Helen of Troy(HELE) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited condensed consolidated financial statements and accompanying notes detail its financial position and performance Condensed Consolidated Balance Sheets (Unaudited) | (in thousands, except shares and par value) | November 30, 2020 | February 29, 2020 | | :---------------------------------------- | :---------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $ 156,661 | $ 24,467 | | Total assets, current | 1,090,068 | 682,836 | | Total assets | $ 2,311,744 | $ 1,903,883 | | Liabilities and Stockholders' Equity | | | | Total liabilities, current | 598,505 | 338,896 | | Total liabilities | 1,101,306 | 742,160 | | Total stockholders' equity | 1,210,438 | 1,161,723 | | Total liabilities and stockholders' equity| $ 2,311,744 | $ 1,903,883 | Condensed Consolidated Statements of Income (Unaudited) | (in thousands, except per share data) | Three Months Ended Nov 30, 2020 | Three Months Ended Nov 30, 2019 | Nine Months Ended Nov 30, 2020 | Nine Months Ended Nov 30, 2019 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales revenue, net | $ 637,737 | $ 474,737 | $ 1,589,424 | $ 1,265,067 | | Gross profit | 287,327 | 209,973 | 696,964 | 541,851 | | Operating income | 100,709 | 79,269 | 256,963 | 180,996 | | Net income | $ 84,155 | $ 68,699 | $ 231,774 | $ 155,488 | | EPS: Basic | $ 3.37 | $ 2.73 | $ 9.20 | $ 6.19 | | EPS: Diluted | $ 3.34 | $ 2.71 | $ 9.14 | $ 6.15 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) | (in thousands) | Three Months Ended Nov 30, 2020 | Three Months Ended Nov 30, 2019 | Nine Months Ended Nov 30, 2020 | Nine Months Ended Nov 30, 2019 | | :------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $ 84,155 | $ 68,699 | $ 231,774 | $ 155,488 | | Comprehensive income | $ 86,190 | $ 68,569 | $ 226,494 | $ 149,412 | Condensed Consolidated Statements of Stockholders' Equity | (in thousands, including shares) | Balances at Feb 29, 2020 | Balances at Nov 30, 2020 | | :------------------------------- | :----------------------- | :----------------------- | | Common Stock (Shares) | 25,194 | 24,394 | | Total Shareholders' Equity | $ 1,161,723 | $ 1,210,438 | Condensed Consolidated Statements of Cash Flows (Unaudited) | (in thousands) | Nine Months Ended Nov 30, 2020 | Nine Months Ended Nov 30, 2019 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $ 249,746 | $ 101,418 | | Net cash used in investing activities | (19,423) | (13,244) | | Net cash used in financing activities | (98,129) | (80,408) | | Net increase in cash and cash equivalents | 132,194 | 7,766 | | Cash and cash equivalents, ending balance | $ 156,661 | $ 19,637 | Note 1 - Basis of Presentation and Related Information This note outlines the basis of presentation, segment descriptions, the Drybar acquisition, and COVID-19 impacts - Helen of Troy operates in three segments: Housewares, Health & Home, and Beauty, offering a diverse portfolio of consumer products[18] - The acquisition of Drybar Products LLC was completed on January 23, 2020, for approximately $255.9 million in cash, adding a prestige hair care and styling brand to the Beauty segment[20] - The company committed in Q4 FY2020 to divest certain mass channel personal care assets (Pert, Brut, Sure, Infusium brands) within fiscal 2021, classifying them as held for sale[21][22] - Favorable impacts of COVID-19 outweighed unfavorable impacts for the nine months ended November 30, 2020, but future impacts remain uncertain[23] Note 2 - New Accounting Pronouncements This note details the adoption of new accounting standards and the evaluation of upcoming pronouncements - ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, will be effective for the company in the first quarter of fiscal 2022, and its impact is currently being evaluated[28] - ASU 2020-04, Reference Rate Reform (Topic 848), was effective upon issuance on March 12, 2020, and its adoption did not have a material impact on the consolidated financial statements[29] - ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), ASU 2018-13, Fair Value Measurement (Topic 820), and ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40), were all effective for the company in the first quarter of fiscal 2021 and did not have a material impact on the consolidated financial statements[30][31][32] Note 3 - Revenue Recognition Revenue is recognized when product control transfers to the customer, with variable consideration reducing net sales - Revenue is recognized when control of, and title to, the product sold transfers to the customer, typically on the date of shipment or receipt[34] - Variable consideration, including customer discounts, volume or trade discounts, and advertising discounts, is classified as a reduction to net sales[36] - The adoption of ASU 2014-09 in fiscal 2019 did not materially impact the timing or amount of revenue recognized but resulted in reclassification of certain payments from SG&A to a reduction of net sales and estimated sales returns from receivables to accrued expenses[34][35] Note 4 - Leases The company's operating leases for office space were recorded on the balance sheet following the adoption of ASC 842 - Adoption of the new lease standard (ASC 842) on March 1, 2019, resulted in recording approximately $37.1 million in lease assets and $47.2 million in lease liabilities, with no material impact on consolidated statements of income or cash flows[38] Operating Lease Expense (in thousands) | Period | 2020 | 2019 | Change (YoY) | | :----- | :--- | :--- | :----------- | | 3 Months Ended Nov 30 | $1,800 | $1,500 | +$300 (+20%) | | 9 Months Ended Nov 30 | $5,000 | $4,800 | +$200 (+4.2%) | Estimated Lease Payments (in thousands) as of Nov 30, 2020 | Fiscal Year | Amount | | :---------- | :----- | | 2021 (balance for remainder of fiscal year) | $1,826 | | 2022 | $7,128 | | 2023 | $6,123 | | 2024 | $5,332 | | 2025 | $5,762 | | Thereafter | $34,370 | | Total Future Lease Payments | $60,541 | | Less: imputed interest | (16,492) | | Present Value of Lease Liability | $44,049 | Note 5 - Assets Held for Sale Certain assets in the mass channel Personal Care business are classified as held for sale, with divestiture expected in fiscal 2021 - The company committed in the fourth quarter of fiscal 2020 to divest certain assets within its mass channel personal care business (Personal Care), including intangible assets, inventory, and fixed assets related to brands such as Pert, Brut, Sure, and Infusium[44] - The divestiture is expected to occur within fiscal 2021, and the identified assets of the disposal group have been classified as held for sale[44] Carrying Amounts of Assets Held for Sale (in thousands) | Asset Category | November 30, 2020 | February 29, 2020 | | :------------- | :---------------- | :---------------- | | Inventory | $11,650 | $17,150 | | Property and equipment, net | $83 | $83 | | Goodwill | $9,849 | $9,849 | | Other intangible assets, net | $17,724 | $17,724 | | Total assets held for sale | $39,306 | $44,806 | Note 6 - Supplemental Balance Sheet Information This note provides detailed breakdowns of property and equipment, and accrued expenses and other current liabilities Property and Equipment, net (in thousands) | Category | November 30, 2020 | February 29, 2020 | | :------- | :---------------- | :---------------- | | Land | $12,644 | $12,644 | | Building and improvements | $117,061 | $115,592 | | Computer, software, furniture and other equipment | $98,382 | $89,257 | | Tools, molds and other production equipment | $43,001 | $37,652 | | Construction in progress | $9,169 | $9,302 | | Property and equipment, net | $135,795 | $132,107 | Accrued Expenses and Other Current Liabilities (in thousands) | Category | November 30, 2020 | February 29, 2020 | | :------- | :---------------- | :---------------- | | Accrued compensation, benefits and payroll taxes | $54,667 | $49,624 | | Accrued sales discounts and allowances | $55,832 | $34,176 | | Accrued sales returns | $31,919 | $22,972 | | Accrued advertising | $60,549 | $31,351 | | Other | $86,601 | $45,034 | | Total accrued expenses and other current liabilities | $289,568 | $183,157 | Note 7 - Acquisitions The company acquired Drybar Products LLC for approximately $255.9 million, expanding its Beauty segment - On January 23, 2020, the company completed the acquisition of Drybar Products LLC for approximately $255.9 million in cash, funded by borrowings under its revolving credit agreement[48] - Drybar is an innovative, trend-setting prestige hair care and styling brand, and as part of the transaction, Helen of Troy granted a worldwide license to Drybar Holdings LLC to use the Drybar trademark for salon operations[49] Net Assets Recorded Upon Drybar Products Acquisition (January 23, 2020, in thousands) | Asset/Liability Category | Amount | | :----------------------- | :----- | | Receivables | $7,710 | | Inventory | $16,603 | | Property and equipment | $1,472 | | Goodwill | $172,933 | | Trade names - definite | $30,000 | | Other intangible assets - definite | $33,000 | | Net assets recorded | $255,861 | Note 8 - Goodwill and Intangible Assets No impairment charges were recorded for goodwill or intangible assets, with details provided by segment - The company performs annual impairment tests during the fourth quarter and interim tests when necessary; no impairment charges were recorded for the three and nine months ended November 30, 2020 and 2019[54] Goodwill and Intangible Assets by Segment (in thousands, November 30, 2020) | Segment | Goodwill Net Book Value | Trademarks - indefinite | Other intangibles - finite | Total Net Book Value | | :------------ | :---------------------- | :---------------------- | :------------------------- | :------------------- | | Housewares | $282,056 | $134,200 | $20,052 | $436,308 | | Health & Home | $284,913 | $54,000 | $21,588 | $360,501 | | Beauty | $172,932 | N/A | $58,777 | $231,709 | | Total | $739,901 | $188,200 | $100,417 | $1,028,518 | Estimated Amortization Expense (in thousands) | Fiscal Year | Amount | | :---------- | :----- | | Fiscal 2021 | $16,751 | | Fiscal 2022 | $10,361 | | Fiscal 2023 | $10,287 | | Fiscal 2024 | $9,902 | | Fiscal 2025 | $9,281 | | Fiscal 2026 | $7,252 | Note 9 - Share-Based Compensation Plans Share-based compensation expense increased due to various equity awards granted to directors and employees - During the nine months ended November 30, 2020, the company granted 2,747 RSUs, 42,143 RSAs, 4,970 PSUs (at target), and 86,004 PSAs (at target)[57] - For the same nine-month period, 112,720 PSUs vested and settled, and employees exercised stock options for 13,540 shares[57] Share-Based Compensation Expense (in thousands) | Period | 2020 | 2019 | Change (YoY) | | :----- | :--- | :--- | :----------- | | 3 Months Ended Nov 30 | $6,739 | $4,758 | +$1,981 (+41.6%) | | 9 Months Ended Nov 30 | $20,654 | $18,743 | +$1,911 (+10.2%) | Note 10 - Repurchase of Helen of Troy Common Stock The company repurchased shares on the open market under its authorized program and through equity award settlements - In May 2019, the Board authorized the repurchase of up to $400 million of common stock, effective for three years[59] - As of November 30, 2020, $190.0 million remained available under this authorization[59] - The company also repurchases shares through "net exercise" of share-settled awards to cover payroll taxes, federal withholding taxes, and exercise prices[60] Share Repurchase Activity (in thousands, except share and per share data) | Period | Common Stock Repurchased on Open Market (Shares) | Aggregate Value (Open Market) | Common Stock Received (Share-Based Comp. Shares) | Aggregate Value (Share-Based Comp.) | | :----- | :----------------------------------------------- | :---------------------------- | :----------------------------------------------- | :---------------------------------- | | 3 Months Ended Nov 30, 2020 | 960,829 | $191,606 | 6,115 | $1,194 | | 3 Months Ended Nov 30, 2019 | — | $— | 6,509 | $1,002 | | 9 Months Ended Nov 30, 2020 | 960,829 | $191,606 | 67,740 | $11,355 | | 9 Months Ended Nov 30, 2019 | — | $— | 77,067 | $10,133 | Note 11 - Restructuring Plan The "Project Refuel" restructuring plan is nearing completion, targeting $9.0 to $11.0 million in annualized profit improvements - The "Project Refuel" restructuring plan, initiated in October 2017, targets total annualized profit improvements of approximately $9.0 to $11.0 million and is expected to be completed during the first quarter of fiscal 2022[62] - As of November 30, 2020, the company incurred $9.1 million of pre-tax restructuring costs since implementing Project Refuel, with a remaining liability of $0.2 million[63] - Pre-tax restructuring charges for the nine months ended November 30, 2020, were $0.4 million, a decrease from $1.1 million in the prior year[63] Note 12 - Commitments and Contingencies The company is involved in various legal proceedings, none of which are expected to have a material adverse effect - The company is involved in various legal claims and proceedings in the normal course of operations[64] - Management believes the outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations, or liquidity[64] Note 13 - Long-Term Debt The company's long-term debt primarily consists of an amended Credit Agreement with increased capacity and extended maturity - On March 13, 2020, the Credit Agreement was amended to extend its maturity to March 13, 2025, and increase the unsecured revolving commitment from $1.0 billion to $1.25 billion[66] - As of November 30, 2020, the outstanding revolving loan principal balance was $426.0 million, with $804.8 million available for borrowings under the Credit Agreement[68] - As of November 30, 2020, the company was in compliance with all covenants under the Credit Agreement and other debt agreements[74] Long-Term Debt Summary (in thousands) | Debt Type | November 30, 2020 | February 29, 2020 | | :-------- | :---------------- | :---------------- | | MBFC Loan | $18,548 | $20,451 | | Credit Agreement | $421,833 | $318,854 | | Total long-term debt | $440,381 | $339,305 | | Long-term debt, excluding current maturities | $438,497 | $337,421 | Note 14 - Fair Value Financial instruments are measured at fair value using a three-level hierarchy, with most classified as Level 2 - The company classifies assets and liabilities recorded or reported at fair value under a GAAP-prescribed hierarchy (Level 1, Level 2, Level 3) based on the observability of inputs[76] - Most financial assets and liabilities are classified as Level 2 because their valuation depends on observable inputs or model-derived valuations whose significant value drivers are observable[77] - Non-financial assets, including goodwill, other intangible assets, and assets held for sale, are classified as Level 3 items and measured at fair value on a non-recurring basis for impairment testing[80] Fair Value of Financial Assets and Liabilities (in thousands, November 30, 2020) | Category | Assets | Liabilities | | :------- | :----- | :---------- | | Money market accounts | $118,559 | — | | Interest rate swaps | — | $11,627 | | Foreign currency contracts | $7 | $5,328 | | Floating rate debt | — | $440,381 | | Total | $118,566 | $457,336 | Note 15 - Financial Instruments and Risk Management The company uses derivative instruments to hedge foreign currency and interest rate risks - The company is subject to foreign currency risk from transactions denominated in Euros, British Pounds, Canadian Dollars, and Mexican Pesos, hedging with forward contracts and zero-cost collars[81][83] - Floating interest rates on $225.0 million of the outstanding principal balance under the Credit Agreement are hedged with interest rate swaps to effectively fix interest rates[84] - The company expects pre-tax losses of $8.3 million associated with foreign currency contracts and interest rate swaps currently in accumulated other comprehensive income to be reclassified into income over the next twelve months[87][89] Fair Values of Derivative Instruments (in thousands, November 30, 2020) | Instrument Type | Assets | Liabilities | | :-------------- | :----- | :---------- | | Foreign currency contracts (hedging) | $7 | $3,510 | | Interest rate swaps (hedging) | — | $11,627 | | Cross-currency debt swaps (non-hedging) | — | $1,216 | | Total fair value | $7 | $16,353 | Note 16 - Accumulated Other Comprehensive Income (Loss) Changes in AOCI were primarily driven by unrealized losses on interest rate swaps and foreign currency contracts Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | Balance at Feb 29, 2020 | Other Comprehensive Loss Before Reclassification (9M Ended Nov 30, 2020) | Amounts Reclassified Out of AOCI | Tax Effects | Balance at Nov 30, 2020 | | :-------- | :---------------------- | :--------------------------------------------------------- | :------------------------------- | :---------- | :---------------------- | | Interest Rate Swaps | $(8,199) | $(910) | — | $214 | $(8,895) | | Foreign Currency Contracts | $1,194 | $(5,653) | $124 | $945 | $(3,390) | | Total | $(7,005) | $(6,563) | $124 | $1,159 | $(12,285) | Note 17 - Segment Information This note provides a detailed breakdown of financial performance by the Housewares, Health & Home, and Beauty segments Sales Revenue, Net by Segment (in thousands, Three Months Ended November 30) | Segment | 2020 | 2019 | % Change | | :------------ | :-------- | :-------- | :------- | | Housewares | $222,400 | $183,211 | 21.4% | | Health & Home | $250,158 | $185,810 | 34.6% | | Beauty | $165,179 | $105,716 | 56.2% | | Total | $637,737 | $474,737 | 34.3% | Operating Income by Segment (in thousands, Three Months Ended November 30) | Segment | 2020 | 2019 | % Change | | :------------ | :-------- | :-------- | :------- | | Housewares | $37,658 | $42,272 | -10.9% | | Health & Home | $30,478 | $24,372 | 25.0% | | Beauty | $32,573 | $12,625 | 158.0% | | Total | $100,709 | $79,269 | 27.0% | Sales Revenue, Net by Segment (in thousands, Nine Months Ended November 30) | Segment | 2020 | 2019 | % Change | | :------------ | :---------- | :---------- | :------- | | Housewares | $564,891 | $496,017 | 13.9% | | Health & Home | $661,568 | $499,543 | 32.4% | | Beauty | $362,965 | $269,507 | 34.7% | | Total | $1,589,424 | $1,265,067 | 25.6% | Operating Income by Segment (in thousands, Nine Months Ended November 30) | Segment | 2020 | 2019 | % Change | | :------------ | :---------- | :---------- | :------- | | Housewares | $106,294 | $109,170 | -2.6% | | Health & Home | $95,782 | $51,836 | 84.8% | | Beauty | $54,887 | $19,990 | 174.6% | | Total | $256,963 | $180,996 | 42.0% | Note 18 - Income Taxes The effective tax rate was impacted by uncertain tax positions, the CARES Act, and a future change in a subsidiary's status - For the three months ended November 30, 2020, the effective tax rate increased to 14.0% (from 10.3% YoY) primarily due to an increase in liabilities related to uncertain tax positions[97] - For the nine months ended November 30, 2020, the effective tax rate decreased to 6.5% (from 9.6% YoY), primarily due to a $9.4 million tax benefit from the CARES Act reversing a prior Tax Act charge, and other discrete benefits[99] - The Macau subsidiary's transition to onshore status on January 1, 2021, is expected to increase the overall effective tax rate by 1.5 to 2.0 percentage points annually, beginning with fiscal 2022[101] Note 19 - Earnings Per Share This note provides the computation of basic and diluted earnings per share, including dilutive securities Weighted Average Shares Outstanding (in thousands) | Period | Basic (2020) | Diluted (2020) | Basic (2019) | Diluted (2019) | | :----- | :----------- | :------------- | :----------- | :------------- | | 3 Months Ended Nov 30 | 24,965 | 25,192 | 25,161 | 25,396 | | 9 Months Ended Nov 30 | 25,182 | 25,350 | 25,099 | 25,295 | Note 20 - Subsequent Events The company entered into a fully paid-up, 40-year license agreement for the Revlon trademark for a $72.5 million fee - On December 22, 2020, the company entered into an amended and extended Trademark License Agreement with Revlon, granting an exclusive, global, fully paid-up license for Revlon's hair care appliance and tools trademark[104] - The Revlon License has an initial term of 40 years and eliminates ongoing royalty payments previously recognized as SG&A expense[104] - A one-time, up-front license fee of $72.5 million was paid, to be recorded as an intangible asset and amortized on a straight-line basis over 40 years[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial results, business trends, liquidity, and capital resources Overview The company is executing Phase II of its transformation strategy, focusing on Leadership Brands and strategic acquisitions - Helen of Troy is a global consumer products company operating in three segments: Housewares, Health & Home, and Beauty[109] - The company completed Phase I of its multi-year transformation strategy in fiscal 2019, focusing on Leadership Brands, strategic acquisitions, and operational efficiency[110] - Phase II, launched in fiscal 2020, aims for improved organic sales growth, continued margin expansion, and strategic capital deployment, with a focus on Leadership Brands, international expansion, and new acquisitions[111] - Key recent events include the acquisition of Drybar Products LLC for $255.9 million (January 2020), a plan to divest certain mass channel personal care assets (Q4 FY2020), and an amendment to the Credit Agreement (March 2020) extending maturity and increasing commitment[113][114][115] - Subsequent to the quarter, the company entered into an amended and extended Trademark License Agreement with Revlon (December 2020) for an exclusive, global, fully paid-up license for $72.5 million, eliminating ongoing royalties[117] Significant Trends Impacting the Business Key business trends include the mixed impacts of COVID-19, tariffs, foreign currency, and shifts in consumer spending Potential Impact of COVID-19 - COVID-19 favorably impacted demand for defensive, healthcare, healthy living, and at-home products, and significantly boosted the online channel, outweighing unfavorable impacts for the nine months ended November 30, 2020[118] - Temporary precautionary measures (e.g., salary reductions, hiring freeze, marketing/capex deferrals) were implemented in Q1 FY2021 to preserve cash flow, but many were reversed in Q2/Q3 FY2021 with increased investments and hiring[120][122] - Strong demand trends in categories like thermometry, air/water filtration, and Housewares continue to outpace supply capacity, leading to out-of-stocks and strain on the U.S. freight network[124] Potential Impact of Tariffs - The company is exposed to risks from U.S. tariffs on products imported from China, where a high concentration of its manufacturers are located, with potential for further tariffs or retaliatory trade measures[127] - Tariff exclusions obtained from the USTR generally expire and require re-approval, otherwise higher tariffs will be assessed[127] Foreign Currency Exchange Rate Fluctuations - The most significant currencies affecting operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso[128] Impact of Foreign Currency Exchange Rates on Consolidated Net Sales Revenue | Period | 2020 Impact ($ millions) | 2020 Impact (%) | 2019 Impact ($ millions) | 2019 Impact (%) | | :----- | :----------------------- | :-------------- | :----------------------- | :-------------- | | 3 Months Ended Nov 30 | +$1.7 | +0.4% | -$2.3 | -0.5% | | 9 Months Ended Nov 30 | -$3.2 | -0.3% | -$6.8 | -0.6% | Consumer Spending and Changes in Shopping Preferences - Approximately 80% of net sales for the three months ended November 30, 2020, and 79% for the nine months ended November 30, 2020, were from U.S. shipments[130] Online Sales as % of Total Consolidated Net Sales Revenue | Period | 2020 % of Total Sales | 2020 Growth YoY | 2019 % of Total Sales | 2019 Growth YoY | | :----- | :-------------------- | :-------------- | :-------------------- | :-------------- | | 3 Months Ended Nov 30 | 24% | 34% | 24% | 30% | | 9 Months Ended Nov 30 | 25% | 33% | 24% | 28% | Variability of the Cough/Cold/Flu Season - Sales in several Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence, which historically runs from November through March[133] Results of Operations The company achieved significant sales and profit growth driven by strong organic performance and the Drybar acquisition Third Quarter Fiscal 2021 Financial Results Third Quarter Fiscal 2021 Key Financial Results (YoY Change) | Metric | 2020 Amount ($ millions) | % Change | | :----- | :----------------------- | :------- | | Consolidated net sales revenue | $637.7 | +34.3% | | Consolidated operating income | $100.7 | +27.0% | | Consolidated operating margin | 15.8% | -0.9 pp | | Net income | $84.2 | +22.5% | | Diluted EPS | $3.34 | +23.2% | | Adjusted operating income (non-GAAP) | $111.9 | +24.0% | | Adjusted diluted EPS (non-GAAP) | $3.76 | +20.5% | Year-To-Date Fiscal 2021 Financial Results Year-To-Date Fiscal 2021 Key Financial Results (YoY Change) | Metric | 2020 Amount ($ millions) | % Change | | :----- | :----------------------- | :------- | | Consolidated net sales revenue | $1,589.4 | +25.6% | | Consolidated operating income | $257.0 | +42.0% | | Consolidated operating margin | 16.2% | +1.9 pp | | Net income | $231.8 | +49.1% | | Diluted EPS | $9.14 | +48.6% | | Adjusted operating income (non-GAAP) | $291.5 | +35.3% | | Adjusted diluted EPS (non-GAAP) | $10.05 | +35.4% | Consolidated and Segment Net Sales Revenue - The company redefined 'Organic business' to refer to net sales revenue associated with product lines or brands after the first twelve months from acquisition, excluding foreign currency impact, replacing the previous 'Core business' definition[143] Consolidated Net Sales Revenue Growth (YoY) | Period | Total Growth | Organic Business Growth | Acquisition Growth (Drybar) | | :----- | :----------- | :---------------------- | :-------------------------- | | 3 Months Ended Nov 30 | +34.3% | +30.3% | +3.7% | | 9 Months Ended Nov 30 | +25.6% | +23.1% | +2.8% | Segment Net Sales Revenue Growth (YoY) | Segment | 3 Months Ended Nov 30, 2020 | 9 Months Ended Nov 30, 2020 | | :------------ | :-------------------------- | :-------------------------- | | Housewares | +21.4% | +13.9% | | Health & Home | +34.6% | +32.4% | | Beauty | +56.2% | +34.7% | Leadership Brand and Other Net Sales Revenue - Leadership Brands include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools, and Drybar[106] Leadership Brand Sales Revenue (in thousands, YoY Change) | Period | 2020 Amount | 2019 Amount | $ Change | % Change | | :----- | :---------- | :---------- | :------- | :------- | | 3 Months Ended Nov 30 | $508,210 | $379,604 | $128,606 | 33.9% | | 9 Months Ended Nov 30 | $1,288,614 | $1,012,346 | $276,268 | 27.3% | Consolidated Net Sales Revenue - Consolidated net sales revenue increased by $163.0 million (+34.3%) to $637.7 million for the three months ended November 30, 2020, driven by a $143.8 million (+30.3%) Organic business increase and a $17.5 million (+3.7%) contribution from the Drybar Products acquisition[147] - Consolidated net sales revenue increased by $324.4 million (+25.6%) to $1,589.4 million for the nine months ended November 30, 2020, driven by a $291.9 million (+23.1%) Organic business increase and a $35.6 million (+2.8%) contribution from the Drybar Products acquisition[149] - Growth was primarily due to increased brick-and-mortar sales, online sales, and international sales, partially offset by reduced store traffic, a soft back-to-school season, and declines in Non-Core business[147][150][151] Segment Net Sales Revenue Housewares Housewares net sales revenue increased by 21.4% in Q3 and 13.9% in 9M FY2021, driven by strong OXO brand demand - Housewares net sales revenue increased $39.2 million (+21.4%) to $222.4 million in Q3 FY2021, driven by a $38.8 million (+21.2%) Organic business increase due to higher demand for OXO brand products and international sales[152] - Housewares net sales revenue increased $68.9 million (+13.9%) to $564.9 million in 9M FY2021, driven by a $68.8 million (+13.9%) Organic business increase due to higher demand for OXO brand products, club channel sales, international sales, and new product introductions[152] - Growth was partially offset by reduced store traffic due to COVID-19, a soft back-to-school season, increased competitive activity primarily impacting the Hydro Flask brand, and lower closeout channel sales[152] Health & Home Health & Home net sales revenue grew 34.6% in Q3 and 32.4% in 9M FY2021, fueled by strong demand for healthcare products - Health & Home net sales revenue increased $64.3 million (+34.6%) to $250.2 million in Q3 FY2021, driven by a $62.9 million (+33.8%) Organic business increase due to strong consumer demand for healthcare and healthy living products (thermometry, air purification) attributable to COVID-19[153] - Health & Home net sales revenue increased $162.0 million (+32.4%) to $661.6 million in 9M FY2021, driven by a $162.1 million (+32.5%) Organic business increase due to strong consumer demand for healthcare and healthy living products (thermometry, air purification) attributable to COVID-19 and wildfire activity[155] - Growth was partially offset by declines in non-strategic categories[154][156] Beauty Beauty net sales revenue surged 56.2% in Q3 and 34.7% in 9M FY2021, driven by organic growth and the Drybar acquisition - Beauty net sales revenue increased $59.5 million (+56.2%) to $165.2 million in Q3 FY2021, driven by a $42.1 million (+39.8%) Organic business increase and a $17.5 million (+16.6%) contribution from the Drybar Products acquisition[157] - Beauty net sales revenue increased $93.5 million (+34.7%) to $363.0 million in 9M FY2021, driven by a $60.9 million (+22.6%) Organic business increase and a $35.6 million (+13.2%) contribution from the Drybar Products acquisition[158] - Organic business growth was primarily due to the strength of the One-Step family of products, expanded distribution (club channel), and increased international sales[157][158] - Growth was partially offset by reduced store traffic due to COVID-19, a net sales revenue decline in Non-Core business, and the closure of key domestic customers[157][158] Consolidated Gross Profit Margin - Consolidated gross profit margin increased by 0.9 percentage points to 45.1% in Q3 FY2021, primarily due to a favorable product mix within Health & Home and Organic Beauty, the favorable impact of the Drybar Products acquisition, and a favorable channel mix within the Housewares segment[159][160] - Consolidated gross profit margin increased by 1.1 percentage points to 43.9% in 9M FY2021, driven by similar factors as Q3, but partially offset by an unfavorable product mix in the Housewares segment and the unfavorable comparative impact of tariff exclusion refunds received in the prior year[161] - Offsetting factors included higher inbound freight expense and an unfavorable product mix in the Housewares segment for Q3[159] Consolidated SG&A - Consolidated SG&A ratio increased by 1.8 percentage points to 29.3% in Q3 FY2021, primarily due to increased marketing, freight and distribution, royalty, legal and other professional fees, and higher bad debt expense[162][165] - This increase was partially offset by the impact of higher overall net sales revenue on operating leverage, travel expense reductions due to COVID-19, and the favorable comparative impact of acquisition-related expenses incurred in the prior year[162][165] - Consolidated SG&A ratio decreased by 0.7 percentage points to 27.7% in 9M FY2021, primarily due to higher net sales revenue operating leverage, lower marketing and personnel expenses (COVID-19 cost reduction initiatives), and travel expense reductions[162][165] Restructuring Charges - An insignificant amount of pre-tax restructuring costs were recorded for the three months ended November 30, 2020 and 2019[163] - For the nine months ended November 30, 2020, pre-tax restructuring charges were $0.4 million, compared to $1.1 million for the same period last year, primarily related to employee severance and termination benefits and contract termination costs[164] Operating income, operating margin, adjusted operating income (non-GAAP), and adjusted operating margin (non-GAAP) by segment Consolidated Operating Income and Margin (in thousands, Three Months Ended November 30) | Metric | 2020 | 2019 | | :----- | :---------- | :---------- | | Operating income, as reported (GAAP) | $100,709 | $79,269 | | Operating margin (GAAP) | 15.8% | 16.7% | | Adjusted operating income (non-GAAP) | $111,937 | $90,304 | | Adjusted operating margin (non-GAAP) | 17.6% | 19.0% | Consolidated Operating Income and Margin (in thousands, Nine Months Ended November 30) | Metric | 2020 | 2019 | | :----- | :---------- | :---------- | | Operating income, as reported (GAAP) | $256,963 | $180,996 | | Operating margin (GAAP) | 16.2% | 14.3% | | Adjusted operating income (non-GAAP) | $291,499 | $215,404 | | Adjusted operating margin (non-GAAP) | 18.3% | 17.0% | Consolidated Operating Income - Consolidated operating income increased 27.0% to $100.7 million in Q3 FY2021, but operating margin decreased by 0.9 percentage points to 15.8%, primarily due to increased marketing, freight, royalty, legal, and bad debt expenses[168] - Consolidated operating income increased 42.0% to $257.0 million in 9M FY2021, with operating margin increasing by 1.9 percentage points to 16.2%, driven by higher net sales operating leverage, favorable product/channel mix, and COVID-19 cost reduction initiatives[169][170] - Adjusted operating income increased 24.0% to $111.9 million in Q3 FY2021 and 35.3% to $291.5 million in 9M FY2021[168][169] Housewares Operating Income - Housewares operating income decreased 10.9% to $37.7 million in Q3 FY2021, with operating margin decreasing by 6.2 percentage points to 16.9%, primarily due to a less favorable product mix, increased freight/distribution, marketing, royalty, and legal fees[171][173] - Housewares operating income decreased 2.6% to $106.3 million in 9M FY2021, with operating margin decreasing by 3.2 percentage points to 18.8%, primarily due to a less favorable product mix, higher freight/distribution, increased marketing, and customer chargeback activity[172][174] - These decreases were partially offset by the favorable impact of higher net sales revenue on operating leverage, a more favorable channel mix, and travel expense reductions due to COVID-19[171][172] Health & Home Operating Income - Health & Home operating income increased 25.0% to $30.5 million in Q3 FY2021, but operating margin decreased by 0.9 percentage points to 12.2%, primarily due to increased marketing, performance-based compensation, royalty expense, and unfavorable foreign currency impacts[175] - Health & Home operating income increased 84.8% to $95.8 million in 9M FY2021, with operating margin increasing by 4.1 percentage points to 14.5%, primarily due to higher net sales operating leverage, lower personnel/marketing expenses (COVID-19 cost reductions), and a more favorable product mix[177] - Adjusted operating income increased 22.5% to $35.3 million in Q3 FY2021 and 62.9% to $110.4 million in 9M FY2021[176][178] Beauty Operating Income - Beauty operating income increased 158.0% to $32.6 million in Q3 FY2021, with operating margin increasing by 7.8 percentage points to 19.7%, driven by higher net sales operating leverage, a more favorable product mix, and the favorable comparative impact of Drybar Products acquisition expenses[179][181] - Beauty operating income increased 174.6% to $54.9 million in 9M FY2021, with operating margin increasing by 7.7 percentage points to 15.1%, driven by similar factors as Q3, including lower personnel expense due to COVID-19 cost reductions[182] - Offsetting factors included higher personnel expense related to the Drybar acquisition, increased marketing, higher performance-based compensation, and higher legal and bad debt expenses[181][182] Interest Expense - Interest expense increased by 5.7% to $2.9 million in Q3 FY2021 and by 3.0% to $9.6 million in 9M FY2021[183][184] - The increase was primarily due to higher average levels of debt outstanding, partially offset by lower average interest rates[183][184] Income Tax Expense - For the three months ended November 30, 2020, income tax expense as a percentage of income before income tax was 14.0%, up from 10.3% in the prior year, primarily due to an increase in liabilities related to uncertain tax positions[186] - For the nine months ended November 30, 2020, income tax expense as a percentage of income before income tax was 6.5%, down from 9.6% in the prior year, primarily due to a $9.4 million tax benefit from the CARES Act[189][190] - The transition of the Macau subsidiary to onshore status in 2021 is expected to increase the overall effective tax rate by 1.5 to 2.0 percentage points annually starting fiscal 2022[192] Net Income, diluted EPS, adjusted income (non-GAAP), and adjusted diluted EPS (non-GAAP) Net Income (in thousands, YoY Change) | Period | 2020 Amount | 2019 Amount | $ Change | % Change | | :----- | :---------- | :---------- | :------- | :------- | | 3 Months Ended Nov 30 | $84,155 | $68,699 | $15,456 | 22.5% | | 9 Months Ended Nov 30 | $231,774 | $155,488 | $76,286 | 49.1% | Diluted EPS (YoY Change) | Period | 2020 Amount | 2019 Amount | % Change | | :----- | :---------- | :---------- | :------- | | 3 Months Ended Nov 30 | $3.34 | $2.71 | 23.2% | | 9 Months Ended Nov 30 | $9.14 | $6.15 | 48.6% | Adjusted Income (non-GAAP, in thousands, YoY Change) | Period | 2020 Amount | 2019 Amount | $ Change | % Change | | :----- | :---------- | :---------- | :------- | :------- | | 3 Months Ended Nov 30 | $94,776 | $79,117 | $15,659 | 19.8% | | 9 Months Ended Nov 30 | $254,894 | $187,751 | $67,143 | 35.8% | Adjusted Diluted EPS (non-GAAP, YoY Change) | Period | 2020 Amount | 2019 Amount | % Change | | :----- | :---------- | :---------- | :------- | | 3 Months Ended Nov 30 | $3.76 | $3.12 | 20.5% | | 9 Months Ended Nov 30 | $10.05 | $7.42 | 35.4% | Financial Condition, Liquidity and Capital Resources The company's liquidity is supported by strong operating cash flow and an expanded credit facility Operating Activities - Operating activities provided net cash of $249.7 million for the nine months ended November 30, 2020, a significant increase from $101.4 million in the prior year[203] - The increase was primarily driven by higher net income and increased cash from accounts payable and accrued expenses, partially offset by increased cash used for receivables and inventory[203] Investing Activities - Investing activities used $19.4 million for capital and intangible asset expenditures during the nine months ended November 30, 2020, an increase from $13.2 million in the prior year[204] - The increase in expenditures was primarily for molds, production and distribution equipment, information technology equipment, and software[204] Financing Activities - Financing activities used $98.1 million of cash during the nine months ended November 30, 2020, compared to $80.4 million in the prior year[205] - The increased cash usage was primarily due to open market repurchases of common stock, partially offset by an increase in proceeds from the line of credit[205] Credit and Other Debt Agreements - The Credit Agreement was amended on March 13, 2020, extending its maturity to March 13, 2025, and increasing the unsecured revolving commitment from $1.0 billion to $1.25 billion[207] - As of November 30, 2020, the outstanding revolving loan principal balance was $426.0 million, with $804.8 million available for borrowings[208] - The company also has an MBFC Loan with an aggregate principal balance of $18.6 million as of November 30, 2020, used to fund its Olive Branch, Mississippi distribution facility[209] - All debt is unconditionally guaranteed by the company and certain subsidiaries, and the company was in compliance with all debt covenants as of November 30, 2020[213] Key Financial Covenants (as defined under debt agreements) | Applicable Financial Covenant | Credit Agreement and MBFC Loan | | :-------------------------- | :----------------------------- | | Minimum Interest Coverage Ratio | EBIT ÷ Interest Expense (Minimum Required: 3.00 to 1.00) | | Maximum Leverage Ratio | Total Current and Long Term Debt ÷ EBITDA + Pro Forma Effect of Transactions (Maximum Currently Allowed: 3.50 to 1.00) | Contractual Obligations - As of November 30, 2020, there have been no material changes from the information provided in the latest annual report on Form 10-K regarding contractual obligations[216] Off-Balance Sheet Arrangements - The company has no existing activities involving special purpose entities or off-balance sheet financing[217] Current and Future Capital Needs - The company believes cash flow from operations and available financing sources will provide sufficient capital to fund foreseeable short- and long-term liquidity requirements, primarily for inventory and accounts receivable[218] - Due to COVID-19 uncertainty, the company has maintained cash and cash equivalent balances higher than historical levels, with $30.2 million held by foreign subsidiaries as of November 30, 2020[219][220] - The company continues to evaluate acquisition opportunities and may finance them, along with share repurchases, using available cash, common stock issuance, additional debt, or other financing sources[220] New Accounting Guidance - For information on recently adopted and issued accounting pronouncements, refer to Note 2 to the accompanying condensed consolidated financial statements[221] Information Regarding Forward-Looking Statements - The report contains forward-looking statements based on current expectations and assumptions, which are subject to risks that could cause actual results to differ materially[222] - The company undertakes no obligation to publicly update or revise any forward-looking statements[223] - Key risks include managing COVID-19 impacts, dependence on retail economies and large customers, acquisition/divestiture integration, cybersecurity, foreign currency fluctuations, tariffs, and changes in laws and regulations[223] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the company's market risk disclosures since the last annual report - There have been no material changes in the information provided in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in the company's latest annual report on Form 10-K[225] - Additional information regarding risk management activities can be found in Notes 13, 14, and 15 to the accompanying condensed consolidated financial statements[225] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls Disclosure Controls and Procedures - Management, under the supervision of the CEO and CFO, maintains disclosure controls and procedures designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[226] - Based on their evaluation, the CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable level of assurance as of November 30, 2020[227] Changes in Internal Control Over Financial Reporting - No changes in internal control over financial reporting were identified during the fiscal quarter ended November 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[228] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings not expected to have a material adverse effect - The company is involved in various legal claims and proceedings in the normal course of operations[229] - Management believes the outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations, or liquidity[229] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the company's latest annual report - Potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. "Risk Factors" of the annual report on Form 10-K for the fiscal year ended February 29, 2020[230] - There have been no material changes in the company's risk factors since the filing of its annual report on Form 10-K[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company continued its common stock repurchase program, with $190.0 million remaining available - In May 2019, the Board of Directors authorized the repurchase of up to $400 million of outstanding common stock, effective for three years[231] - As of November 30, 2020, $190.0 million remained available under the stock repurchase authorization[231][233] Share Repurchase Activity (Three Months Ended November 30, 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----- | :------------------------------- | :--------------------------- | | September 1 to September 30, 2020 | 5,710 | $194.97 | | October 1 to October 31, 2020 | 746,276 | $201.07 | | November 1 to November 30, 2020 | 214,958 | $193.68 | | Total | 966,944 | $199.39 | Item 6. Exhibits This section lists the certifications and iXBRL financial data filed as exhibits with the report - Exhibits include certifications of the Chief Executive Officer (31.1) and Chief Financial Officer (31.2), a joint certification (32), and financial statements formatted in Inline eXtensible Business Reporting Language (iXBRL) (101, 104)[234] SIGNATURES - The report is signed by Julien R. Mininberg, Chief Executive Officer, and Brian L. Grass, Chief Financial Officer, on January 8, 2021[239][240]