvements of approximately $75 million to $85 million, expected to be substantially achieved by the end of fiscal 2026[53] - Total one-time pre-tax restructuring charges are estimated to be between $85 million and $95 million over the duration of the plan, with $4.8 million incurred in Q2 FY23[52][53] Note 9 - Commitments and Contingencies Discusses patent infringement litigation and EPA compliance issues impacting sales and profits - The company is involved in patent infringement litigation with Brita LP regarding its PUR water filtration systems[56] - Discussions with the EPA regarding packaging claims on certain Health & Wellness products led to temporary stop shipments and ongoing repackaging efforts, which materially impacted sales and profits[58] EPA Compliance Costs (in thousands) | EPA Compliance Costs | Three Months Ended Aug 31, 2022 | Six Months Ended Aug 31, 2022 | | :--- | :--- | :--- | | Cost of goods sold | $7,103 | $16,558 | | SG&A | $1,251 | $3,440 | | Total | $8,354 | $19,998 | Note 14 - Segment Information Provides detailed sales revenue and operating income data across Home & Outdoor, Health & Wellness, and Beauty segments Segment Performance (Three Months Ended Aug 31, 2022) | Segment | Sales Revenue, Net ($M) | Operating Income (Loss) ($M) | | :--- | :--- | :--- | | Home & Outdoor | $240.6 | $42.1 | | Health & Wellness | $180.5 | ($2.6) | | Beauty | $100.3 | $7.5 | | Total | $521.4 | $46.9 | Segment Performance (Three Months Ended Aug 31, 2021) | Segment | Sales Revenue, Net ($M) | Operating Income ($M) | | :--- | :--- | :--- | | Home & Outdoor | $215.2 | $41.9 | | Health & Wellness | $141.5 | $4.8 | | Beauty | $118.5 | $20.6 | | Total | $475.2 | $67.3 | Management's Discussion and Analysis of Financial Condition and Results of Operations Sales growth was driven by acquisitions, while profitability declined due to macroeconomic pressures, higher costs, and unfavorable product mix Significant Trends Impacting the Business Analyzes macroeconomic trends, retail inventory rebalancing, supply chain disruptions, and online sales growth - Macroeconomic trends, including high inflation and rising interest rates, are negatively impacting consumer disposable income and spending on discretionary items[113][115] - The company experienced an adverse impact on orders as retail customers aimed to rebalance their inventory levels in response to lower consumer demand and shifts in spending patterns[116] - Global supply chain disruptions continue to cause higher costs, less capacity, and longer lead times, with inbound freight costs increasing by several multiples compared to calendar year 2020 averages[120][122] - Online sales comprised approximately 22% of total consolidated net sales for the quarter and grew by about 8% year-over-year[117] Results of Operations Details the drivers of net sales growth, gross profit margin decline, SG&A ratio increase, and rising interest expense Net Sales Revenue Growth (Q2 FY23 vs Q2 FY22) | Net Sales Revenue Growth | Home & Outdoor | Health & Wellness | Beauty | Total | | :--- | :--- | :--- | :--- | :--- | | Total Growth | 11.8% | 27.6% | (15.4)% | 9.7% | | Organic Business | (9.0)% | 27.9% | (23.1)% | (1.5)% | | Acquisition Impact | 22.0% | 0.0% | 8.6% | 12.1% | - Consolidated gross profit margin decreased by 1.8 percentage points to 42.5%, primarily due to an unfavorable product mix from the Osprey acquisition, higher EPA compliance costs, and the dilutive impact of inflationary costs[165] - The consolidated SG&A ratio increased by 2.5 percentage points to 32.6%, driven by higher outbound freight costs, increased marketing expenses, and higher salary and wage costs[168] - Interest expense increased to $9.2 million from $3.3 million in the prior-year quarter, due to higher average debt levels from acquisitions and rising interest rates[188] Liquidity and Capital Resources Outlines credit agreement amendments, cash position, available borrowing capacity, and increased capital expenditures - The company amended its Credit Agreement, borrowing an additional $250 million as term loans and replacing LIBOR with Term SOFR as the reference interest rate[202][210] - As of August 31, 2022, the company had $39.7 million in cash and cash equivalents and $324.3 million available for borrowing under its Credit Agreement[201][212] - Capital expenditures increased to $112.6 million for the six-month period, up from $24.0 million in the prior year, primarily for the construction of a new distribution center for the Home & Outdoor segment[208] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures, with a 1.0% interest rate increase projected to raise annual interest expense by $10.5 million - A 1.0% increase in market interest rates would lead to an estimated $10.5 million increase in annual interest expense, net of the effect of interest rate swaps[219] Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting identified - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[222] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[223] PART II. OTHER INFORMATION Legal Proceedings No material changes in legal proceedings have occurred since the last Form 10-K filing - There have been no material changes in legal proceedings from those disclosed in the company's most recent Form 10-K[224] Risk Factors No material changes to risk factors, but increased emphasis on vulnerability to economic downturns impacting consumer discretionary spending - The company emphasizes its vulnerability to prolonged economic downturns, as consumer purchases of discretionary items tend to decline when disposable income is lower[227] - Factors affecting consumer spending include inflation, interest rates, credit availability, energy costs, and consumer confidence, all of which are beyond the company's control[226][227] Unregistered Sales of Equity Securities and Use of Proceeds Details share repurchase activity under a $500 million authorization, primarily for tax withholding on employee equity awards - The Board of Directors authorized a repurchase of up to $500 million of common stock, effective August 25, 2021, for a three-year period[229] Share Repurchase Activity (2022) | Period (2022) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June | 281 | $173.28 | | July | 163 | $157.69 | | August | 57 | $129.97 | | Total Q2 | 501 | $163.28 | - All shares purchased during the quarter were acquired from associates to satisfy tax withholding on equity awards; there were no open market purchases[230]