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 for the fiscal year ended February 28, 2017 (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 MD&A, we refer to our Leadership Brands, which are brands that have number-one and number-two positions in their respective categories and include OXO®, Honeywell®, Braun®, PUR®, Hydro Flask®, Vicks®, and Hot Tools®.
Throughout MD&A, we refer to certain measures used by management to evaluate financial performance. We also may refer to a number of financial measures that are not defined under GAAP, but have corresponding GAAP-based measures. Where non-GAAP measures appear, we provide tables reconciling these to their corresponding GAAP-based measures and refer to a discussion of their use. We believe these measures provide investors with important information that is useful in understanding our business results and trends.
OVERVIEW
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global consumer products company offering creative products and solutions for our customers through a diversified portfolio of well-recognized and widely-trusted brands. We have built leading market positions through new product innovation, product quality and competitive pricing. We operate in four segments consisting of Housewares, Health & Home, Nutritional Supplements, and Beauty. In fiscal 2015, we launched a transformational strategy to improve the performance of our business segments and strengthen our shared service capabilities. We believe we continue to make progress on achieving our strategic objectives.
Significant Trends Impacting the Business
Sale of the Nutritional Supplements Business
On December 20, 2017, the Company completed the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The purchase price from the sale is comprised of $46 million in cash, paid at closing, and a supplemental payment with a target value of $25 million, payable on or before August 1, 2019. The final amount of the supplemental payment may be adjusted up or down based on the performance of Healthy Directions through February 28, 2018. As a result, at this time, we are unable to accurately determine the amount of the supplemental payment the Company will receive. The final purchase price is also subject to a customary working capital adjustment. The transaction is not reflected in our consolidated condensed financial statements as of and for the period ended November 30, 2017.
During the third quarter of fiscal 2018, we received information regarding the potential fair value of our Nutritional Supplements business that we concluded should be considered when determining if impairments of our long-lived assets, including goodwill, had occurred. As a result of our testing, we recorded pre-tax non-cash asset impairment charges totaling $82.2 million, consisting of $70.6 million to the segment’s goodwill and $11.6 million to the segment’s indefinite-lived brand assets.
In the first and second quarters of fiscal 2018, we recorded pre-tax non-cash asset impairment charges related to the Nutritional Supplements segment totaling $32.0 million and $18.1 million, respectively. For additional information regarding impairment testing and related intangible asset impairments, see Note 5 to the accompanying consolidated condensed financial statements.
The fair values used in our impairment tests were determined using a weighted average of various valuation methods including estimated future discounted cash flows and other market data. The valuation techniques utilized assumptions we believe to be appropriate in the circumstances; however, future circumstances attributable to a strategic change in the Nutritional Supplements segment, such as the sale of the business, could result in changes to those assumptions and other charges or losses relating to the segment may be recorded and could be material.
Restructuring Plan
On October 5, 2017, the Company announced that it had approved a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance of the Beauty and Nutritional Supplements segments. Project Refuel includes a reduction-in-force and the elimination of certain contracts. Following the divestiture of the Nutritional Supplements segment, as discussed in Note 17 to the accompanying consolidated condensed financial statements, the Company is targeting total annualized profit improvements of approximately $8.0 million over the duration of the plan. The Company estimates the plan to be completed by the first quarter of fiscal 2020, and expects to incur total restructuring charges in the range of approximately $3.2 to $4.8 million over the same period. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically. Restructuring charges also include amounts recognized as incurred. For the three- and nine-months ended November 30, 2017, the Company incurred $1.3 million of pre-tax restructuring costs, of which $1.2 million related to employee severance and termination benefits and $0.1 million related to contract termination costs.
Tax Reform
The Tax Cuts and Jobs Act was signed into law in December 2017, which represents significant U.S. federal tax reform legislation that includes a permanent reduction to the U.S. federal corporate income tax rate. The permanent reduction to the federal corporate income tax rate will have the effect of a one-time impact to the value of our deferred tax assets and liabilities. Additionally, we expect that the tax reform legislation will subject certain of our cumulative foreign earnings and profits to U.S. income taxes through a deemed repatriation. We are reviewing the recently enacted tax reform’s effects on our deferred tax assets and the taxation of certain foreign earnings and profits, and we expect to recognize the impact in the fourth quarter of fiscal 2018.
Foreign Currency Exchange Rate Fluctuations
Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates from transactions that are denominated in a currency other than our reporting currency (the U.S. Dollar). The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso. For the three months ended November 30, 2017, changes in foreign currency exchange rates had a favorable impact on consolidated U.S. dollar reported net sales revenue of approximately $2.8 million, or 0.6%. For the nine months ended November 30, 2017, net foreign currency exchange rate fluctuations had a favorable impact on our consolidated U.S. dollar reported net sales revenue of approximately $1.1 million, or 0.1%.
Consumer Spending and Changes in Shopping Preference
s
Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy, as approximately 81%, 80% and 79% of our consolidated net sales were from U.S. shipments in fiscal 2017, 2016 and 2015, respectively. Additionally, the shift in consumer shopping preferences to online or multichannel shopping experiences has shifted the concentration of our sales. For fiscal 2017, 2016 and 2015, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 13%, 10% and 9%
,
respectively, of our total consolidated net sales revenue for each fiscal year and grew over 30%
in fiscal 2017. For the third quarter and first nine months of fiscal 2018, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 17% and 16% respectively of our total consolidated net sales revenue and grew approximately 19% and 21%, respectively, compared to the same periods last year. With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. For the 2016-2017 season, fall and winter weather was mild and reports of cough/cold/flu incidence were below the 2015-2016 season, which was a below average season. We expect that the weakness in the 2016-2017 cough/cold/flu season will have an unfavorable impact on initial replenishment of affected categories during fiscal 2018, due to high retail inventory levels.
Third Quarter Fiscal 2018 Financial Results
|
·
|
|
Consolidated net sales revenue increased 1.9%, or $8.6 million, to $453.0 million for the three months ended November 30, 2017, compared to $444.4 million for the same period last year.
|
|
·
|
|
Consolidated operating loss was $(15.6) million for the three months ended November 30, 2017, compared to operating income of $63.3 million in the same period last year. Consolidated operating income for the three months ended November 30, 2017 includes a pre-tax non-cash asset impairment charge of $82.2 million and pre-tax restructuring charges of $1.3 million associated with Project Refuel. There were no comparable charges in the same period last year.
|
|
·
|
|
Consolidated adjusted operating income increased 7.5%, or $5.5 million, to $79.0 million for the three months ended November 30, 2017, compared to $73.4 million in the same period last year. Consolidated adjusted operating margin increased 0.9 percentage points to 17.4% of consolidated net sales revenue in the three months ended November 30, 2017, compared to 16.5% in the same period last year.
|
|
·
|
|
Net loss was $(30.4) million for the three months ended November 30, 2017, compared to net income of $57.6 million for the same period last year. Diluted loss per share was $(1.12) for the three months ended November 30, 2017, compared to diluted earnings per share of $2.07 in the same period last year.
|
|
·
|
|
Adjusted income increased 4.3% to $68.8 million in the three months ended November 30, 2017, compared to $66.0 million in the same period last year. Adjusted diluted earnings per share increased 6.3% to $2.52 in the three months ended November 30, 2017, compared to $2.37 in the same period last year.
|
Year-To-Date Fiscal 2018 Financial Results
|
·
|
|
Consolidated net sales revenue increased 2.6%, or $30.6
million, to $1,191.1 million for the nine months ended November 30, 2017, compared to $1,160.5 million for the same period last year.
|
|
·
|
|
Consolidated operating income was $1.2 million for the nine months ended November 30, 2017, compared to operating income of $123.7 million in the same period last year. Consolidated operating income for the nine months ended November 30, 2017 includes: (i) pre-tax non-cash asset impairment charges of $136.3 million; (ii) a $3.6 million charge related to the bankruptcy of Toys “R” Us (“TRU”); and (iii) pre-tax restructuring charges of $1.3 million associated with Project Refuel. The nine months ended November 30, 2016 includes pre-tax non-cash impairment charges of $7.4 million.
|
|
·
|
|
Consolidated adjusted operating income increased 4.4%, or $7.3 million
to $173.1 million for the nine months ended November 30, 2017, compared to $165.9 million
in the same period last year. Consolidated adjusted operating margin increased 0.2 percentage points to 14.5%
of consolidated net sales revenue for the nine months ended November 30, 2017, compared to 14.3% in the same period last year.
|
|
·
|
|
Net loss was $(15.6) million
for the nine months ended November 30, 2017, compared to net income of $105.0 million for the same period last year. Diluted loss per share was $(0.58) for the nine months ended November 30, 2017, compared to diluted earnings per share of $3.74 in the same period last year.
|
|
·
|
|
Adjusted income increased 9.0% to $151.5 million for the nine months ended November 30, 2017, compared to $138.9 million
i
n the same period last year. Adjusted diluted earnings per share increased 12.1% to $5.55
for the nine months ended November 30, 2017, compared to $4.95
in the same period last year.
|
Adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted earnings per share as discussed above are non
‐
GAAP financial measures and are discussed further, and reconciled to their applicable GAAP
‐
based measures in each respective section below. 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 in the section below entitled, “
Explanation of Non-GAAP Financial Measures
”.
RESULTS OF OPERATIONS
The following tables set 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
(In thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
2017
|
|
2016
|
|
Sales revenue by segment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housewares
|
|
$
|
128,017
|
|
$
|
124,723
|
|
$
|
3,294
|
|
2.6
|
%
|
|
28.3
|
%
|
28.1
|
%
|
Health & Home
|
|
|
190,975
|
|
|
179,842
|
|
|
11,133
|
|
6.2
|
%
|
|
42.2
|
%
|
40.5
|
%
|
Nutritional Supplements
|
|
|
29,336
|
|
|
32,163
|
|
|
(2,827)
|
|
(8.8)
|
%
|
|
6.5
|
%
|
7.2
|
%
|
Beauty
|
|
|
104,717
|
|
|
107,686
|
|
|
(2,969)
|
|
(2.8)
|
%
|
|
23.1
|
%
|
24.2
|
%
|
Total sales revenue, net
|
|
|
453,045
|
|
|
444,414
|
|
|
8,631
|
|
1.9
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
|
251,271
|
|
|
250,199
|
|
|
1,072
|
|
0.4
|
%
|
|
55.5
|
%
|
56.3
|
%
|
Gross profit
|
|
|
201,774
|
|
|
194,215
|
|
|
7,559
|
|
3.9
|
%
|
|
44.5
|
%
|
43.7
|
%
|
Selling, general and administrative expense
|
|
|
133,894
|
|
|
130,896
|
|
|
2,998
|
|
2.3
|
%
|
|
29.6
|
%
|
29.5
|
%
|
Asset impairment charges
|
|
|
82,227
|
|
|
-
|
|
|
82,227
|
|
*
|
|
|
18.1
|
%
|
-
|
%
|
Restructuring charges
|
|
|
1,283
|
|
|
-
|
|
|
1,283
|
|
*
|
|
|
0.3
|
%
|
-
|
%
|
Operating income (loss)
|
|
|
(15,630)
|
|
|
63,319
|
|
|
(78,949)
|
|
(124.7)
|
%
|
|
(3.4)
|
%
|
14.2
|
%
|
Nonoperating income, net
|
|
|
34
|
|
|
106
|
|
|
(72)
|
|
(67.9)
|
%
|
|
-
|
%
|
-
|
%
|
Interest expense
|
|
|
(3,619)
|
|
|
(3,625)
|
|
|
6
|
|
(0.2)
|
%
|
|
(0.8)
|
%
|
(0.8)
|
%
|
Total other expense
|
|
|
(3,585)
|
|
|
(3,519)
|
|
|
(66)
|
|
1.9
|
%
|
|
(0.8)
|
%
|
(0.8)
|
%
|
Income (loss) before income taxes
|
|
|
(19,215)
|
|
|
59,800
|
|
|
(79,015)
|
|
(132.1)
|
%
|
|
(4.2)
|
%
|
13.5
|
%
|
Income tax expense
|
|
|
11,221
|
|
|
2,188
|
|
|
9,033
|
|
*
|
|
|
2.5
|
%
|
0.5
|
%
|
Net income (loss)
|
|
$
|
(30,436)
|
|
$
|
57,612
|
|
$
|
(88,048)
|
|
(152.8)
|
%
|
|
(6.7)
|
%
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30,
|
|
|
|
|
|
|
|
% of Sales Revenue, net
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
2017
|
|
2016
|
|
Sales revenue by segment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housewares
(1)
|
|
$
|
341,165
|
|
$
|
315,302
|
|
$
|
25,863
|
|
8.2
|
%
|
|
28.6
|
%
|
27.2
|
%
|
Health & Home
|
|
|
489,102
|
|
|
470,650
|
|
|
18,452
|
|
3.9
|
%
|
|
41.1
|
%
|
40.6
|
%
|
Nutritional Supplements
|
|
|
92,212
|
|
|
101,215
|
|
|
(9,003)
|
|
(8.9)
|
%
|
|
7.7
|
%
|
8.7
|
%
|
Beauty
|
|
|
268,633
|
|
|
273,355
|
|
|
(4,722)
|
|
(1.7)
|
%
|
|
22.6
|
%
|
23.6
|
%
|
Total sales revenue, net
|
|
|
1,191,112
|
|
|
1,160,522
|
|
|
30,590
|
|
2.6
|
%
|
|
100.0
|
%
|
100.0
|
%
|
Cost of goods sold
|
|
|
664,956
|
|
|
650,912
|
|
|
14,044
|
|
2.2
|
%
|
|
55.8
|
%
|
56.1
|
%
|
Gross profit
|
|
|
526,156
|
|
|
509,610
|
|
|
16,546
|
|
3.2
|
%
|
|
44.2
|
%
|
43.9
|
%
|
Selling, general and administrative expense
|
|
|
387,332
|
|
|
378,506
|
|
|
8,826
|
|
2.3
|
%
|
|
32.5
|
%
|
32.6
|
%
|
Asset impairment charges
|
|
|
136,297
|
|
|
7,400
|
|
|
128,897
|
|
*
|
|
|
11.4
|
%
|
0.6
|
%
|
Restructuring charges
|
|
|
1,283
|
|
|
-
|
|
|
1,283
|
|
*
|
|
|
0.1
|
%
|
-
|
%
|
Operating income
|
|
|
1,244
|
|
|
123,704
|
|
|
(122,460)
|
|
(99.0)
|
%
|
|
0.1
|
%
|
10.7
|
%
|
Nonoperating income, net
|
|
|
281
|
|
|
343
|
|
|
(62)
|
|
(18.1)
|
%
|
|
-
|
%
|
-
|
%
|
Interest expense
|
|
|
(11,327)
|
|
|
(11,142)
|
|
|
(185)
|
|
1.7
|
%
|
|
(1.0)
|
%
|
(1.0)
|
%
|
Total other expense
|
|
|
(11,046)
|
|
|
(10,799)
|
|
|
(247)
|
|
2.3
|
%
|
|
(0.9)
|
%
|
(0.9)
|
%
|
Income (loss) before income taxes
|
|
|
(9,802)
|
|
|
112,905
|
|
|
(122,707)
|
|
(108.7)
|
%
|
|
(0.8)
|
%
|
9.7
|
%
|
Income tax expense
|
|
|
5,833
|
|
|
7,912
|
|
|
(2,079)
|
|
(26.3)
|
%
|
|
0.5
|
%
|
0.7
|
%
|
Net income (loss)
|
|
$
|
(15,635)
|
|
$
|
104,993
|
|
$
|
(120,628)
|
|
(114.9)
|
%
|
|
(1.3)
|
%
|
9.0
|
%
|
_____________________
|
(1)
|
|
The nine months ended November 30, 2017 includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.
|
* Calculation is not meaningful
Comparison of Third Quarter Fiscal 2018 to Third Quarter Fiscal 2017
Consolidated and Segment Net Sales
The following table summarizes the impact that core business, foreign exchange and acquisitions, as applicable, had on our net sales revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
(in thousands)
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Fiscal 2017 sales revenue, net
|
$
|
124,723
|
|
$
|
179,842
|
|
$
|
32,163
|
|
$
|
107,686
|
|
$
|
444,414
|
|
Core business
|
|
3,074
|
|
|
9,323
|
|
|
(2,827)
|
|
|
(3,731)
|
|
|
5,839
|
|
Impact of foreign currency
|
|
220
|
|
|
1,810
|
|
|
-
|
|
|
762
|
|
|
2,792
|
|
Change in sales revenue, net
|
|
3,294
|
|
|
11,133
|
|
|
(2,827)
|
|
|
(2,969)
|
|
|
8,631
|
|
Fiscal 2018 sales revenue, net
|
$
|
128,017
|
|
$
|
190,975
|
|
$
|
29,336
|
|
$
|
104,717
|
|
$
|
453,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales revenue growth
|
|
2.6
|
%
|
|
6.2
|
%
|
|
(8.8)
|
%
|
|
(2.8)
|
%
|
|
1.9
|
%
|
Core business
|
|
2.5
|
%
|
|
5.2
|
%
|
|
(8.8)
|
%
|
|
(3.5)
|
%
|
|
1.3
|
%
|
Impact of foreign currency
|
|
0.2
|
%
|
|
1.0
|
%
|
|
-
|
%
|
|
0.7
|
%
|
|
0.6
|
%
|
_____________________
In the above table, core business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the impact that foreign currency had on reported net sales. Net sales revenue from internally developed brands or product lines is considered core business activity.
Consolidated Net Sales Revenue
Consolidated net sales revenue increased $8.6 million, or 1.9%, to $453.0 million for the three months ended November 30, 2017, compared to $444.4 million for the same period last year. The growth was primarily driven by new product introductions, online customer growth, incremental distribution, growth in international sales, and a favorable impact from foreign currency, partially offset by:
|
·
|
|
a decline in the Nutritional Supplements segment of $2.8 million, or 8.8%;
|
|
·
|
|
a decline in our Beauty segment of $3.0 million or 2.8%, primarily attributable to the personal care category; and
|
|
·
|
|
the impact of lower store traffic and soft consumer spending at traditional brick and mortar retail.
|
Segment Net Sales Revenue
Housewares
Net sales revenue in the Housewares segment increased $3.3 million, or 2.6%, to $128.0 million for the three months ended November 30, 2017, compared to $124.7 million for same period last year. The growth was primarily driven by an increase in online sales, incremental distribution with existing customers, international growth, and new product introductions for both the Hydro Flask and OXO brands. These factors were partially offset by the unfavorable impact of lower store traffic and soft consumer spending at traditional brick and mortar retail, and the unfavorable comparative impact of strong sales into the club channel in the same period last year.
Health & Home
Net sales revenue in the Health & Home segment increased $11.1 million, or 6.2%, to $191.0 million for the three months ended November 30, 2017, compared to $179.8 million for the same period last year. The growth was primarily driven by online sales, expanded international distribution, and incremental distribution with existing customers. Segment net sales also benefitted from the favorable impact of net
foreign currency fluctuations of approximately $1.8 million, or 1.0%. These factors were partially offset by lower royalty revenue and lower store traffic at traditional brick and mortar retail outlets.
Nutritional Supplements
Net sales revenue in the Nutritional Supplements segment decreased $2.8 million, or 8.8%, to $29.3 million for the three months ended November 30, 2017, compared to $32.2 million for the same period last year. The decrease was primarily driven by a decline in auto-delivery revenue resulting primarily from the transition to new order management and customer relationship management systems, partially offset by increases in direct mail and third-party retail sales.
Beauty
Net sales revenue in the Beauty segment decreased 2.8% to $104.7 million for the three months ended November 30, 2017, compared to $107.7 million for the same period last year. Solid growth in both retail and professional appliance sales, particularly to online retail customers, was offset by declines in the personal care category. Segment net sales benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.8 million, or 0.7%.
Gross Profit Margin
Consolidated gross profit as a percentage of net sales revenue for the three months ended November 30, 2017 increased 0.8% percentage points to 44.5%, compared to 43.7% for the same period last year. The increase in consolidated gross profit margin was primarily due to favorable product mix, growth in our Leadership Brands and the favorable impact of net foreign currency fluctuations, partially offset by the unfavorable impact that the revenue declines in the Nutritional Supplements segment and the personal care category had on consolidated gross profit margin.
Selling, General and Administrative Expense (“SG&A”)
Our consolidated SG&A ratio, defined as consolidated SG&A expense as a percent of consolidated net sales, increased 0.1% percentage points to 29.6% for the three months ended November 30, 2017, compared to 29.5% for the same period last year. The increase in consolidated SG&A ratio was primarily due to:
|
·
|
|
higher incentive compensation expense; and
|
|
·
|
|
the unfavorable comparative impact of foreign currency revaluations year-over-year.
|
These factors were partially offset by:
|
·
|
|
lower advertising expense;
|
|
·
|
|
a decline in product liability expense;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs; and
|
|
·
|
|
the impact that higher overall net sales had on operating leverage.
|
Asset Impairment Charges
As previously discussed under the heading “Significant Trends Impacting the Business”, we performed interim impairment testing in the third quarter of fiscal 2018. As a result of our testing, we recorded pre-tax non-cash asset impairment charges of $82.2 million in our Nutritional Supplements segment, of
which $70.6 million relates to the segment’s goodwill and $11.6 million relates to the segment’s indefinite-lived brand assets.
Operating Income (Loss), Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment
In order to provide a better understanding of the comparative impact of certain items on operating income, the tables that follow report the comparative before tax impact of non
‐
cash asset impairment charges, restructuring charges, amortization of intangible assets, and non
‐
cash share
‐
based compensation, as applicable, on operating income (loss) and operating margin for each segment and in total for the periods covered below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2017
|
|
(In thousands)
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income (loss), as reported (GAAP)
|
|
$
|
29,982
|
|
23.4
|
%
|
|
$
|
27,897
|
|
14.6
|
%
|
|
$
|
(83,521)
|
|
(284.7)
|
%
|
|
$
|
10,012
|
|
9.6
|
%
|
|
$
|
(15,630)
|
|
(3.4)
|
%
|
Asset impairment charges
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
82,227
|
|
280.3
|
%
|
|
|
-
|
|
-
|
%
|
|
|
82,227
|
|
18.1
|
%
|
Restructuring charges
(1)
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
118
|
|
0.4
|
%
|
|
|
1,165
|
|
1.1
|
%
|
|
|
1,283
|
|
0.3
|
%
|
Subtotal
|
|
|
29,982
|
|
23.4
|
%
|
|
|
27,897
|
|
14.6
|
%
|
|
|
(1,176)
|
|
(4.0)
|
%
|
|
|
11,177
|
|
10.7
|
%
|
|
|
67,880
|
|
15.0
|
%
|
Amortization of intangible assets
|
|
|
489
|
|
0.4
|
%
|
|
|
2,797
|
|
1.5
|
%
|
|
|
1,770
|
|
6.0
|
%
|
|
|
1,374
|
|
1.3
|
%
|
|
|
6,430
|
|
1.4
|
%
|
Non-cash share-based compensation
|
|
|
1,527
|
|
1.2
|
%
|
|
|
1,632
|
|
0.9
|
%
|
|
|
467
|
|
1.6
|
%
|
|
|
1,025
|
|
1.0
|
%
|
|
|
4,651
|
|
1.0
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
31,998
|
|
25.0
|
%
|
|
$
|
32,326
|
|
16.9
|
%
|
|
$
|
1,061
|
|
3.6
|
%
|
|
$
|
13,576
|
|
13.0
|
%
|
|
$
|
78,961
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2016
|
|
(In thousands)
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income (loss), as reported (GAAP)
|
|
$
|
29,223
|
|
23.4
|
%
|
|
$
|
20,155
|
|
11.2
|
%
|
|
$
|
(80)
|
|
(0.2)
|
%
|
|
$
|
14,021
|
|
13.0
|
%
|
|
$
|
63,319
|
|
14.2
|
%
|
Amortization of intangible assets
|
|
|
658
|
|
0.5
|
%
|
|
|
3,546
|
|
2.0
|
%
|
|
|
1,571
|
|
4.9
|
%
|
|
|
1,424
|
|
1.3
|
%
|
|
|
7,199
|
|
1.6
|
%
|
Non-cash share-based compensation
|
|
|
671
|
|
0.5
|
%
|
|
|
872
|
|
0.5
|
%
|
|
|
369
|
|
1.1
|
%
|
|
|
991
|
|
0.9
|
%
|
|
|
2,903
|
|
0.7
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
30,552
|
|
24.5
|
%
|
|
$
|
24,573
|
|
13.7
|
%
|
|
$
|
1,860
|
|
5.8
|
%
|
|
$
|
16,436
|
|
15.3
|
%
|
|
$
|
73,421
|
|
16.5
|
%
|
_____________________
|
(1)
|
|
Charges incurred in conjunction with the Company’s restructuring plan for the three months ended November 30, 2017, with no comparable charges in the same period last year.
|
Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures. 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 in the section below entitled, “
Explanation of Non-GAAP Financial Measures
”.
Consolidated
Consolidated operating loss was $(15.6) million, or (3.4)% of net sales, compared to $63.3 million, or 14.2% of net sales, for the same period last year. The three months ended November 30, 2017 includes pre-tax non-cash asset impairment charges of $82.2 million in our Nutritional Supplements segment and pre-tax restructuring charges of $1.3 million related to Project Refuel, with no comparable charges in the same period last year. These items unfavorably impacted the year-over-year comparison of operating margin by 18.4 percentage points. The remaining increase in consolidated operating margin primarily reflects:
|
·
|
|
a higher mix of Leadership Brand sales at a higher operating margin;
|
|
·
|
|
lower marketing and advertising expense;
|
|
·
|
|
a decline in product liability expense;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs; and
|
|
·
|
|
the impact that higher overall net sales had on operating leverage.
|
These factors were partially offset by:
|
·
|
|
higher incentive compensation expense; and
|
|
·
|
|
the unfavorable comparative impact of foreign currency revaluations year-over-year.
|
Consolidated adjusted operating income increased 7.5% to $79.0 million, or 17.4% of net sales, compared to $73.4 million, or 16.5% of net sales, in the same period last year.
Housewares
The Housewares segment’s operating income was $30.0 million, or 23.4% of segment net sales, compared to $29.2 million, or 23.4% of segment net sales, for the same period last year. The segment operating margin was unchanged, reflecting lower incentive compensation expense and the favorable impact of increased operating leverage from net sales growth, offset by higher marketing, advertising and new product development expense.
Segment adjusted operating income increased 4.7%
to $32.0 million, or 25.0% of segment net sales, compared to $30.6 million, or 24.5% of segment net sales, in the same period last year.
Health & Home
The Health & Home segment’s operating income was $27.9 million, or 14.6% of segment net sales, compared to $20.2 million, or 11.2% of segment net sales, in the same period last year. The 3.4 percentage point increase in segment operating margin is primarily due to:
|
·
|
|
a decline in product liability expense;
|
|
·
|
|
lower legal fee expense;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs;
|
|
·
|
|
a decrease in marketing, advertising and new product development expense;
|
|
·
|
|
increased operating leverage from net sales growth; and
|
|
·
|
|
the favorable impact of net foreign currency fluctuations on net sales.
|
Segment adjusted operating income increased 31.6% to $32.3 million, or 16.9% of segment net sales, compared to $24.6 million, or 13.7% of segment net sales, in the same period last year.
Nutritional Supplements
The Nutritional Supplements segment’s operating loss was $(83.5) million for the three months ended November 30, 2017, compared to an operating loss of $(0.1) million in the same period last year. The increase in the segment operating loss is primarily due to:
|
·
|
|
the impact of pre-tax non-cash asset impairment charges of $82.2 million recorded during the three months ended November 30, 2017, with no comparable charges in the same period last year;
|
|
·
|
|
higher promotion, advertising and customer acquisition costs as a percentage of sales;
|
|
·
|
|
pre-tax restructuring charges of $0.1 million associated with Project Refuel; and
|
|
·
|
|
the net sales decline and its unfavorable impact on operating leverage.
|
Segment adjusted operating income was $1.1 million compared to $1.9 million in the same period last year.
Beauty
:
The Beauty segment’s operating income was $10.0 million, or 9.6% of segment net sales, for the three months ended November 30, 2017, compared to $14.0 million, or 13.0% of segment net sales, in the same period last year. The decrease in operating margin is primarily due to pre-tax restructuring charges of $1.2 million associated with Project Refuel, higher incentive compensation expense and the net sales decline in the personal care category and its unfavorable impact on sales mix and operating leverage. These factors were partially offset by:
|
·
|
|
lower media advertising expense; and
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs.
|
Segment adjusted operating income decreased 17.4% to $13.6 million, or 13.0% of segment net sales, compared to $16.4 million, or 15.3% of segment net sales, in the same period last year.
Interest Expense
Interest expense was $3.6 million for both the three months ended November 30, 2017 and 2016. Lower average levels of debt held during the three months ended November 30, 2017, were offset by higher overall average interest rates.
Income Tax Expense
The year-over-year comparison of our effective tax rates is impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.
For the three months ended November 30, 2017, income tax expense as a percentage of pretax loss was (58.4)%, compared to income tax expense of 3.7% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income, as opposed to the periods in which the charges were incurred. As a result, the expected tax benefit from impairment charges of $52.8 million will be recognized entirely in the fourth quarter of fiscal 2018, relative to pre-tax income.
Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP)
In order to provide a better understanding of the impact of certain items on our net income (loss) and earnings (loss) per share, the analysis that follows reports the comparative after tax impact of non
‐
cash asset impairment charges, restructuring charges, amortization of intangible assets, and non
‐
cash share
‐
based compensation, as applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2017
|
|
|
|
Income (Loss)
|
|
Diluted Earnings (Loss) Per Share
|
(in thousands, except per share data)
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
As reported (GAAP)
|
|
$
|
(19,215)
|
|
$
|
11,221
|
|
$
|
(30,436)
|
|
$
|
(0.71)
|
|
$
|
0.41
|
|
$
|
(1.12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
82,227
|
|
|
(6,380)
|
|
|
88,607
|
|
|
3.02
|
|
|
(0.23)
|
|
|
3.25
|
Restructuring charges
(1)
|
|
|
1,283
|
|
|
69
|
|
|
1,214
|
|
|
0.05
|
|
|
-
|
|
|
0.04
|
Subtotal
|
|
|
64,295
|
|
|
4,910
|
|
|
59,385
|
|
|
2.36
|
|
|
0.18
|
|
|
2.18
|
Amortization of intangible assets
|
|
|
6,430
|
|
|
853
|
|
|
5,577
|
|
|
0.24
|
|
|
0.03
|
|
|
0.20
|
Non-cash share-based compensation
|
|
|
4,651
|
|
|
781
|
|
|
3,870
|
|
|
0.17
|
|
|
0.03
|
|
|
0.14
|
Adjusted (non-GAAP)
|
|
$
|
75,376
|
|
$
|
6,544
|
|
$
|
68,832
|
|
$
|
2.76
|
|
$
|
0.24
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share, as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,113
|
Adjusted diluted earnings per share (non-GAAP)
|
|
|
|
|
|
|
|
|
27,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2016
|
|
|
|
Income
|
|
Diluted Earnings Per Share
|
(in thousands, except per share data)
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
As reported (GAAP)
|
|
$
|
59,800
|
|
$
|
2,188
|
|
$
|
57,612
|
|
$
|
2.15
|
|
$
|
0.08
|
|
$
|
2.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Restructuring charges
(1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Subtotal
|
|
|
59,800
|
|
|
2,188
|
|
|
57,612
|
|
|
2.15
|
|
|
0.08
|
|
|
2.07
|
Amortization of intangible assets
|
|
|
7,199
|
|
|
1,009
|
|
|
6,190
|
|
|
0.26
|
|
|
0.04
|
|
|
0.22
|
Non-cash share-based compensation
|
|
|
2,903
|
|
|
706
|
|
|
2,197
|
|
|
0.10
|
|
|
0.02
|
|
|
0.08
|
Adjusted (non-GAAP)
|
|
$
|
69,902
|
|
$
|
3,903
|
|
$
|
65,999
|
|
$
|
2.51
|
|
$
|
0.14
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,802
|
Adjusted diluted earnings per share (non-GAAP)
|
|
|
|
|
|
|
|
|
27,802
|
_________________
|
(1)
|
|
Charges incurred in conjunction with the Company’s restructuring plan for the three months ended November 30, 2017, with no comparable charges in the same period last year.
|
Adjusted income and adjusted diluted earnings per share may be considered non-GAAP financial measures. 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 in the section below entitled, “
Explanation of Non-GAAP Financial Measures”
.
Net loss was $(30.4) million for the three months ended November 30, 2017 compared to net income of $57.6 million for the same period last year. Diluted loss per share was $(1.12) for the three months ended November 30, 2017 compared to diluted earnings per share of $2.07 for the same period last year.
Adjusted income increased $2.8 million, or 4.3%, to $68.8 million for the three months ended November 30, 2017 compared to $66.0 million the same period last year. Adjusted diluted earnings per share increased 6.3% to $2.52 for the three months ended November 30, 2017 compared to $2.37 for the same period last year. Adjusted diluted earnings per share increased primarily due to the impact of higher adjusted operating income for our Housewares and Health & Home segments, and lower weighted average diluted shares outstanding compared to the same period last year.
Comparison of First Nine Months of Fiscal 2018 to First Nine Months of Fiscal 2017
Consolidated and Segment Net Sales
The following table summarizes the impact that core business, foreign exchange and acquisitions, as applicable, had on our net sales revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30,
|
|
(in thousands)
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Fiscal 2017 sales revenue, net
|
$
|
315,302
|
|
$
|
470,650
|
|
$
|
101,215
|
|
$
|
273,355
|
|
$
|
1,160,522
|
|
Core business
|
|
20,043
|
|
|
17,364
|
|
|
(9,003)
|
|
|
(5,025)
|
|
|
23,379
|
|
Impact of foreign currency
|
|
(328)
|
|
|
1,088
|
|
|
-
|
|
|
303
|
|
|
1,063
|
|
Acquisitions
(1)
|
|
6,148
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,148
|
|
Change in sales revenue, net
|
|
25,863
|
|
|
18,452
|
|
|
(9,003)
|
|
|
(4,722)
|
|
|
30,590
|
|
Fiscal 2018 sales revenue, net
|
$
|
341,165
|
|
$
|
489,102
|
|
$
|
92,212
|
|
$
|
268,633
|
|
$
|
1,191,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales revenue growth
|
|
8.2
|
%
|
|
3.9
|
%
|
|
(8.9)
|
%
|
|
(1.7)
|
%
|
|
2.6
|
%
|
Core business
|
|
6.4
|
%
|
|
3.7
|
%
|
|
(8.9)
|
%
|
|
(1.8)
|
%
|
|
2.0
|
%
|
Impact of foreign currency
|
|
(0.1)
|
%
|
|
0.2
|
%
|
|
0.0
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Acquisitions
|
|
1.9
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.5
|
%
|
_____________________
|
(1)
|
|
Includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.
|
In the above table, core business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the impact that foreign currency had on reported net sales. Net sales revenue from internally developed brands or product lines is considered core business activity.
Consolidated Net Sales Revenue
Consolidated net sales revenue increased $30.6 million, or 2.6%, to $1,191.1 million for the nine months ended November 30, 2017, compared to $1,160.5 million for the same period last year. The growth was primarily driven by:
|
·
|
|
a core business increase of $23.4 million, or 2.0%, primarily due to new product introductions, online customer growth, incremental distribution and growth in international sales;
|
|
·
|
|
growth from acquisitions of $6.1 million, or 0.5%; and
|
|
·
|
|
the favorable impact from foreign currency fluctuations of approximately $1.1 million, or 0.1%.
|
These factors were partially offset by:
|
·
|
|
a decline in the Nutritional Supplements segment of $9.0 million;
|
|
·
|
|
a decline in the personal care category within Beauty; and
|
|
·
|
|
the impact of lower store traffic and soft consumer spending at traditional brick and mortar retail.
|
Segment Net Sales Revenue
Housewares
Net sales revenue in the Housewares segment increased $25.9 million, or 8.2%, to $341.2 million for the nine months ended November 30, 2017, compared to $315.3 million
for same period last year. The growth was primarily driven by:
|
·
|
|
a core business increase of $20.0 million, or 6.4%, due to an increase in online sales, incremental distribution with existing customers, expanded international and U.S. distribution, and new product introductions for both the Hydro Flask and OXO brands; and
|
|
·
|
|
growth from acquisitions of $6.1 million, or 1.9%, representing an incremental half month of operating results from Hydro Flask, compared to the same period last year.
|
These factors were partially offset by:
|
·
|
|
lower store traffic and soft consumer spending at traditional brick and mortar retail;
|
|
·
|
|
the unfavorable comparative impact of retail pipeline fill and strong sales into the club channel in the prior year period; and
|
|
·
|
|
the unfavorable impact of net foreign currency fluctuations of approximately $0.3 million, or 0.1%.
|
Health & Home
Net sales revenue in the Health & Home segment increased $18.5 million, or 3.9%, to $489.1 million for the nine months ended November 30, 2017, compared to $470.7 million for the same period last year. The growth was primarily driven by an increase in online sales, incremental distribution and shelf space gains with existing customers, growth in international sales, and the favorable impact of net foreign currency fluctuations of approximately $1.1 million, or 0.2%, partially offset by lower sales into the club channel and lower royalty revenue.
Nutritional Supplements
Net sales revenue in the Nutritional Supplements segment decreased $9.0 million, or 8.9%, to $92.2 million for the nine months ended November 30, 2017, compared to $101.2 million for the same period last year. The change was primarily driven by a decline in auto-delivery revenue resulting primarily from the transition to new order management and customer relationship management systems, partially offset by increases in direct mail and third-party retail sales.
Beauty
Net sales revenue in the Beauty segment decreased $4.7 million, or 1.7%, to $268.6 million for the nine months ended November 30, 2017, compared to $273.4 million for the same period last year. The change was primarily driven by a decline in the personal care category and a decrease in international sales, partially offset by the favorable impact of net foreign currency fluctuations of approximately $0.3 million, or 0.1%. These factors were partially offset by solid growth in both retail and professional appliance sales, particularly to online retail customers.
Gross Profit Margin
Consolidated gross profit as a percentage of net sales revenue for the nine months ended November 30, 2017 was 44.2% compared to 43.9% for the same period last year. The increase is
primarily due to the favorable impact from growth in our Leadership Brands, a higher margin mix and the favorable impact of net foreign currency fluctuations, which was partially offset by the unfavorable impact from sales declines in the Nutritional Supplements segment and personal care category.
Selling, General and Administrative Expense
Our consolidated SG&A ratio, decreased 0.1% percentage points to 32.5% for the nine months ended November 30, 2017, compared to 32.6% for the same period last year. The decrease in consolidated SG&A ratio was primarily due to:
|
·
|
|
the favorable comparative impact of a $1.5 million patent litigation charge in the same period last year;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight expense; and
|
|
·
|
|
the favorable impact that higher overall sales had on operating leverage.
|
These factors were partially offset by a $3.6 million charge related to the bankruptcy of TRU and higher overall marketing, advertising and new product development expense in support of our Leadership Brands.
Asset Impairment Charges
As previously discussed under the heading “Significant Trends Impacting the Business”, for the nine months ended November 30, 2017, we recorded non-cash asset impairment charges totaling $136.3 million to certain goodwill and intangible assets as further discussed below.
We performed interim impairment testing in the first quarter of fiscal 2018 in connection with our continuing evaluation of strategic alternatives for the Nutritional Supplements segment. We performed interim impairment testing in the second quarter of fiscal 2018 as the result of a revised financial projection for the segment. As a result of our testing, we recorded non-cash asset impairment charges totaling $50.1 million for the six months ended August 31, 2017. During the third quarter of fiscal 2018, we performed interim impairment testing due to the receipt of new information regarding the potential fair value of the business. As a result, we recorded a pre-tax asset impairment charge of $70.6 million
to the segment’s goodwill and $11.6 million to the segment’s indefinite-lived brand assets.
We also performed interim impairment testing in the first quarter of fiscal 2018 for a certain brand in our Beauty segment as a result of a revised financial projection. As a result of our testing, we recorded a non-cash impairment charge of $4.0 million.
Operating Income (Loss), Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment
In order to provide a better understanding of the comparative impact of certain items on operating income (loss), the tables that follow report the comparative before tax impact of non
‐
cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non
‐
cash share
‐
based compensation, as applicable, on operating income (loss) and operating margin for each segment and in total for the periods covered below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2017
|
|
(In thousands)
|
|
Housewares
(2)
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income (loss), as reported (GAAP)
|
|
$
|
71,601
|
|
21.0
|
%
|
|
$
|
50,187
|
|
10.3
|
%
|
|
$
|
(138,413)
|
|
(150.1)
|
%
|
|
$
|
17,869
|
|
6.7
|
%
|
|
$
|
1,244
|
|
0.1
|
%
|
Asset impairment charges
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
132,297
|
|
143.5
|
%
|
|
|
4,000
|
|
1.5
|
%
|
|
|
136,297
|
|
11.4
|
%
|
Restructuring charges
(1)
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
118
|
|
0.4
|
%
|
|
|
1,165
|
|
1.1
|
%
|
|
|
1,283
|
|
0.3
|
%
|
TRU bankruptcy charge
|
|
|
956
|
|
0.3
|
%
|
|
|
2,640
|
|
0.5
|
%
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
3,596
|
|
0.3
|
%
|
Subtotal
|
|
|
72,557
|
|
21.3
|
%
|
|
|
52,827
|
|
10.8
|
%
|
|
|
(5,998)
|
|
(6.5)
|
%
|
|
|
23,034
|
|
8.6
|
%
|
|
|
142,420
|
|
12.0
|
%
|
Amortization of intangible assets
|
|
|
1,618
|
|
0.5
|
%
|
|
|
8,373
|
|
1.7
|
%
|
|
|
5,380
|
|
5.8
|
%
|
|
|
4,207
|
|
1.6
|
%
|
|
|
19,578
|
|
1.6
|
%
|
Non-cash share-based compensation
|
|
|
3,579
|
|
1.0
|
%
|
|
|
3,792
|
|
0.8
|
%
|
|
|
980
|
|
1.1
|
%
|
|
|
2,779
|
|
1.0
|
%
|
|
|
11,130
|
|
0.9
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
77,754
|
|
22.8
|
%
|
|
$
|
64,992
|
|
13.3
|
%
|
|
$
|
362
|
|
0.4
|
%
|
|
$
|
30,020
|
|
11.2
|
%
|
|
$
|
173,128
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2016
|
|
(In thousands)
|
|
Housewares
|
|
|
Health & Home
|
|
|
Nutritional
Supplements
|
|
|
Beauty
|
|
|
Total
|
|
Operating income (loss), as reported (GAAP)
|
|
$
|
68,956
|
|
21.9
|
%
|
|
$
|
39,156
|
|
8.3
|
%
|
|
$
|
(6,581)
|
|
(6.5)
|
%
|
|
$
|
22,173
|
|
8.1
|
%
|
|
$
|
123,704
|
|
10.7
|
%
|
Asset impairment charges
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
5,000
|
|
4.9
|
%
|
|
|
2,400
|
|
0.9
|
%
|
|
|
7,400
|
|
0.6
|
%
|
Patent litigation charge
|
|
|
-
|
|
-
|
%
|
|
|
1,468
|
|
0.3
|
%
|
|
|
-
|
|
-
|
%
|
|
|
-
|
|
-
|
%
|
|
|
1,468
|
|
0.1
|
%
|
Subtotal
|
|
|
68,956
|
|
21.9
|
%
|
|
|
40,624
|
|
8.6
|
%
|
|
|
(1,581)
|
|
(1.6)
|
%
|
|
|
24,573
|
|
9.0
|
%
|
|
|
132,572
|
|
11.4
|
%
|
Amortization of intangible assets
|
|
|
1,986
|
|
0.6
|
%
|
|
|
10,626
|
|
2.3
|
%
|
|
|
4,713
|
|
4.7
|
%
|
|
|
4,300
|
|
1.6
|
%
|
|
|
21,625
|
|
1.9
|
%
|
Non-cash share-based compensation
|
|
|
2,404
|
|
0.8
|
%
|
|
|
3,787
|
|
0.8
|
%
|
|
|
1,734
|
|
1.7
|
%
|
|
|
3,736
|
|
1.4
|
%
|
|
|
11,661
|
|
1.0
|
%
|
Adjusted operating income (non-GAAP)
|
|
$
|
73,346
|
|
23.3
|
%
|
|
$
|
55,037
|
|
11.7
|
%
|
|
$
|
4,866
|
|
4.8
|
%
|
|
$
|
32,609
|
|
11.9
|
%
|
|
$
|
165,858
|
|
14.3
|
%
|
_____________________
|
(1)
|
|
Charges incurred in conjunction with the Company’s restructuring plan for the nine-months ended November 30, 2017 with no comparable charges in the same period last year.
|
|
(2)
|
|
Includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.
|
Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures. 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 in the section below entitled, “
Explanation of Non-GAAP Financial Measures
”.
Consolidated
Consolidated operating income was $1.2 million, or 0.1% of net sales, compared to consolidated operating income of $123.7 million, or 10.7% of net sales, for the same period last year. The nine months ended November 30, 2017 includes: (i) pre-tax non-cash asset impairment charges totaling $136.3 million; (ii) a $3.6 million charge related to the TRU bankruptcy; and (iii) pre-tax restructuring charges of $1.3 million associated with Project Refuel. The nine months ended November 30, 2016 includes pre-tax non-cash asset impairment charges of $7.4 million and a patent litigation charge of $1.5 million. The effect of these items in both years unfavorably impacted the year-over-year comparison of operating margin by a combined 11.3 percentage points. The remaining improvement in consolidated operating margin primarily reflects:
|
·
|
|
a higher mix of Leadership Brand sales at a higher operating margin;
|
|
·
|
|
the favorable comparative impact of a $1.5 million patent litigation charge in the same period last year;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs; and
|
|
·
|
|
the favorable impact that higher overall net sales had on operating leverage.
|
These factors were partially offset by higher marketing, advertising and new product development expense in support of our Leadership Brands.
Consolidated adjusted operating income increased 4.4% to $173.1 million, or 14.5% of net sales, compared to $165.9 million, or 14.3% of net sales, in the same period last year.
Housewares
The Housewares segment’s operating income was $71.6 million, or 21.0% of segment net sales, compared to $69.0 million, or 21.9% of segment net sales, for the same period last year. The 0.9 percentage point decrease in segment operating margin is primarily due to:
|
·
|
|
higher marketing, advertising and new product development expense; and
|
|
·
|
|
a $1.0 million charge related to the bankruptcy of TRU.
|
These factors were partially offset by the favorable margin impact from growth in the Hydro Flask business, improved distribution and logistics efficiency coupled with lower outbound freight costs, and the impact of increased operating leverage from overall sales growth.
Segment adjusted operating income increased 6.0% to $77.8 million, or 22.8% of segment net sales, compared to $73.3 million, or 23.3% of segment net sales, in the same period last year.
Health & Home
The Health & Home segment’s operating income was $50.2 million, or 10.3% of segment net sales, compared to $39.2 million, or 8.3% of segment net sales, in the same period last year. The 2.0 percentage point increase in segment operating margin is primarily due to:
|
·
|
|
lower legal fee expense;
|
|
·
|
|
lower amortization expense;
|
|
·
|
|
the comparative impact of a $1.5 million patent litigation charge in the same period last year;
|
|
·
|
|
improved distribution and logistics efficiency and lower outbound freight costs;
|
|
·
|
|
lower royalty expense; and
|
|
·
|
|
the favorable impact that higher overall net sales had on operating leverage.
|
These factors were partially offset by:
|
·
|
|
an increase in new product development expense;
|
|
·
|
|
a $2.6 million charge related to the bankruptcy of TRU; and
|
|
·
|
|
an increase in product liability expense.
|
Segment adjusted operating income increased 18.1% to $65.0 million, or 13.3% of segment net sales, compared to $55.0 million, or 11.7% of segment net sales, in the same period last year.
Nutritional Supplements
The Nutritional Supplements segment’s operating loss was $(138.4) million, or (150.1)% of segment net sales, for the nine months ended November 30, 2017, compared to an operating loss of $6.6 million, or (6.5)% of segment net sales, in the same period last year. The increase in the segment operating loss is primarily due to:
|
·
|
|
pre-tax non-cash asset impairment charges of $132.3 million recorded during the nine months ended November 30, 2017, compared to $5.0 million recorded in the same period last year;
|
|
·
|
|
pre-tax restructuring charges of $0.1 million related to Project Refuel;
|
|
·
|
|
higher promotion, advertising and customer acquisition costs; and
|
|
·
|
|
the net sales decline and its unfavorable impact on operating leverage.
|
These factors were partially offset by lower personnel expense and lower royalty expense.
Segment adjusted operating income was $0.4 million, or 0.4% of segment net sales, compared to segment adjusted operating income of $4.9 million, or 4.8% of segment net sales in the same period last year.
Beauty
The Beauty segment’s operating income was $17.9 million, or 6.7% of segment net sales, for the nine months ended November 30, 2017, compared to operating income of $22.2 million, or 8.1% of segment net sales, in the same period last year. The 1.4 percentage point decrease in segment operating margin is primarily due to:
|
·
|
|
pre-tax non-cash asset impairment charges of $4.0 million, recorded during the nine months ended November 30, 2017, compared to $2.4 million recorded in the same period last year;
|
|
·
|
|
pre-tax restructuring charges of $1.2 million related to Project Refuel; and
|
|
·
|
|
the net sales decline in the personal care category and its unfavorable impact on gross margin mix and operating leverage.
|
These factors were partially offset by the favorable impact of new product introductions in the appliance category, lower media advertising expense, improved distribution and logistics efficiency coupled with lower outbound freight costs and the favorable impact of foreign currency fluctuations.
Segment adjusted operating income decreased 7.9% to $30.0 million, or 11.2% of segment net sales, compared to $32.6 million, or 11.9% of segment net sales, in the same period last year.
Interest Expense
Interest expense was $11.3 million for the nine months ended November 30, 2017 compared to $11.1 million in the same period last year. The increase in interest expense is due to higher overall average interest rates, partially offset by lower average levels of debt held during the nine months ended November 30, 2017.
Income Tax Expense
The year-over-year comparison of our effective tax rates is impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.
For the nine months ended November 30, 2017, income tax expense as a percentage of pre-tax loss was (59.5)%, compared to expense of 7.0% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income, as opposed to the periods in which the charges were incurred. As a result, the expected tax benefit from impairment charges of $52.8 million will be recognized entirely in the fourth quarter of fiscal 2018, relative to pre-tax income.
Income taxes for the nine-months ended November 30, 2017 also included:
|
·
|
|
$2.6 million in excess tax benefits from share-based compensation settlements and exercises; and
|
|
·
|
|
$2.8 million of tax benefits related to the resolution of uncertain tax positions.
|
Income taxes for the nine months ended November 30, 2016 included tax benefits of $1.4 million related to the resolution of uncertain tax positions and $1.3 million in excess tax benefits from share-based compensation settlements and exercises.
Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP)
In order to provide a better understanding of the impact of certain items on our net income (loss) and earnings (loss) per share, the analysis that follows reports the comparative after tax impact of non
‐
cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non
‐
cash share
‐
based compensation, as applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2017
|
|
|
|
Income (Loss)
|
|
Diluted Earnings (Loss) Per Share
|
(in thousands, except per share data)
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
As reported (GAAP)
|
|
$
|
(9,802)
|
|
$
|
5,833
|
|
$
|
(15,635)
|
|
$
|
(0.36)
|
|
$
|
0.21
|
|
$
|
(0.58)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
136,297
|
|
|
3
|
|
|
136,294
|
|
|
4.99
|
|
|
-
|
|
|
4.99
|
Restructuring charges
(1)
|
|
|
1,283
|
|
|
69
|
|
|
1,214
|
|
|
0.05
|
|
|
-
|
|
|
0.04
|
Patent litigation charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
TRU bankruptcy charge
|
|
|
3,596
|
|
|
204
|
|
|
3,392
|
|
|
0.13
|
|
|
0.01
|
|
|
0.12
|
Subtotal
|
|
|
131,374
|
|
|
6,109
|
|
|
125,265
|
|
|
4.81
|
|
|
0.22
|
|
|
4.59
|
Amortization of intangible assets
|
|
|
19,578
|
|
|
2,625
|
|
|
16,953
|
|
|
0.72
|
|
|
0.10
|
|
|
0.62
|
Non-cash share-based compensation
|
|
|
11,130
|
|
|
1,862
|
|
|
9,268
|
|
|
0.41
|
|
|
0.07
|
|
|
0.34
|
Adjusted (non-GAAP)
|
|
$
|
162,082
|
|
$
|
10,596
|
|
$
|
151,486
|
|
$
|
5.94
|
|
$
|
0.39
|
|
$
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share, as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,140
|
Adjusted diluted earnings per share (non-GAAP)
|
|
|
|
|
|
|
|
|
27,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2016
|
|
|
|
Income
|
|
Diluted Earnings Per Share
|
(in thousands, except per share data)
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
|
Before tax
|
|
Tax
|
|
Net of Tax
|
As reported (GAAP)
|
|
$
|
112,905
|
|
$
|
7,912
|
|
$
|
104,993
|
|
$
|
4.02
|
|
$
|
0.28
|
|
$
|
3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
7,400
|
|
|
2,303
|
|
|
5,097
|
|
|
0.26
|
|
|
0.08
|
|
|
0.18
|
Restructuring charges
(1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Patent litigation charge
|
|
|
1,468
|
|
|
4
|
|
|
1,464
|
|
|
0.05
|
|
|
-
|
|
|
0.05
|
TRU bankruptcy charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Subtotal
|
|
|
121,773
|
|
|
10,219
|
|
|
111,554
|
|
|
4.34
|
|
|
0.36
|
|
|
3.98
|
Amortization of intangible assets
|
|
|
21,625
|
|
|
3,005
|
|
|
18,620
|
|
|
0.77
|
|
|
0.11
|
|
|
0.66
|
Non-cash share-based compensation
|
|
|
11,661
|
|
|
2,920
|
|
|
8,741
|
|
|
0.42
|
|
|
0.11
|
|
|
0.31
|
Adjusted (non-GAAP)
|
|
$
|
155,059
|
|
$
|
16,144
|
|
$
|
138,915
|
|
$
|
5.53
|
|
$
|
0.58
|
|
$
|
4.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,058
|
Adjusted diluted earnings per share (non-GAAP)
|
|
|
|
|
|
|
|
|
28,058
|
__________________
(1)
Charges incurred in conjunction with the Company’s restructuring plan for the nine months ended November 30, 2017, with no comparable charges in the same period last year.
Adjusted income and adjusted diluted earnings per share may be considered non-GAAP financial measures. 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 in the section below entitled,
“Explanation of Non-GAAP Financial Measures”
.
Consolidated net loss was $(15.6) million for the nine months ended November 30, 2017 compared to net income of $105.0 million for the same period last year. Diluted loss per share was $(0.58) for the nine months ended November 30, 2017 compared to diluted earnings per share of $3.74 for the same period last year.
Adjusted income increased $12.6 million, or 9.0%, to $151.5 million for the nine months ended November 30, 2017 compared to $138.9 million in the same period last year. Adjusted diluted earnings per share increased 12.1% to $5.55 for the nine months ended November 30, 2017 compared to $4.95 for the same period last year. Adjusted diluted earnings per share increased primarily due to the impact of higher adjusted operating income in the Housewares and Health & Home segments, and lower weighted average diluted shares outstanding for the nine months ended November 30, 2017 compared to the same period last year.
Explanation of Non-GAAP Financial Measures
In the tables above, under the headings “Operating Income, Operating Margin, Adjusted Operating Income (non-GAAP) and Adjusted Operating Margin (non-GAAP) by Segment” and “Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP),” we report operating income (loss), operating margin, net income (loss) and earnings (loss) per share without the impact of non-cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The preceding tables reconcile these measures to their corresponding GAAP-based measures presented in our consolidated statements of operations. We believe that adjusted operating income, adjusted operating margin, adjusted income and adjusted diluted earnings per share provide useful information to management and investors regarding financial and business trends relating to our financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with our financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on operating income (loss), operating margin, net income (loss) and earnings (loss) per share. We also believe that these non-GAAP measures facilitate a more direct comparison of our performance with our competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of our continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in our GAAP financial results in the near future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of our activities. Our adjusted operating income, adjusted operating margin, adjusted income and adjusted diluted earnings per share 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
Selected measures of our liquidity and capital resources are shown for the periods below:
SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL UTILIZATION
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30,
|
|
|
|
2017
|
|
2016
|
|
Accounts Receivable Turnover (Days)
(1)
|
|
|
59.1
|
|
|
57.8
|
|
Inventory Turnover (Times)
(1)
|
|
|
2.9
|
|
|
2.8
|
|
Working Capital
(in thousands)
|
|
$
|
263,520
|
|
$
|
292,559
|
|
Current Ratio
|
|
|
1.7:1
|
|
|
1.9:1
|
|
Ending Debt to Ending Equity Ratio
|
|
|
43.3
|
%
|
|
57.7
|
%
|
Return on Average Equity
(1)
|
|
|
2.0
|
%
|
|
11.9
|
%
|
_____________________
|
(1)
|
|
Accounts receivable turnover, inventory turnover and return on average equity computations use 12 month trailing net sales revenue, cost of goods sold or net income components as required by the particular measure. The current and four prior quarters' ending balances of accounts receivable, inventory and equity are used for the purposes of computing the average balance component as required by the particular measure.
|
Operating Activities
Operating activities provided $107.6 million of cash during the nine months ended November 30, 2017 compared to $139.1 million of cash provided during the same period last year.
Accounts receivable increased $72.5 million, to $302.4 million as of November 30, 2017, compared to $229.9 million at the end of fiscal year 2017. Accounts receivable turnover was 59.1 days at November 30, 2017, compared to 57.8 days for the same period last year.
Inventory decreased $3.5 million, to $285.6 million as of November 30, 2017, compared to $289.1 million at the end of fiscal year 2017. Inventory turnover was 2.9 times at November 30, 2017 compared to 2.8 times at November 30, 2016.
Working capital was $263.5 million at November 30, 2017, compared to $292.6 million at November 30, 2016 and our current ratio was 1.7:1 at November 30, 2017, compared to 1.9:1 as of November 30, 2016.
Investing Activities
Investing activities used $19.8 million of cash during the nine months ended November 30, 2017. We spent $7.1 million on computers, furniture and other equipment, $3.7 million on tools, molds and other capital asset additions, and $9.0 million on patents and certain trademark related assets.
Financing Activities
Financing activities used $89.7 million of cash during the nine months ended November 30, 2017. Highlights of those activities follow:
|
·
|
|
we had draws of $389.5 million against our credit agreement;
|
|
·
|
|
we repaid $444.2 million drawn against our credit agreement;
|
|
·
|
|
we repaid $5.7 million of our long-term debt;
|
|
·
|
|
employees exercised options to purchase 110,552 shares of common stock, providing $5.5 million of cash;
|
|
·
|
|
employees purchased 16,018 shares of common stock for $1.2 million through our employee stock purchase plan; and
|
|
·
|
|
we paid $6.8 million in tax obligations resulting from cashless share award settlements.
|
Credit and Other Debt Agreements
Credit Agreement
We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $1 billion as of November 30, 2017. The commitment under the Credit Agreement terminates on December 7, 2021. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time. We also incur loan commitment and letter of credit fees under the Credit Agreement. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. As of November 30, 2017, the outstanding revolving loan principal balance was $386.0 million and the balance of outstanding letters of credit was $7.6 million. As of November 30, 2017, the amount available for borrowings under the Credit Agreement was $606.4 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur. As of November 30, 2017, these covenants effectively limited our ability to incur more than $348.2 million of additional debt from all sources, including our Credit Agreement.
Other Debt Agreements
In addition to the Credit Agreement, at November 30, 2017, we had an aggregate principal balance of $20 million of 3.9% Senior Notes due January 2018 with one remaining installment due in January 2018.
We also have an aggregate principal balance of $24.3 million under a loan agreement with the Mississippi Business Finance Corporation (the “MBFC Loan”). The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. The remaining loan balance is payable as follows: $1.9 million annually on March 1, 2018 through 2022; and $14.8 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 key financial covenants, defined in the table below. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt agreements. The commitments of the lenders to make loans to us under the Credit Agreement are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the Credit Agreement.
The table below provides the formulas currently in effect for certain key financial covenants as defined under our debt agreements:
|
|
|
Applicable Financial Covenant
|
Credit Agreement and MBFC Loan
|
3.9% 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 Acquisitions]
|
[EBITDA (2) + Pro Forma Effect of Acquisitions]
|
|
|
|
|
|
|
|
Maximum Currently 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
Our contractual obligations and commercial commitments in effect as of November 30, 2017, were:
PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED THE LAST DAY OF NOVEMBER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
After
|
(in thousands)
|
|
Total
|
|
1 year
|
|
2 years
|
|
3 years
|
|
4 years
|
|
5 years
|
|
5 years
|
Fixed rate debt
|
|
$
|
20,000
|
|
$
|
20,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Floating rate debt
|
|
|
410,307
|
|
|
1,900
|
|
|
1,900
|
|
|
1,900
|
|
|
1,900
|
|
|
387,900
|
|
|
14,807
|
Long-term incentive plan payouts
|
|
|
10,658
|
|
|
4,972
|
|
|
4,286
|
|
|
1,400
|
|
|
-
|
|
|
-
|
|
|
-
|
Interest on fixed rate debt
|
|
|
91
|
|
|
91
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Interest on floating rate debt
(1)
|
|
|
43,591
|
|
|
10,800
|
|
|
10,750
|
|
|
10,701
|
|
|
10,651
|
|
|
593
|
|
|
96
|
Open purchase orders
|
|
|
205,399
|
|
|
205,399
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Long-term purchase commitments
|
|
|
1,180
|
|
|
1,180
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Minimum royalty payments
|
|
|
56,970
|
|
|
12,515
|
|
|
12,905
|
|
|
13,067
|
|
|
8,999
|
|
|
8,983
|
|
|
501
|
Advertising and promotional
|
|
|
48,396
|
|
|
17,586
|
|
|
7,315
|
|
|
7,371
|
|
|
7,450
|
|
|
7,174
|
|
|
1,500
|
Operating leases
|
|
|
34,343
|
|
|
6,468
|
|
|
5,079
|
|
|
4,524
|
|
|
4,152
|
|
|
3,543
|
|
|
10,577
|
Capital spending commitments
|
|
|
643
|
|
|
643
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total contractual obligations
(2)
|
|
$
|
831,578
|
|
$
|
281,554
|
|
$
|
42,235
|
|
$
|
38,963
|
|
$
|
33,152
|
|
$
|
408,193
|
|
$
|
27,481
|
_____________________
|
(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 November 30, 2017 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 November 30, 2017 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)
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In addition to the contractual obligations and commercial commitments in the table above, as of November 30, 2017, we have recorded total provisions for our uncertain tax positions totaling $4.5 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.
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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. We may also elect to repurchase additional shares of common stock up to the balance of our current authorization over the next three fiscal years, subject to limitations contained in our debt agreements and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions, financial conditions, any applicable contractual limitations and other factors, including alternative investment opportunities.