ITEM 2. MANAGEMENT’S DISCUSSIO
N 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 and its other filings with the Securities and Exchange Commission (the “SEC”). This discussion should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1. of this report.
Throughout this 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 make reference 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. Please see “Explanation of Certain Terms and Measures Used in MD&A” beginning on page 49 for more information on the use and calculation of certain GAAP-based and non-GAAP financial measures.
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 global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have four segments: Housewares, Health & Home, Nutritional Supplements, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home and includes the “Hydro Flask” business acquired on March 18, 2016. Product offerings include food preparation tools and appliances, insulated stainless steel food and beverage containers, gadgets and storage containers, cleaning, organization, and baby and toddler care products. 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 Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, as well as other health products sold directly to consumers. 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.
The Nutritional Supplements segment primarily sells directly to consumers. Our other segments primarily sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores. In addition, the Beauty segment sells extensively through beauty supply retailers and wholesalers, and the Health & Home segment sells certain of its product lines through medical distributors and other products through home improvement stores. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.
The overall sales pattern for the Nutritional Supplements segment is not highly seasonal. Our other segments are seasonal due to the different calendar events, holidays and seasonal weather patterns. Historically, the third fiscal quarter produces the highest net sales revenue and operating income during the fiscal year.
We believe that the growth in the internet as a sales channel is reducing market share in the traditional “brick and mortar” channels. During the fiscal quarter and year-to-date periods ended August 31, 2016, sales to internet-based customers comprised approximately 13.5 and 12.2 percent, respectively, of our total consolidated net sales revenue compared to approximately 10.1 and 9.9 percent, respectively, for the same periods last year. As a result, we continue to refine our domestic distribution capabilities to adjust to this form of demand and meet the logistical challenge of higher frequency, smaller order size shipments.
With the continued growth in internet sales, we believe there are certain trends emerging in the retail environment. Shopping mall traffic is declining and many brick and mortar retailers are aggressively looking to their suppliers for gross margin improvement to make up the sales volume lost to the internet. The internet affects brick and mortar retailers not just by taking sales, but lower foot traffic also reduces opportunities for impulse buying. In addition, retailers are rationalizing their product offerings with weaker brand equities being de-emphasized or replaced with private label. Major internet retailers are also becoming increasingly efficient with respect to inventory management and are able to operate with lower shelf stock and tighter safety stock. In addition, there is uncertainty related to the upcoming U.S. election and impending exit of the U.K. from the European Union (“Brexit”). The confluence of these trends has created additional uncertainty for our business as we enter our peak selling season, and we are responding by developing additional pricing, promotional and supply chain strategies to adapt to a changing retail environment.
Our business is dependent 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 80 percent of our fiscal year 2016 net sales revenue was from U.S. shipments. We believe U.S. consumer sentiment continues to remain cautious and uncertain.
We also believe that Brexit has contributed to a contraction of consumer activity for our Europe, Middle East and Africa (“EMEA”) operations. The retail outlook for the EMEA region has grown considerably more uncertain and our operations may be affected by regional recessions, currency volatility and emergent regional trade disputes, any of which could have a material adverse effect on our business. For the fiscal quarter and year-to-date periods ended August 31, 2016, the British Pound has weakened against the U.S. dollar by 10.4 and 5.5 percent, respectively, compared to the same periods last year. For the fiscal quarter and year-to-date periods ended August 31, 2016, net sales revenue denominated in British Pounds represented approximately 2.1 percent of our consolidated net sales revenue.
The outlook for our non-EMEA international operations continues to remain uncertain as these operations serve consumers in more inconsistently recovering economies that are more susceptible to fiscal and geo-political instabilities. During the fiscal quarter and year-to-date periods ended August 31, 2016, foreign currency fluctuations, particularly in Latin America, exposed our international operating results to significant variability and uncertainty, which was compounded by weakness in the retail environments throughout these markets.
As further discussed in Note 13 to the accompanying consolidated condensed financial statements and under Part I. Item 3. “Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk – Venezuelan Bolivar Currency Exchange Uncertainties”, we adopted the new Venezuela DICOM exchange rate at the beginning of the first quarter of fiscal year 2017. DICOM opened at 207 Bolivars per U.S. Dollar and devalued to approximately 645 Bolivars per U.S. Dollar as of August 31, 2016. Absent further changes in the exchange system, or unless future developments call for further changes, we intend to use DICOM to re-measure our financial statements going forward. At the current DICOM exchange rate, we expect that U.S. Dollar reported operating results from Venezuela will no longer be meaningful to the Company or the Beauty segment. Net sales revenue from Venezuela for the fiscal quarter and year-to-date periods ended August 31, 2016 was $0.14 and $0.37 million, respectively, compared to $5.93
and $10.04 million, respectively, for the same periods last year. Operating income (loss) from Venezuela for the fiscal quarter and year-to-date periods ended August 31, 2016 was ($0.01) and ($0.11) million, respectively, compared to $1.74 and $3.32 million, respectively, for the same periods last year. Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, and we cannot assess the impact, if any, such events may have on our Venezuelan business.
Financial Performance Highlights
Consolidated net sales revenue for the fiscal quarter ended August 31, 2016 decreased $0.96 million, or 0.3 percent, to $368.17, compared to $369.13 million for the same period last year. Consolidated net sales revenue for the fiscal year-to-date period ended August 31, 2016 increased $1.64 million, or 0.2 percent, to $716.11 million, compared to $714.47 million for the same period last year. Core business net sales revenue decreased $30.02 and $42.51 million, or 8.1 and 5.9 percent, for the fiscal quarter and year-to-date periods ended August 31, 2016, respectively, compared to the same periods last year.
Net sales revenue for the fiscal quarter and year-to-date periods ended August 31, 2016 includes the unfavorable impact of net foreign exchange fluctuations of $2.32 and $4.13 million, respectively, compared to the same periods last year. In addition to the impact from foreign currency fluctuations, the year-over-year comparisons of net sales revenue were unfavorably impacted by the Company’s transition from the official exchange rate in Venezuela to the market rate of DICOM, which is the lowest rate in the current exchange rate system. Net sales revenue from our Venezuelan operations decreased by $5.79 and $9.67 million to $0.14 and $0.37 million, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $5.93 and $10.04 million in the same periods last year, almost entirely due to the adoption of the DICOM exchange rate. This impact is reported in the Beauty segment.
Net sales revenue in our Housewares segment increased $27.13 and $46.55 million for the fiscal quarter and year-to-date periods ended August 31, 2016, or 34.4 and 32.3 percent, respectively, compared to the same period last year. The year-over-year increases include $29.06 and $43.43 million of net sales from the Hydro Flask acquisition. For the fiscal quarter and year-to-date periods ended August 31, 2016, Housewares core business declined $1.93 million and increased $3.12 million, respectively, compared to the same periods last year. Net sales revenue in our Health & Home segment increased $1.20 and $4.51 million for the fiscal quarter and year-to-date periods ended August 31, 2016, or 0.8 and 1.6 percent, respectively, compared to the same periods last year. Net sales revenue in our Nutritional Supplements segment decreased $4.94 and $8.44 million for the fiscal quarter and year-to-date periods ended August 31, 2016, or 13.0 and 10.9 percent, respectively, compared to the same periods last year. Net sales revenue in our Beauty segment decreased $24.35 and $40.99 million for the fiscal quarter and year-to-date periods ended August 31, 2016, or 22.3 and 19.8 percent, respectively, compared to the same periods last year. The declines in the Beauty segment’s net sales revenue for the fiscal quarter and year-to-date periods ended August 31, 2016
include the net unfavorable impacts of $1.27 and $2.67 million, respectively, from foreign currency exchange fluctuations and $5.79 and $9.67 million in declines, respectively, from our Venezuelan operations, which are primarily due to the adoption of the new DICOM exchange rate discussed above.
In addition to our net sales revenue performance discussed above, key results for the fiscal quarter and year-to-date periods ended August 31, 2016 include the following:
|
·
|
|
Consolidated gross profit margin increased 4.2 percentage points to 44.3 percent for the fiscal quarter ended August 31, 2016, compared to 40.1 percent for the same period last year. Consolidated gross profit margin increased 3.2 percentage points to 44.0 percent for the fiscal year-to-date ended August 31, 2016, compared to 40.8 percent for the same period last year.
|
|
·
|
|
Our SG&A ratio increased 2.8 percentage points to 34.1 percent for the fiscal quarter ended August 31, 2016, compared to 31.3 percent for the same period last year. Our SG&A ratio increased 2.5 percentage points to 34.6 percent for the fiscal year-to-date ended August 31, 2016, compared to 32.1 percent for the same period last year.
|
|
·
|
|
Operating income was $37.49 and $60.39 million, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $32.43 and $58.98 million for the same periods last year. Operating income for the fiscal year-to-date period ended August 31, 2016 includes non-cash intangible asset impairment charges of $7.40 million, compared to $3.00 million for the same period last year. Operating income for the fiscal year-to-date period ended August 31, 2016 also includes a patent litigation charge of $1.47
million for which there were no comparable charges in the same period last year.
|
|
·
|
|
Adjusted operating margin was 13.0 percent for the fiscal quarter ended August 31, 2016, compared to 11.2 percent for the same period last year. Adjusted operating margin was 12.9 percent for the fiscal year-to-date ended August 31, 2016, compared to 11.2 percent for the same period last year.
|
|
·
|
|
Income tax expense was $5.35 and $5.72 million, or 15.9 and 10.8 percent of income before taxes, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $5.43 and $8.81 million, or 18.2 and 16.4 percent of income before taxes, respectively, for the same periods last year.
|
|
·
|
|
Net income was $28.36 and $47.38 million, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $24.45 and $44.86 million, respectively, for the same periods last year. Diluted earnings per share was $1.00 and $1.68, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $0.84 and $1.54, respectively, for the same periods last year.
|
|
·
|
|
Adjusted income was $37.03 and $72.92 million, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $32.33 and $63.04 million, respectively, for the same periods last year. Adjusted diluted EPS was $1.31 and $2.59, respectively, for the fiscal quarter and year-to-date periods ended August 31, 2016, compared to $1.12 and $2.17 million, respectively, for the same periods last year.
|
Adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS 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 on pages 35 through 36 for the fiscal quarter and 42 through 43 for the fiscal year-to-date period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our selected operating data, in U.S. Dollars, as a year-over-year percentage change and as a percentage of net sales revenue. We will refer to this table in the discussion of results of operations which follows:
SELECTED OPERATING DATA (1)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
2016
|
|
2015
|
|
Sales revenue by segment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housewares
|
|
$
|
105,976
|
|
$
|
78,848
|
|
$
|
27,128
|
|
34.4
|
%
|
|
28.8
|
%
|
21.4
|
%
|
Health & Home
|
|
|
144,453
|
|
|
143,254
|
|
|
1,199
|
|
0.8
|
%
|
|
39.2
|
%
|
38.8
|
%
|
Nutritional Supplements
|
|
|
33,112
|
|
|
38,048
|
|
|
(4,936)
|
|
(13.0)
|
%
|
|
9.0
|
%
|
10.3
|
%
|
Beauty
|
|
|
84,629
|
|
|
108,979
|
|
|
(24,350)
|
|
(22.3)
|
%
|
|
23.0
|
%
|
29.5
|
%
|
Total sales revenue, net
|
|
|
368,170
|
|
|
369,129
|
|
|
(959)
|
|
(0.3)
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
|
205,202
|
|
|
221,124
|
|
|
(15,922)
|
|
(7.2)
|
%
|
|
55.7
|
%
|
59.9
|
%
|
Gross profit
|
|
|
162,968
|
|
|
148,005
|
|
|
14,963
|
|
10.1
|
%
|
|
44.3
|
%
|
40.1
|
%
|
Selling, general and administrative expense
|
|
|
125,481
|
|
|
115,573
|
|
|
9,908
|
|
8.6
|
%
|
|
34.1
|
%
|
31.3
|
%
|
Asset impairment charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
%
|
|
-
|
%
|
-
|
%
|
Operating income
|
|
|
37,487
|
|
|
32,432
|
|
|
5,055
|
|
15.6
|
%
|
|
10.2
|
%
|
8.8
|
%
|
Nonoperating income (expense), net
|
|
|
88
|
|
|
(46)
|
|
|
134
|
|
*
|
%
|
|
-
|
%
|
-
|
%
|
Interest expense
|
|
|
(3,866)
|
|
|
(2,503)
|
|
|
(1,363)
|
|
54.5
|
%
|
|
(1.1)
|
%
|
(0.7)
|
%
|
Total other expense
|
|
|
(3,778)
|
|
|
(2,549)
|
|
|
(1,229)
|
|
48.2
|
%
|
|
(1.0)
|
%
|
(0.7)
|
%
|
Income before income taxes
|
|
|
33,709
|
|
|
29,883
|
|
|
3,826
|
|
12.8
|
%
|
|
9.2
|
%
|
8.1
|
%
|
Income tax expense
|
|
|
5,354
|
|
|
5,431
|
|
|
(77)
|
|
(1.4)
|
%
|
|
1.5
|
%
|
1.5
|
%
|
Net income
|
|
$
|
28,355
|
|
$
|
24,452
|
|
$
|
3,903
|
|
16.0
|
%
|
|
7.7
|
%
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
2016
|
|
2015
|
|
Sales revenue by segment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housewares
|
|
$
|
190,579
|
|
$
|
144,034
|
|
$
|
46,545
|
|
32.3
|
%
|
|
26.6
|
%
|
20.2
|
%
|
Health & Home
|
|
|
290,808
|
|
|
286,296
|
|
|
4,512
|
|
1.6
|
%
|
|
40.6
|
%
|
40.1
|
%
|
Nutritional Supplements
|
|
|
69,052
|
|
|
77,488
|
|
|
(8,436)
|
|
(10.9)
|
%
|
|
9.6
|
%
|
10.8
|
%
|
Beauty
|
|
|
165,669
|
|
|
206,656
|
|
|
(40,987)
|
|
(19.8)
|
%
|
|
23.1
|
%
|
28.9
|
%
|
Total sales revenue, net
|
|
|
716,108
|
|
|
714,474
|
|
|
1,634
|
|
0.2
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
|
400,713
|
|
|
423,150
|
|
|
(22,437)
|
|
(5.3)
|
%
|
|
56.0
|
%
|
59.2
|
%
|
Gross profit
|
|
|
315,395
|
|
|
291,324
|
|
|
24,071
|
|
8.3
|
%
|
|
44.0
|
%
|
40.8
|
%
|
Selling, general and administrative expense
|
|
|
247,610
|
|
|
229,349
|
|
|
18,261
|
|
8.0
|
%
|
|
34.6
|
%
|
32.1
|
%
|
Asset impairment charges
|
|
|
7,400
|
|
|
3,000
|
|
|
4,400
|
|
146.7
|
%
|
|
1.0
|
%
|
0.4
|
%
|
Operating income
|
|
|
60,385
|
|
|
58,975
|
|
|
1,410
|
|
2.4
|
%
|
|
8.4
|
%
|
8.3
|
%
|
Nonoperating income (expense), net
|
|
|
237
|
|
|
91
|
|
|
146
|
|
*
|
%
|
|
-
|
%
|
-
|
%
|
Interest expense
|
|
|
(7,517)
|
|
|
(5,394)
|
|
|
(2,123)
|
|
39.4
|
%
|
|
(1.0)
|
%
|
(0.8)
|
%
|
Total other expense
|
|
|
(7,280)
|
|
|
(5,303)
|
|
|
(1,977)
|
|
37.3
|
%
|
|
(1.0)
|
%
|
(0.7)
|
%
|
Income before income taxes
|
|
|
53,105
|
|
|
53,672
|
|
|
(567)
|
|
(1.1)
|
%
|
|
7.4
|
%
|
7.5
|
%
|
Income tax expense
|
|
|
5,724
|
|
|
8,810
|
|
|
(3,086)
|
|
(35.0)
|
%
|
|
0.8
|
%
|
1.2
|
%
|
Net income
|
|
$
|
47,381
|
|
$
|
44,862
|
|
$
|
2,519
|
|
5.6
|
%
|
|
6.6
|
%
|
6.3
|
%
|
* Calculation is not meaningful
|
(1)
|
|
Includes three and approximately five and a half months, respectively, of operating results of Hydro Flask for the fiscal quarter and year-to-date periods ended August 31, 2016, with no comparable results in the same period last year. Hydro Flask operating results are reported in the Housewares segment.
|
Second Quarter of Fiscal Year 2017 Compared to Second Quarter of Fiscal Year 2016
Consolidated net sales revenue:
Consolidated net sales revenue for the fiscal quarter ended August 31, 2016 decreased $0.96 million to $368.17 million, compared to $369.13 million for the same period last year, a decrease of 0.3 percent. Net sales revenue in our Housewares segment increased $27.13 million, or 34.4 percent, compared to the same period last year. The year-over-year increase was comprised of $29.06 million of net sales from the Hydro Flask acquisition, partially offset by a $1.93 million decline in Housewares’ core business net sales revenue. Net sales revenue in our Health & Home segment increased $1.20 million, or 0.8 percent, compared to the same period last year. Net sales revenue in our Nutritional Supplements segment decreased $4.94 million, or 13.0 percent, compared to the same period last year. Net sales revenue in our Beauty segment decreased $24.35 million, or 22.3 percent, compared to the same period last year. The decline in the Beauty segment includes the net unfavorable impacts of $1.27 million of foreign currency exchange fluctuations and a $5.79 million decline from our Venezuelan operations, which is primarily due to the adoption of the new DICOM exchange rate referred to previously.
Impact of acquisitions on net sales revenue:
Because we are an acquisition-oriented company, we provide an analysis of our net sales revenue in terms of growth from our core business and growth from acquisitions. Our most recent acquisition of Hydro Flask occurred on March 18, 2016. Hydro Flask reports its operating results in the Housewares segment. For further information about this acquisition, see Note 9 to the accompanying consolidated condensed financial statements.
IMPACT OF ACQUISITIONS ON NET SALES REVENUE
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
2016
|
|
2015
|
|
Prior year's sales revenue, net
|
|
$
|
369,129
|
|
$
|
319,949
|
|
Components of sales revenue change, net
|
|
|
|
|
|
|
|
Core business
|
|
|
(30,018)
|
|
|
34,937
|
|
Incremental net sales revenue from acquisitions (non-core business):
|
|
|
|
|
|
|
|
Healthy Directions (one month in fiscal year 2016)
|
|
|
-
|
|
|
13,445
|
|
Vicks VapoSteam (three months in fiscal year 2016)
|
|
|
-
|
|
|
798
|
|
Hydro Flask (three months in fiscal year 2017)
|
|
|
29,059
|
|
|
-
|
|
Change in sales revenue, net
|
|
|
(959)
|
|
|
49,180
|
|
Total sales revenue, net
|
|
$
|
368,170
|
|
$
|
369,129
|
|
|
|
|
|
|
|
|
|
Total net sales revenue growth
|
|
|
(0.3)
|
%
|
|
15.4
|
%
|
Core business
|
|
|
(8.1)
|
%
|
|
10.9
|
%
|
Acquisitions
|
|
|
7.9
|
%
|
|
4.5
|
%
|
Impact of foreign currencies on net sales revenue:
During the fiscal quarters ended August 31, 2016 and 2015, approximately 11 and 15 percent, respectively, of our net sales revenue was denominated in foreign currencies. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, and Venezuelan Bolivars. For the fiscal quarter ended August 31, 2016, the impact of net foreign currency exchange rate fluctuations negatively impacted our consolidated U.S. Dollar reported net sales revenue by approximately $2.32 million, or 0.6 percent. In our Beauty segment, foreign exchange fluctuations had a $1.27 million, or 1.5 percent, unfavorable impact on U.S. Dollar reported net sales revenue. In our Housewares and Health & Home segments, foreign exchange fluctuations had unfavorable impacts of $0.53 and $0.52 million, respectively, on U.S. Dollar reported net sales revenue.
In addition to the impact from foreign currency fluctuations, the year-over-year comparison of net sales revenue was unfavorably impacted by the Company’s transition from the official exchange rate in Venezuela to the market rate of DICOM, which is the lowest rate in the current exchange rate system. Net sales revenue from our Venezuelan operations decreased by $5.79 million to $0.14 million for the fiscal quarter ended August 31, 2016, compared to $5.93 million in the same period last year, almost entirely due to the adoption of the DICOM exchange rate. This impact reduced year-over-year net sales in the Beauty Segment by 5.3 percent.
Segment net sales revenue:
Housewares Segment
- Net sales revenue in the Housewares segment for the fiscal quarter ended August 31, 2016 increased $27.13 million, or 34.4 percent, to $105.98 million, compared to $78.85 million for the same period last year. The year-over-year increase was comprised of $29.06 million of net sales from the Hydro Flask acquisition partially offset by a $1.93 million, or 2.4 percent decline in Housewares’ core business net sales revenue. We believe the Hydro Flask business is on track to exceed our expectations, fueled by new product introductions, increased shelf and display space, and new distribution gains. In the segment’s core business, a 4.4 percent increase in average unit selling price was offset by a 6.9 percent decline in unit volume. The decrease in Housewares core net sales revenue occurred principally in the U.S., as sales in EMEA increased modestly despite the negative impact of the weakened British Pound. The net sales decline in the U.S. was primarily the result of smaller and less frequent replenishment orders due to weakening retail sales in the sector, retailer inventory reductions, and in some cases, delays in early season holiday orders as a result of falling consumer traffic counts.
We continue to expect the segment’s longer-term growth to continue to be driven by new products, category expansion, expanded shelf space and assortments at key traditional and internet retailers, and new distribution gains in international markets.
Health & Home Segment
- Net sales revenue in the Health & Home segment for the fiscal quarter ended August 31, 2016 increased $1.20 million, or 0.8 percent, to $144.45 million, compared to $143.25 million for the same period last year. Higher unit volumes contributed 5.0 percent to the segment’s growth, partially offset by a 4.2 percent decline in the average unit selling price. Average unit selling price declines were principally caused by a seasonal shift in mix, which included higher sales of mid-priced items such as fans, and lower priced consumables such as water filters, Vaposteam and VapoPads. Foreign currency fluctuations reduced U.S. Dollar reported net sales revenue by $0.52 million, or 0.4 percent. Net sales gains were primarily driven by PUR water filtration systems, seasonal fans and early season shipments of heaters, partially offset by declines in humidification and hot/cold therapy. In the water filtration category, we believe consumer awareness of municipal water quality issues across the U.S. continues to drive more frequent consumer filter replacement, growth in household penetration and incremental gains in product placement with key retailers. Our seasonal fan business benefited from strong in-season replenishment orders due to high summer temperatures. The heater business growth was driven by early-season new product introductions and distribution gains. The decline in humidifier sales was primarily due to retailers exiting last year’s cough/cold/flu season with higher inventory levels. The decline in the hot/cold therapy category was primarily due to the rationalization of lower margin business.
Nutritional Supplements Segment
- Net sales revenue for the fiscal quarter ended August 31, 2016 decreased $4.94 million, or 13.0 percent, to $33.11 million, compared to $38.05 million for the same period last year. Lower unit volumes and a decrease in average unit selling price contributed approximately 9.1 and 3.9 percent, respectively, to the decline in the segment’s net sales revenue. The decline in average selling price was primarily driven by lower average order values and an increase in promotional pricing to develop new buyer growth in selected categories. The segment saw declines in its offline response rates and legacy print newsletter subscription business, which is being strategically de-emphasized in the segment’s business model. Net sales revenue from the segment’s AutoDelivery program, a continuity program where customers can schedule delivery of product based on their timing and frequency requirements, was essentially flat when compared to the same period last year. The segment is in the process of implementing a multi-year strategic transition from offline to online channels and is dedicating resources to its online interface and e-commerce platforms in an effort to improve order conversion and average order values. The segment recently completed a significant milestone in its
multi-year plan by implementing new order and customer relationship management systems, which we believe will enhance marketing and order conversion effectiveness, as well as improve the overall customer experience.
Beauty Segment
- Net sales revenue in the Beauty segment for the fiscal quarter ended August 31, 2016 decreased $24.35 million, or 22.3 percent, to $84.63 million, compared to $108.98 million for the same period last year. Lower unit volumes and a lower average unit selling price contributed approximately 17.5 and 4.8 percent, respectively, to the decline in the segment’s net sales revenue. The decline in the Beauty segment net sales revenue includes a $5.79 million decline from our Venezuelan operations, which is almost entirely due to the adoption of the new DICOM exchange rate, and the net unfavorable impact of $1.27 million from foreign currency exchange fluctuations. Another $4.16 million of the sales decline relates to a decline in the foot care category due to high inventory in the channel and competitive pressures. Additionally, the segment has de-emphasized sales into the discount channel and other lower margin business. Lower store traffic counts and soft consumer spending at traditional brick and mortar retailers, continued inventory rationalization within the segment’s product categories, and competitive pressures accounted for the remainder of the decline. We continue to expect challenging conditions for the segment for the balance of fiscal year 2017.
Consolidated gross profit margin:
Consolidated gross profit as a percentage of net sales revenue for the fiscal quarter ended August 31, 2016 increased 4.2 percentage points to 44.3 percent, compared to 40.1 percent for the same period last year. The increase in consolidated gross profit margin is primarily due to favorable shifts in product mix, product rationalization efforts, accretion from the Hydro Flask acquisition, and reductions in product costs, partially offset by the unfavorable impact of foreign currency fluctuations.
A significant portion of the products we sell are purchased from third-party manufacturers in China. The Chinese Renminbi has fluctuated against the U.S. Dollar in recent years, devaluing by approximately 6 percent against the U.S. Dollar during fiscal year 2016. If China’s currency fluctuates against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. There can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.
Selling, general and administrative expense (“SG&A”):
Our consolidated SG&A ratio increased 2.8 percentage points to 34.1 percent for fiscal quarter ended August 31, 2016, compared to 31.3 percent for the same period last year. The increase was primarily due to:
|
·
|
|
the impact of higher compensation costs due to hourly wage increases, increases in share-based compensation as new three-year performance based incentives enter their third year of existence and estimated performance factors are adjusted, and higher current year severance costs; and
|
|
·
|
|
the impact within our core business that lower overall net sales had on operating leverage.
|
These factors were partially offset by:
|
·
|
|
lower advertising expense; and
|
|
·
|
|
lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and $10 million of U.S. Dollar to Euro cross-currency debt swaps.
|
Operating income by segment:
The following table sets forth segment operating income, for the periods covered below:
OPERATING INCOME BY SEGMENT
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
2016
|
|
2015
|
|
Housewares (1)
|
|
$
|
24,233
|
|
$
|
15,142
|
|
$
|
9,091
|
|
60.0
|
%
|
|
22.9
|
%
|
19.2
|
%
|
Health & Home
|
|
|
9,397
|
|
|
4,808
|
|
|
4,589
|
|
95.4
|
%
|
|
6.5
|
%
|
3.4
|
%
|
Nutritional Supplements
|
|
|
(1,229)
|
|
|
2,969
|
|
|
(4,198)
|
|
(141.4)
|
%
|
|
(3.7)
|
%
|
7.8
|
%
|
Beauty
|
|
|
5,086
|
|
|
9,513
|
|
|
(4,427)
|
|
(46.5)
|
%
|
|
6.0
|
%
|
8.7
|
%
|
Total operating income
|
|
$
|
37,487
|
|
$
|
32,432
|
|
$
|
5,055
|
|
15.6
|
%
|
|
10.2
|
%
|
8.8
|
%
|
|
(1)
|
|
Includes three months of operating results from Hydro Flask, with no comparable results in the same period last year.
|
In the discussion that follows, our usage of the terms operating margin, operating expense ratio and operating leverage are further described and explained beginning on page 49.
Housewares Segment
- Operating income for the fiscal quarter ended August 31, 2016 increased $9.09 million, or 60.0 percent, compared to the same period last year. Operating margin increased 3.7 percentage points to 22.9 percent, compared to 19.2 percent for the same period last year. The increase in operating margin was primarily due to the accretive impact of the Hydro Flask acquisition, which increased the segment operating margin by 4.6 percentage points for the fiscal quarter ended August 31, 2016, partially offset by margin compression from new product categories in the core business.
Health & Home Segment
- Operating income for the fiscal quarter ended August 31, 2016 increased $4.59 million, or 95.4 percent, compared to the same period last year. Operating margin increased 3.1 percentage points to 6.5 percent, compared to 3.4 percent for the same period last year. The increase in operating margin is primarily due to improved gross margin as a result of product cost reductions, improvement in product sales mix, lower advertising expense, and lower outbound freight costs.
Nutritional Supplements Segment
- Operating income for the fiscal quarter ended August 31, 2016 decreased $4.20 million compared to the same period last year. Operating margin was (3.7
) percent
, compared to 7.8 percent for the same period last year. The primary drivers of the operating margin decline were:
|
·
|
|
the net sales decline and the impact it had on operating leverage; and
|
|
·
|
|
increased investments in promotions, advertising, customer acquisition, and online sales channel development.
|
Beauty Segment
- Operating income for the fiscal quarter ended August 31, 2016 decreased $4.43 million to $5.09 million, compared to $9.51 million for the same period last year. Operating margin decreased 2.7 percentage points to 6.0 percent, compared to 8.7 percent for the same period last year. The primary drivers of the operating margin decline were:
|
·
|
|
the net sales revenue decline and the impact it had on operating leverage;
|
|
·
|
|
foreign currency exchange rate fluctuations, which reduced segment net sales revenue by $1.27 million; and
|
|
·
|
|
a decline in operating income of $1.75 million from our Venezuelan operations, due almost entirely to the adoption of the new DICOM exchange rate.
|
These factors were partially offset by an increase in the segment’s gross profit margin primarily due to reduced product costs and improvement in product sales mix.
ADJUSTED OPERATING INCOME AND OPERATING MARGIN
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2016
|
|
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income, as reported (GAAP)
|
|
$
|
24,233
|
|
22.9
|
%
|
|
$
|
9,397
|
|
6.5
|
%
|
|
$
|
(1,229)
|
|
(3.7)
|
%
|
|
$
|
5,086
|
|
6.0
|
%
|
|
$
|
37,487
|
|
10.2
|
%
|
Amortization of intangible assets (1)
|
|
|
671
|
|
0.6
|
%
|
|
|
3,542
|
|
2.5
|
%
|
|
|
1,571
|
|
4.7
|
%
|
|
|
1,438
|
|
1.7
|
%
|
|
|
7,222
|
|
2.0
|
%
|
Non-cash share-based compensation (2)
|
|
|
705
|
|
0.7
|
%
|
|
|
1,005
|
|
0.7
|
%
|
|
|
333
|
|
1.0
|
%
|
|
|
1,101
|
|
1.3
|
%
|
|
|
3,144
|
|
0.9
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
25,609
|
|
24.2
|
%
|
|
$
|
13,944
|
|
9.7
|
%
|
|
$
|
675
|
|
2.0
|
%
|
|
$
|
7,625
|
|
9.0
|
%
|
|
$
|
47,853
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2015
|
|
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income, as reported (GAAP)
|
|
$
|
15,142
|
|
19.2
|
%
|
|
$
|
4,808
|
|
3.4
|
%
|
|
$
|
2,969
|
|
7.8
|
%
|
|
$
|
9,513
|
|
8.7
|
%
|
|
$
|
32,432
|
|
8.8
|
%
|
Amortization of intangible assets (1)
|
|
|
338
|
|
0.4
|
%
|
|
|
3,868
|
|
2.7
|
%
|
|
|
1,564
|
|
4.1
|
%
|
|
|
1,438
|
|
1.3
|
%
|
|
|
7,208
|
|
2.0
|
%
|
Non-cash share-based compensation (2)
|
|
|
325
|
|
0.4
|
%
|
|
|
533
|
|
0.4
|
%
|
|
|
273
|
|
0.7
|
%
|
|
|
746
|
|
0.7
|
%
|
|
|
1,877
|
|
0.5
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
15,805
|
|
20.0
|
%
|
|
$
|
9,209
|
|
6.4
|
%
|
|
$
|
4,806
|
|
12.6
|
%
|
|
$
|
11,697
|
|
10.7
|
%
|
|
$
|
41,517
|
|
11.2
|
%
|
In the tables above, footnote references (1) to (2) correspond to the notes beginning on page 36 under the table entitled “Adjusted Income and EPS”.
Adjusted operating income and adjusted operating margin, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures is furnished on page 44.
Interest expense:
Interest expense for the fiscal quarter ended August 31, 2016 was $3.87 million, compared to $2.50 million for the same period last year. The increase in interest expense is due to higher levels of debt and higher average interest rates during the fiscal quarter ended August 31, 2016, when compared to the same period last year.
Income tax expense:
Income tax expense for the fiscal quarter ended August 31, 2016 was 15.9 percent of income before
income taxes, compared to 18.2 percent for the same period last year. The year-over-year decrease in our effective tax rate was due to shifts in the mix of taxable income in our various tax jurisdictions.
Net income:
Net income for the fiscal quarter ended August 31, 2016 increased by $3.90 million, compared to the same period last year. Our diluted earnings per share increased $0.16 to $1.00 compared to $0.84 for the same period last year.
Adjusted
income and EPS
:
In order to provide a better understanding of the impact of certain items on our net income and EPS, the analysis that follows reports the comparative after tax impact of amortization of intangible assets and non-cash share-based compensation on our net income and basic and diluted EPS for the periods covered below.
ADJUSTED INCOME AND EPS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
Basic EPS
|
|
Diluted EPS
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income as reported (GAAP)
|
|
$
|
28,355
|
|
$
|
24,452
|
|
$
|
1.02
|
|
$
|
0.86
|
|
$
|
1.00
|
|
$
|
0.84
|
Amortization of intangible assets, net of tax (1)
|
|
|
6,228
|
|
|
6,278
|
|
|
0.22
|
|
|
0.22
|
|
|
0.22
|
|
|
0.22
|
Non-cash share-based compensation, net of tax (2)
|
|
|
2,451
|
|
|
1,603
|
|
|
0.09
|
|
|
0.06
|
|
|
0.09
|
|
|
0.06
|
Adjusted income (non-GAAP)
|
|
$
|
37,034
|
|
$
|
32,333
|
|
$
|
1.33
|
|
$
|
1.14
|
|
$
|
1.31
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic and diluted EPS
|
|
|
|
|
|
|
|
|
27,845
|
|
|
28,435
|
|
|
28,224
|
|
|
28,986
|
|
(1)
|
|
For the fiscal quarters ended August 31, 2016 and 2015, amortization of intangible assets was $7.22 million ($6.23 million after tax) and $7.21 million ($6.28 million after tax), respectively.
|
|
(2)
|
|
For the fiscal quarters ended August 31, 2016 and 2015, non-cash share based compensation was $3.14 million ($2.45 million after tax) and $1.88 million ($1.60 million after tax), respectively.
|
Adjusted income for the fiscal quarter ended August 31, 2016 increased $4.70 million compared to the same period last year. The increase in adjusted income was primarily due to:
|
·
|
|
the overall improvement in core business gross profit margin;
|
|
·
|
|
the accretive impact of the Hydro Flask acquisition;
|
|
·
|
|
lower advertising expense; and
|
|
·
|
|
lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and $10 million of U.S. Dollar to Euro cross-currency debt swaps.
|
These factors were partially offset by:
|
·
|
|
the unfavorable impact of net foreign currency exchange rate fluctuations, which reduced our reported consolidated net sales revenue by $2.32 million year-over-year;
|
|
·
|
|
a decline in net income of $1.49 million from our Venezuelan operations, due almost entirely to the adoption of the new DICOM exchange rate;
|
|
·
|
|
higher compensation costs; and
|
|
·
|
|
the impact within our core business that lower overall net sales had on operating leverage.
|
Adjusted diluted EPS was $1.31 for the fiscal quarter ended August 31, 2016, compared to $1.12 for the same period last year. Adjusted diluted EPS increased primarily due to the impact of higher earnings and lower weighted average diluted shares outstanding for the fiscal quarter ended August 31, 2016 compared to the same period last year.
Adjusted income and EPS, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures, is furnished on page 44.
First Six Months of Fiscal Year 2017 Compared to First Six Months of Fiscal Year 2016
Consolidated net sales revenue:
Consolidated net sales revenue for the six months ended August 31, 2016 increased $1.63 million to $716.11 million, compared to $714.47 million for the same period last year, an increase of 0.2 percent. Net sales revenue in our Housewares segment increased $46.55 million, or 32.3 percent, compared to the same period last year. The year-over-year increase was comprised of $43.42 million of net sales from the Hydro Flask acquisition and core business growth of $3.25 million. Net sales revenue in our Health & Home segment increased $4.51 million, or 1.6 percent, compared to the same period last year. Net sales revenue in our Nutritional Supplements segment decreased $8.44 million, or 10.9 percent, compared to the same period last year. Net sales revenue in our Beauty segment decreased $40.99 million, or 19.8 percent, compared to the same period last year. The decline in the Beauty segment includes the net unfavorable impacts of $2.67 million from foreign currency exchange fluctuations and a $9.67 million decline from our Venezuelan operations, which is primarily due to the adoption of a new DICOM exchange rate referred to previously.
Impact of acquisitions on net sales revenue:
Because we are an acquisition-oriented company, we provide an analysis of our net sales revenue in terms of growth from our core business and growth from acquisitions. Our most recent acquisition of Hydro Flask occurred on March 18, 2016. Hydro Flask reports its operating results in the Housewares segment. Our preceeding acquisitions of Healthy Directions and Vicks VapoSteam occurred on June 30, 2014 and March 31, 2015, respectively. For further information about the Hydro Flask and Vicks VapoSteam acquisitions, see Note 9 to the accompanying consolidated condensed financial statements.
IMPACT OF ACQUISITIONS ON NET SALES REVENUE
(in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
|
|
2016
|
|
2015
|
|
Prior year's sales revenue, net
|
|
$
|
714,474
|
|
$
|
631,727
|
|
Components of sales revenue change, net
|
|
|
|
|
|
|
|
Core business
|
|
|
(42,506)
|
|
|
28,412
|
|
Incremental net sales revenue from acquisitions (non-core business):
|
|
|
|
|
|
|
|
Healthy Directions (four months in fiscal year 2016)
|
|
|
-
|
|
|
52,885
|
|
Vicks VapoSteam (one and five months in fiscal years 2017 and 2016, respectively)
|
|
|
712
|
|
|
1,450
|
|
Hydro Flask (five and a half months in fiscal year 2017)
|
|
|
43,428
|
|
|
-
|
|
Change in sales revenue, net
|
|
|
1,634
|
|
|
82,747
|
|
Total sales revenue, net
|
|
$
|
716,108
|
|
$
|
714,474
|
|
|
|
|
|
|
|
|
|
Total net sales revenue growth
|
|
|
0.2
|
%
|
|
13.1
|
%
|
Core business
|
|
|
(5.9)
|
%
|
|
4.5
|
%
|
Acquisitions
|
|
|
6.2
|
%
|
|
8.6
|
%
|
Impact of foreign currencies on net sales revenue:
During the six months ended August 31, 2016 and 2015, approximately 12 and 15 percent, respectively, of our net sales revenue was denominated in foreign currencies. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, and Venezuelan Bolivars. For the six months ended August 31, 2016, the impact of net foreign currency exchange rate fluctuations decreased our consolidated U.S. Dollar reported net sales revenue by approximately $4.13 million. In our Beauty segment, foreign exchange fluctuations had a $2.67 million unfavorable impact on U.S. Dollar reported net sales revenue. In our Housewares and Health & Home segments, foreign exchange fluctuations had unfavorable impacts of $0.68 and $0.78 million, respectively, on U.S. Dollar reported net sales revenue.
In addition to the impact from foreign currency fluctuations, the year-over-year comparison of net sales revenue was unfavorably impacted by the Company’s transition from the official exchange rate in Venezuela to the market rate of DICOM, which is the lowest rate in the current exchange rate system. Net sales revenue from our Venezuelan operations decreased by $9.67 million to $0.37 million for the six months ended August 31, 2016, compared to $10.04 million in the same period last year, almost entirely due to the adoption of the DICOM exchange rate. This impact reduced year-over-year net sales revenue in the Beauty Segment by 4.7 percent.
Segment net sales revenue:
Housewares Segment
- Net sales revenue in the Housewares segment for the six months ended August 31, 2016 increased $46.55 million, or 32.3 percent, to $190.58 million, compared to $144.03 million for the same period last year. The year-over-year increase was comprised of $43.43 million of net sales from the Hydro Flask acquisition and core business growth of $3.12 million, or 2.2 percent. In the segment’s core business, a 5.6 percent increase in average unit selling price was partially offset by a 3.4 percent decline in unit volume. The overall increase in core business net sales revenue continues to be primarily due to new product and category introductions. We expect the segment’s longer-term growth to continue to be driven by new products, category expansion, expanded shelf space and assortments at key traditional and internet retailers, and new distribution gains in international markets.
Health & Home Segment
- Net sales revenue in the Health & Home segment for the six months ended August 31, 2016 increased $4.51 million, or 1.6 percent, to $290.81 million, compared to $286.30 million for the same period last year. Higher unit volumes contributed 2.7 percent to the segment’s growth, partially offset by a 1.1 percent decline in average unit selling price. Foreign currency fluctuations reduced U.S. Dollar reported net sales revenue by $0.78 million, or 0.3 percent. Year-to-date net sales gains were primarily driven by PUR water filtration systems, seasonal fans, air purification systems, and early season shipments of heaters, partially offset by net sales declines in humidification and hot/cold therapy products. In the water filtration category, we believe consumer awareness of municipal water quality issues across the U.S. continues to drive more frequent consumer filter replacement, growth in household penetration and incremental gains in product placement with key retailers. Our seasonal fan business benefited from strong sell-in and in-season replenishment orders due to high summer temperatures. The heater business growth was driven by early-season new product introductions and distribution gains. The decline in humidifier sales was primarily due to retailers exiting last year’s cough/cold/flu season with higher inventory levels. The decline in the hot/cold therapy category was primarily due to the rationalization of lower margin business.
Nutritional Supplements Segment
-
Net sales revenue for the six months ended August 31, 2016 decreased $8.44 million, or 10.9 percent, to $69.05 million, compared to $77.49 million for the same period last year. Lower unit volume and a decrease in average unit selling price contributed approximately 8.5 and 2.4 percent, respectively, to the decline in the segment’s net sales revenue. The decline in average selling price was primarily driven by lower average order values and an increase in promotional pricing to develop new buyer growth in selected categories. The segment saw declines in its offline response rates and legacy print newsletter subscription business, which is being strategically de-emphasized in the segment’s business model. Net sales revenue from the segment’s AutoDelivery program, a continuity program where customers can schedule delivery
of products based on their timing and frequency requirements, grew slightly when compared to the same period last year. The segment is in the process of implementing a multi-year strategic transition from offline to online channels and is dedicating resources to its online interface and e-commerce platforms in an effort to improve order conversion and average order values. The segment recently completed a significant milestone in its multi-year plans by implementing new order and customer relationship management systems, which we believe will enhance marketing and order conversion effectiveness, as well as improve the overall customer experience.
Beauty Segment
- Net sales revenue in the Beauty segment for the six months ended August 31, 2016 decreased $40.99 million, or 19.8 percent, to $165.67 million, compared to $206.66 million for the same period last year. Lower unit volume and a lower average unit selling price contributed approximately 16.5 and 3.3 percent, respectively, to the decline in the segment’s net sales revenue. The decline in the Beauty segment net sales revenue includes a $9.67 million net sales decline from our Venezuelan operations, which is almost entirely due to the adoption of the new DICOM exchange rate, and the net unfavorable impact of $2.67 million from foreign currency exchange fluctuations. Another $8.19 million of the sales decline relates to a decline in the foot care category due to high inventory in the channel and competitive pressures. Additionally, the segment has de-emphasized sales into the discount channel and other lower margin business. Lower store traffic counts and sluggish consumer spending at traditional brick and mortar retailers, continued inventory rationalization within the segment’s product categories, and competitive pressures accounted for the remainder of the decline. We continue to expect challenging conditions for the segment for the balance of fiscal year 2017.
Consolidated gross profit margin:
Consolidated gross profit as a percentage of net sales revenue for the six months ended August 31, 2016 increased 3.2 percentage points to 44.0 percent, compared to 40.8 percent for the same period last year. The increase in consolidated gross profit margin is primarily due to favorable shifts in product mix, product rationalization efforts, accretion from the Hydro Flask acquisition, and reductions in product costs, partially offset by the unfavorable impact of foreign currency fluctuations.
A significant portion of the products we sell are purchased from third-party manufacturers in China. The Chinese Renminbi has fluctuated against the U.S. Dollar in recent years, devaluing by approximately 6 percent against the U.S. Dollar during fiscal year 2016. If China’s currency fluctuates against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. There can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.
Selling, general and administrative expense:
Our consolidated SG&A ratio increased 2.5 percentage points to 34.6 percent for the six months ended August 31, 2016, compared to 32.1 percent for the same period last year. The increase was primarily due to:
|
·
|
|
the impact of higher compensation costs due to hourly wage increases, increases in share-based compensation as new three-year performance based incentives enter their third year of existence and estimated performance factors are adjusted, and higher current year severance costs;
|
|
·
|
|
the impact of additional patent litigation charges, which increased the SG&A ratio by 0.2 percentage points; and
|
|
·
|
|
the impact within our core business that lower overall net sales had on operating leverage.
|
These factors were partially offset by:
|
·
|
|
lower outbound freight costs;
|
|
·
|
|
lower advertising expense; and
|
|
·
|
|
lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and $10 million of U.S. Dollar to Euro cross-currency debt swaps.
|
Asset impairment charges:
We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2017. As a result of our testing of indefinite-lived trademarks, we recorded non-cash asset impairment charges of $7.40 million ($5.10 million after tax). The charges were related to certain brand assets and trademarks in our Beauty and Nutritional Supplements segments, which were written down to their estimated fair values, determined on the basis of future discounted cash flows using the relief from royalty valuation method. We recorded a similar charge of $3.00 million ($2.66 million after tax) during the first quarter of fiscal year 2016.
Operating income by segment:
The following table sets forth segment operating income for the periods covered below:
OPERATING INCOME BY SEGMENT
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
2016
|
|
2015
|
|
Housewares (1)
|
|
$
|
39,733
|
|
$
|
26,325
|
|
$
|
13,408
|
|
50.9
|
%
|
|
20.8
|
%
|
18.3
|
%
|
Health & Home
|
|
|
19,001
|
|
|
13,226
|
|
|
5,775
|
|
43.7
|
%
|
|
6.5
|
%
|
4.6
|
%
|
Nutritional Supplements
|
|
|
(6,501)
|
|
|
5,589
|
|
|
(12,090)
|
|
*
|
|
|
(9.4)
|
%
|
7.2
|
%
|
Beauty
|
|
|
8,152
|
|
|
13,835
|
|
|
(5,683)
|
|
(41.1)
|
%
|
|
4.9
|
%
|
6.7
|
%
|
Total operating income
|
|
$
|
60,385
|
|
$
|
58,975
|
|
$
|
1,410
|
|
2.4
|
%
|
|
8.4
|
%
|
8.3
|
%
|
* Calculation is not meaningful
|
(1)
|
|
Includes five and a half months of operating results from Hydro Flask, with no comparable results in the same period last year.
|
In the discussion that follows, our usage of the terms operating margin, operating expense ratio and operating leverage are further described and explained beginning on page 49.
Housewares Segment
- Operating income for the six months ended August 31, 2016 increased $13.41 million, or 50.9 percent, compared to the same period last year. Operating margin increased 2.5 percentage points to 20.8 percent, compared to 18.3 percent for the same period last year. The increase in operating margin was primarily due to the accretive impact of the Hydro Flask acquisition, which increased the segment operating margin by 3.1 percentage points for the six months ended August 31, 2016, partially offset by higher promotional spending and higher media advertising in support of new products and categories and margin compression from new product categories.
Health & Home Segment
- Operating income for the six months ended August 31, 2016 increased $5.78 million, or 43.7 percent, compared to the same period last year. Operating margin increased 1.9 percentage points to 6.5 percent, compared to 4.6 percent for the same period last year. The increase in operating margin is due to improved gross margin as a result of product cost reductions, improvement in product sales mix, lower advertising expense, and lower outbound freight costs, partially offset by the impact of patent litigation charges.
Nutritional Supplements Segment
- Operating income for the six months ended August 31, 2016 decreased $12.09 million compared to the same period last year. Operating margin was
(9.4) percent
, compared to 7.2 percent for the same period last year. Operating income for the six months ended August 31, 2016 includes a non-cash intangible asset impairment charge of $5.00 million, for which there was no comparable charge in the same period last year. This charge accounted for 7.2 percentage points of operating margin decline.
Additional drivers of the operating margin decline were:
|
·
|
|
the net sales decline and the impact it had on operating leverage; and
|
|
·
|
|
increased investments in promotions, advertising, customer acquisition, and online sales channel development.
|
Beauty Segment
- Operating income for the six months ended August 31, 2016 decreased $5.68 million to $8.15 million, compared to $13.84 million for the same period last year. Operating margin decreased 1.8 percentage points to 4.9 percent, compared to 6.7 percent for the same period last year. Operating income included non-cash intangible asset impairment charges of $2.40 and $3.00 million for the fiscal quarters ended May 31, 2016 and 2015, respectively. Additional drivers of the operating margin decline were:
|
·
|
|
the net sales decline and the impact it had on operating leverage;
|
|
·
|
|
foreign currency exchange rate fluctuations, which reduced segment net sales revenue by $2.67 milliion;
|
|
·
|
|
a decline in operating income of $3.43 million from our Venezuelan operations, due almost entirely to the adoption of the new DICOM exchange rate; and
|
|
·
|
|
higher compensation costs.
|
These factors were partially offset by an increase in the segment’s gross profit margin primarily due to reduced product costs and an improvement in product sales mix.
ADJUSTED OPERATING INCOME AND OPERATING MARGIN
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2016
|
|
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income, as reported (GAAP)
|
|
$
|
39,733
|
|
20.8
|
%
|
|
$
|
19,001
|
|
6.5
|
%
|
|
$
|
(6,501)
|
|
(9.4)
|
%
|
|
$
|
8,152
|
|
4.9
|
%
|
|
$
|
60,385
|
|
8.4
|
%
|
Asset impairment charges (1)
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
5,000
|
|
7.2
|
%
|
|
|
2,400
|
|
1.4
|
%
|
|
|
7,400
|
|
1.0
|
%
|
Patent litigation charge (2)
|
|
|
-
|
|
-
|
%
|
|
|
1,468
|
|
0.5
|
%
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
1,468
|
|
0.2
|
%
|
Subtotal
|
|
|
39,733
|
|
20.8
|
%
|
|
|
20,469
|
|
7.0
|
%
|
|
|
(1,501)
|
|
(2.2)
|
%
|
|
|
10,552
|
|
6.4
|
%
|
|
|
69,253
|
|
9.7
|
%
|
Amortization of intangible assets (3)
|
|
|
1,328
|
|
0.7
|
%
|
|
|
7,080
|
|
2.4
|
%
|
|
|
3,142
|
|
4.6
|
%
|
|
|
2,876
|
|
1.7
|
%
|
|
|
14,426
|
|
2.0
|
%
|
Non-cash share-based compensation (4)
|
|
|
1,733
|
|
0.9
|
%
|
|
|
2,915
|
|
1.0
|
%
|
|
|
1,365
|
|
2.0
|
%
|
|
|
2,745
|
|
1.7
|
%
|
|
|
8,758
|
|
1.2
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
42,794
|
|
22.5
|
%
|
|
$
|
30,464
|
|
10.5
|
%
|
|
$
|
3,006
|
|
4.4
|
%
|
|
$
|
16,173
|
|
9.8
|
%
|
|
$
|
92,437
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2015
|
|
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income, as reported (GAAP)
|
|
$
|
26,325
|
|
18.3
|
%
|
|
$
|
13,226
|
|
4.6
|
%
|
|
$
|
5,589
|
|
7.2
|
%
|
|
$
|
13,835
|
|
6.7
|
%
|
|
$
|
58,975
|
|
8.3
|
%
|
Asset impairment charges (1)
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
3,000
|
|
1.5
|
%
|
|
|
3,000
|
|
0.4
|
%
|
Subtotal
|
|
|
26,325
|
|
18.3
|
%
|
|
|
13,226
|
|
4.6
|
%
|
|
|
5,589
|
|
7.2
|
%
|
|
|
16,835
|
|
8.1
|
%
|
|
|
61,975
|
|
8.7
|
%
|
Amortization of intangible assets (3)
|
|
|
650
|
|
0.5
|
%
|
|
|
7,368
|
|
2.6
|
%
|
|
|
3,128
|
|
4.0
|
%
|
|
|
2,876
|
|
1.4
|
%
|
|
|
14,022
|
|
2.0
|
%
|
Non-cash share-based compensation (4)
|
|
|
631
|
|
0.4
|
%
|
|
|
1,128
|
|
0.4
|
%
|
|
|
576
|
|
0.7
|
%
|
|
|
1,603
|
|
0.8
|
%
|
|
|
3,938
|
|
0.6
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
27,606
|
|
19.2
|
%
|
|
$
|
21,722
|
|
7.6
|
%
|
|
$
|
9,293
|
|
12.0
|
%
|
|
$
|
21,314
|
|
10.3
|
%
|
|
$
|
79,935
|
|
11.2
|
%
|
In the tables above, footnote references (1) to (4) correspond to the notes beginning on page 43 under the table entitled “Adjusted Income and EPS”.
Adjusted operating income and adjusted operating margin, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures, is furnished on page 44.
Interest expense:
Interest expense for the six months ended August 31, 2016 was $7.52 million, compared to $5.39 million for the same period last year. The increase in interest expense is due to higher levels of debt and higher average interest rates during the six months ended August 31, 2016, when compared to the same period last year.
Income tax expense:
Income tax expense for the six months ended August 31, 2016 was 10.8 percent of income before
income taxes, compared to 16.4 percent for the same period last year. The year-over-year decrease in our effective tax rate was primarily due to a $1.40 million tax benefit related to the resolution of uncertain tax positions and a
$1.34
million tax benefit resulting from the recognition of excess tax benefits from share-based compensation in income tax expense rather than paid-in capital due to our adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” See Note 2 to the accompanying consolidated condensed financial statements for further information regarding the impact of this recent accounting change.
Net income:
Net income for the six months ended August 31, 2016 increased by $2.52 million, compared to the same period last year. Our diluted earnings per share increased $0.14 to $1.68 compared to $1.54 for the same period last year.
Adjusted
income and EPS
:
In order to provide a better understanding of the impact of certain items on our net income and EPS, the analysis that follows reports the comparative after tax impact of asset impairment charges, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation on our net income, and basic and diluted EPS for the periods covered below.
ADJUSTED INCOME AND EPS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
Basic EPS
|
|
Diluted EPS
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income as reported (GAAP)
|
|
$
|
47,381
|
|
$
|
44,862
|
|
$
|
1.70
|
|
$
|
1.58
|
|
$
|
1.68
|
|
$
|
1.54
|
Asset impairment charges, net of tax (1)
|
|
|
5,097
|
|
|
2,656
|
|
|
0.18
|
|
|
0.09
|
|
|
0.18
|
|
|
0.09
|
Patent litigation charge, net of tax (2)
|
|
|
1,464
|
|
|
-
|
|
|
0.05
|
|
|
-
|
|
|
0.05
|
|
|
-
|
Subtotal
|
|
|
53,942
|
|
|
47,518
|
|
|
1.94
|
|
|
1.67
|
|
|
1.91
|
|
|
1.64
|
Amortization of intangible assets, net of tax (3)
|
|
|
12,430
|
|
|
12,172
|
|
|
0.45
|
|
|
0.43
|
|
|
0.44
|
|
|
0.42
|
Non-cash share-based compensation, net of tax (4)
|
|
|
6,544
|
|
|
3,345
|
|
|
0.24
|
|
|
0.12
|
|
|
0.23
|
|
|
0.12
|
Adjusted income (non-GAAP)
|
|
$
|
72,916
|
|
$
|
63,035
|
|
$
|
2.62
|
|
$
|
2.21
|
|
$
|
2.59
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic and diluted EPS
|
|
|
|
|
|
|
|
|
27,809
|
|
|
28,478
|
|
|
28,185
|
|
|
29,037
|
|
(1)
|
|
For the six months ended August 31, 2016 and 2015, non-cash intangible asset impairment charges totaling $7.40 million ($5.10 million after tax) and $3.00 million ($2.66 million after tax), respectively.
|
|
(2)
|
|
The six months ended August 31, 2016 includes a patent litigation charge of $1.47 million ($1.46 million after tax).
|
|
(3)
|
|
For the six months ended August 31, 2016 and 2015, amortization of intangible assets was $14.43 million ($12.43 million after tax) and $14.02 million ($12.17 million after tax), respectively.
|
|
(4)
|
|
For the six months ended August 31, 2016 and 2015, non-cash share based compensation was $8.76 million ($6.54 million after tax) and $3.94 million ($3.35 million after tax), respectively.
|
Adjusted income for the
six months
ended August 31, 2016 increased $9.88 million compared to the same period last year. The increase in adjusted income was primarily due to:
|
·
|
|
the overall improvement in core business gross profit margin;
|
|
·
|
|
the accretive impact of the Hydro Flask acquisition;
|
|
·
|
|
lower outbound freight costs;
|
|
·
|
|
lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and $10 million of U.S. Dollar to Euro cross-currency debt swaps; and
|
|
·
|
|
lower tax expense as a result of the recognition of a tax benefit related to the resolution of uncertain tax positions and the recognition of excess tax benefits from share-based compensation in income tax expense rather than paid-in capital.
|
These factors were partially offset by:
|
·
|
|
the unfavorable impact of net foreign currency exchange rate fluctuations, which reduced our reported consolidated net sales revenue by $4.13 million year-over-year;
|
|
·
|
|
a decline in net income of $2.81 million from our Venezuelan operations, due almost entirely to the adoption of the new DICOM exchange rate;
|
|
·
|
|
higher compensation costs; and
|
|
·
|
|
the impact within our core business that lower overall net sales had on operating leverage.
|
Adjusted diluted EPS was $2.59 for the six months ended August 31, 2016, compared to $2.17 for the same period last year. Adjusted diluted EPS increased due to the combined impacts of higher earnings and lower weighted average diluted shares outstanding for the six months ended August 31, 2016, compared to the same period last year.
The tables referred to on pages 35 and 36, and 42 entitled 43 entitled “Adjusted operating income and operating margin” and “Adjusted income and EPS”, respectively report operating income, operating margin, net income, and EPS without the impact of non-cash asset impairment charges, patent litigation charges, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. For additional information on these adjusted measures, see “Explanation of Certain Terms and Measures Used in MD&A” on page 49. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The preceding tables reconcile these measures to their corresponding GAAP-based measures presented in our consolidated condensed statements of income. We believe that adjusted operating income, adjusted operating margin, adjusted income and adjusted EPS provide useful information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with the Company’s financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on operating income, operating margin, net income, and earnings per share. We also believe that these non-GAAP measures facilitate a more direct comparison of the Company’s performance with its competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of the Company’s continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in the Company’s 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 the Company's activities. The Company’s adjusted operating income, adjusted operating margin, adjusted income and adjusted EPS 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following are selected measures of our liquidity and capital resources for the periods covered below:
SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL UTILIZATION (1)
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
|
|
2016
|
|
2015
|
|
Accounts Receivable Turnover (Days)
|
|
|
54.8
|
|
|
55.7
|
|
Inventory Turnover (Times)
|
|
|
2.7
|
|
|
2.8
|
|
Working Capital
(in thousands)
|
|
$
|
283,958
|
|
$
|
296,719
|
|
Current Ratio
|
|
|
2.0:1
|
|
|
2.0:1
|
|
Ending Debt to Ending Equity Ratio
|
|
|
55.3
|
%
|
|
52.1
|
%
|
Return on Average Equity (2)
|
|
|
10.9
|
%
|
|
16.0
|
%
|
|
(1)
|
|
Our computation and use of the measures in this table are described beginning on page 49.
|
|
(2)
|
|
Net income and average equity reported above include the twelve month trailing impacts, after tax, of non-cash asset impairment charges, acquisition-related expenses, CEO succession costs, Venezuelan currency re-measurement related charges, and patent litigation charges, as applicable. For the periods reported above, these items had an unfavorable impact of 4.9 and 0.5 percentage points, respectively, on the return on average equity.
|
Operating Activities:
Operating activities provided $85.68
million of cash during the six months ended August 31, 2016, compared to $52.21 million of cash provided during the same period last year. The year-over-year increase in operating cash flow was primarily due to higher non-cash charges, additional cash flow from the acquisition of Hydro Flask and the timing of fluctuations in working capital components.
Accounts receivable increased $5.37
million, to $222.91
million as of August 31, 2016, compared to $217.54 million at the end of fiscal year 2016. Accounts receivable as of August 31, 2016 includes $16.25 million from the Hydro Flask acquisition. Accounts receivable turnover was 54.8 days at August 31, 2016, compared to 55.7 days for the same period last year. This calculation is based on a rolling five quarter accounts receivable balance.
Inventory increased $15.89 million, to $317.50
million as of August 31, 2016, compared to $301.61 million at the end of fiscal year 2016. Inventory as of August 31, 2016 includes $13.62 million from the Hydro Flask acquisition. Inventory turnover decreased to 2.7 times at August 31, 2016 compared to 2.8 times for the same period last year.
Working capital was $283.96 million at August 31, 2016, compared to $296.72 million at August 31, 2015 and our current ratio was 2.0:1 at the end of each period. As a result of the adoption of new accounting guidance, we reclassified certain prior period balances affecting the determination of comparative working capital and cash provided by operating activities. These reclassifications had no impact on the reported results of our operations for the six months ended August 31, 2015. Our prior period working capital, current ratio and debt to equity ratio, without reclassifications, were originally reported at August 31, 2015 as $322.86 million, 2.0:1 and 52.6 percent, respectively. For more information regarding the impact of these changes in accounting, see Note 2 to the accompanying consolidated condensed financial statements.
Investing activities:
Investing activities used $219.44 million of cash during the six months ended August 31, 2016. Highlights of those activities follow:
|
·
|
|
we spent $0.29 million on building improvements, $5.61 million on computers, furniture and other equipment, $3.79 million on tools, molds and other capital asset additions, and $0.53 million on the development of new patents; and
|
|
·
|
|
we paid $209.26 million to acquire Hydro Flask.
|
Financing activities:
Financing activities used $66.23 million of cash during the six months ended August 31, 2016. Highlights of those activities follow:
|
·
|
|
we had draws of $155.90 million under our credit agreement;
|
|
·
|
|
we repaid $224.00 million drawn under our credit agreement;
|
|
·
|
|
we repaid $3.80 million of our long-term debt;
|
|
·
|
|
employees exercised options to purchase 111,667 shares of common stock, providing $5.01 million of cash;
|
|
·
|
|
Employees purchased 14,580 shares of common stock for $1.12 million through our employee stock purchase plan; and
|
|
·
|
|
we paid $0.42 million in tax obligations resulting from cashless share award settlements.
|
Revolving 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 $650 million as of August 31, 2016. The commitment under the Credit Agreement terminates on January 16, 2020. Accordingly, borrowings under the Credit Agreement are reported as long-term debt. 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 August 31, 2016, the outstanding revolving loan principal balance was $482.00 million and the face amount of outstanding letters of credit was $1.50 million. For the three- and six-months ended August 31, 2016, borrowings under the Credit Agreement incurred interest charges at rates ranging from 2.19 to 4.25 percent and 1.93 to 4.25 percent, respectively. For the three- and six-months ended August 31, 2015, borrowings under the Credit Agreement incurred interest charges at rates ranging from
1.43 to 3.50 percent and 1.43 to 4.00 percent, respectively. As of August 31, 2016, the amount available for borrowings under the Credit Agreement was $166.50 million. Our debt agreements effectively limited our ability to incur more than $201.45 million of additional debt from all sources, including the Credit Agreement.
Other Debt Agreements:
In addition to the Credit Agreement, at August 31, 2016, we had the following other long term debt outstanding:
|
·
|
|
$40 million aggregate principal amount of 3.90% Senior Notes due January 2018 outstanding with equal annual $20 million installments in January 2017 and 2018.
|
|
·
|
|
$30.01 million principal outstanding under floating rate loan agreement with the Mississippi Business Finance Corporation (the “MBFC Loan”), which funded the original construction of our Olive Branch, Mississippi distribution facility. The remaining principal balance of the MBFC loan is payable as follows: $5.70 million on March 1, 2017; $1.90 million annually on March 1, 2018 through 2022; and $14.81 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
|
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 are defined in the various agreements). Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting the Company, 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. Under the terms of our Credit Agreement, the commitments of the lenders to make loans to us 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.
The table below provides the formulas in effect for certain key financial covenants as defined in our debt agreements as of August 31, 2016:
|
|
|
|
Applicable Financial Covenant
|
|
Credit Agreement and MBFC Loan
|
3.90% Senior Notes
|
|
|
|
|
|
|
|
$500 Million
|
Minimum Consolidated Net Worth
|
|
None
|
+
|
|
|
|
25% of Fiscal Quarter Net Earnings
|
|
|
|
After August 31, 2010 (1)
|
|
|
|
|
|
|
EBIT (2)
|
EBIT (2)
|
|
|
÷
|
÷
|
Interest Coverage Ratio
|
|
Interest Expense (2)
|
Interest Expense (2)
|
|
|
Minimum Required: 3.00 to 1.00
|
Minimum Required: 2.50 to 1.00
|
|
|
Total Current and Long Term Debt (3)
|
Total Current and Long Term Debt (3)
|
|
|
÷
|
÷
|
Maximum Leverage Ratio
|
|
[EBITDA (2) + Pro Forma Effect of
|
[ EBITDA (2) + Pro Forma Effect of Acquisitions ]
|
|
|
Acquisitions]
|
|
|
|
Maximum Allowed: 3.25 to 1.00
|
Maximum Allowed: 3.25 to 1.00
|
Key Definitions:
|
|
|
EBIT:
|
|
Earnings Before Non-Cash Charges, Interest Expense and Taxes
|
|
|
|
EBITDA:
|
|
EBIT + Depreciation and Amortization Expense + Share Based Compensation
|
|
|
|
Total Capitalization:
|
|
Total Current and Long Term Debt + Total Equity
|
|
|
|
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) Excluding any fiscal quarter net losses.
(2) Computed using totals for the latest reported four consecutive fiscal quarters.
(3) Computed using the ending balances as of the latest reported fiscal quarter.
Contractual obligations and commercial commitments:
Our contractual obligations and commercial commitments at August 31, 2016, were:
PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED THE LAST DAY OF AUGUST:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
After
|
|
|
Total
|
|
1
year
|
|
2 years
|
|
3 years
|
|
4 years
|
|
5 years
|
|
5 years
|
Fixed rate debt
|
|
$
|
40,000
|
|
$
|
20,000
|
|
$
|
20,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Floating rate debt
|
|
|
512,007
|
|
|
5,700
|
|
|
1,900
|
|
|
1,900
|
|
|
483,900
|
|
|
1,900
|
|
|
16,707
|
Long-term incentive plan payouts
|
|
|
11,709
|
|
|
6,503
|
|
|
3,768
|
|
|
1,438
|
|
|
-
|
|
|
-
|
|
|
-
|
Interest on fixed rate debt
|
|
|
1,352
|
|
|
1,066
|
|
|
286
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Interest on floating rate debt (1)
|
|
|
40,960
|
|
|
11,852
|
|
|
11,766
|
|
|
11,723
|
|
|
4,693
|
|
|
401
|
|
|
525
|
Open purchase orders
|
|
|
178,186
|
|
|
178,186
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Long-term purchase commitments
|
|
|
1,190
|
|
|
584
|
|
|
606
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Minimum royalty payments
|
|
|
63,779
|
|
|
12,626
|
|
|
12,467
|
|
|
12,234
|
|
|
9,169
|
|
|
8,985
|
|
|
8,298
|
Advertising and promotional
|
|
|
52,950
|
|
|
16,794
|
|
|
6,408
|
|
|
6,516
|
|
|
6,627
|
|
|
6,740
|
|
|
9,865
|
Operating leases
|
|
|
33,376
|
|
|
5,821
|
|
|
5,245
|
|
|
4,057
|
|
|
3,327
|
|
|
2,825
|
|
|
12,101
|
Capital spending commitments
|
|
|
3,099
|
|
|
3,099
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total contractual obligations (2)
|
|
$
|
938,608
|
|
$
|
262,231
|
|
$
|
62,446
|
|
$
|
37,868
|
|
$
|
507,716
|
|
$
|
20,851
|
|
$
|
47,496
|
|
(1)
|
|
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 August 31, 2016 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 August 31, 2016 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.
|
|
(2)
|
|
In addition to the contractual obligations and commercial commitments in the table above, as of August 31, 2016, we have recorded total provisions for our uncertain tax positions totaling $6.81 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:
Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund our foreseeable short- and long-term liquidity requirements. 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. The Company may also elect to repurchase additional shares of common stock up to the balance of its current authorization over the next two fiscal years, subject to limitations contained in its debt agreements and based upon its assessment of a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions, financial conditions, any applicable contractual limitations and other factors, including alternative investment opportunities.
CRITICAL ACCOUNTING POLICIES
The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Critical Accounting Policies” in our annual report on Form 10-K for the year ended February 29, 2016. There have been no material changes to the Company’s critical accounting policies from the information provided in our annual report on Form 10-K.
NEW ACCOUNTING GUIDANCE
See Note (2) “New Accounting Pronouncements” in the accompanying consolidated condensed financial statements for a discussion of the status and potential impact of any new accounting pronouncements.
EXPLANATION OF CERTAIN TERMS AND MEASURES USED IN MD&A
Accounts receivable turnover:
Twelve-month trailing net sales revenue divided by the average of the current and prior four fiscal quarters’ ending accounts receivable balances. This result is divided into 365 to express turnover in terms of average days outstanding.
Adjusted diluted EPS (non-GAAP):
Adjusted income divided by the weighted average shares of common stock
outstanding plus the effect of dilutive securities.
Adjusted income (non-GAAP):
Net income as reported under GAAP excluding the following items net of their applicable tax effects: non-cash asset impairment charges, CEO succession costs, acquisition
‐
related expenses, Venezuelan
re-measurement related charges, patent litigation charges,
amortization of intangible assets, and non-cash share-based compensation, as applicable.
Adjusted operating income (non-GAAP):
Operating income for the Company or a segment as reported under GAAP excluding non-cash asset impairment charges, CEO succession costs, acquisition
‐
related expenses, Venezuelan
re-measurement related charges, patent litigation charges,
amortization of intangible assets, and non-cash share-based compensation, as applicable.
Adjusted operating margin (non-GAAP):
Adjusted operating income for the Company or a segment divided by
the related net sales revenue for the Company or a segment.
Core business:
Core business is net sales revenue and related operations associated with product lines or brands after the first twelve months from the date the product line or brand was acquired. Net sales revenue and related operations from internally developed product lines or brands are always considered core business.
Corporate overhead costs:
General corporate managerial and related administrative compensation costs, legal, accounting, and regulatory compliance costs, together with associated operating overhead that is not directly attributable to any one operating segment, but benefits the Company as a whole. These charges are allocated to each operating segment based upon a number of factors depending on the nature of the expense. Such factors include relative revenues, estimates of relative labor expenditures for each segment and certain intangible asset levels held by each segment.
Current ratio:
Current assets divided by current liabilities at the end of a reporting period, expressed as a ratio.
Ending debt to ending equity ratio:
Total interest bearing short- and long-term debt divided by shareholders’ equity. We use this as a leverage metric to indicate what proportion of debt and equity we are using to finance assets.
Growth from acquisitions:
Net sales revenue growth associated with product lines or brands that we have acquired and operated for less than twelve months during each period presented.
Inventory turnover:
Twelve-month trailing cost of goods sold divided by the average of the current and prior four fiscal quarters’ ending inventory balances.
Operating expense ratio:
Total operating expense (SG&A plus asset impairment charges) for the Company or a segment divided by the related net sales revenue for the Company or a segment.
Operating leverage:
The improvement in operating margin that the Company or a segment achieves with sales growth, due to the fixed nature of certain operating expenses.
Operating margin:
Operating income for the Company or a segment divided by the related net sales revenue for the Company or a segment.
Return on average equity:
Twelve month trailing net income divided by the average of the current and prior four fiscal quarters’ ending shareholders’ equity.
Segment operating income:
We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment. We then deduct allocations for operational shared services and corporate overhead costs. We do not allocate nonoperating income and expense, including interest or income taxes to operating segments.
SG&A ratio:
This is total SG&A for the Company or a segment divided by the related net sales revenue for the Company or a segment.
Working capital:
Current assets less current liabilities.