UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended May 31, 2024
or
For the transition period from __ to __
Commission File Number: 001-14669
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer | |||||||
| of incorporation or organization) | Identification No.) | |||||||
(Address of principal executive offices)
(Registrant's United States Mailing Address) (Zip Code)
(915 ) 225-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of June 28, 2024, there were 22,813,316 common shares, $0.10 par value per share, outstanding.
HELEN OF TROY LIMITED AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
| PAGE | ||||||||
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| (in thousands, except shares and par value) | May 31, 2024 | February 29, 2024 | |||||||||
| Assets | |||||||||||
| Assets, current: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowances of $ | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income taxes receivable | |||||||||||
| Total assets, current | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Goodwill | |||||||||||
Other intangible assets, net of accumulated amortization of $ | |||||||||||
| Operating lease assets | |||||||||||
| Deferred tax assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Liabilities, current: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Long-term debt, current maturities | |||||||||||
| Total liabilities, current | |||||||||||
| Long-term debt, excluding current maturities | |||||||||||
| Lease liabilities, non-current | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Other liabilities, non-current | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Cumulative preferred stock, non-voting, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
2
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
| Three Months Ended May 31, | |||||||||||
| (in thousands, except per share data) | 2024 | 2023 | |||||||||
| Sales revenue, net | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
Selling, general and administrative expense (“SG&A”) | |||||||||||
| Restructuring charges | |||||||||||
| Operating income | |||||||||||
| Non-operating income, net | |||||||||||
| Interest expense | |||||||||||
| Income before income tax | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
Earnings per share (“EPS”): | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | |||||||||||
| Weighted average shares used in computing EPS: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes to condensed consolidated financial statements.
3
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Three Months Ended May 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Net income | $ | $ | |||||||||
Other comprehensive income (loss), net of tax: | |||||||||||
| Cash flow hedge activity - interest rate swaps | ( | ||||||||||
| Cash flow hedge activity - foreign currency contracts | ( | ( | |||||||||
Total other comprehensive income (loss), net of tax | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
4
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders' Equity | ||||||||||||||||
| (in thousands, including shares) | Shares | Par Value | ||||||||||||||||||
| Balances at February 28, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | ( | ||||||||||||||
| Exercise of stock options | — | — | ||||||||||||||||||
| Issuance and settlement of restricted stock | ( | — | — | |||||||||||||||||
| Issuance of common stock related to stock purchase plan | — | — | ||||||||||||||||||
| Common stock repurchased and retired | ( | ( | ( | — | — | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Balances at May 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Balances at February 29, 2024 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | ||||||||||||||||
| Exercise of stock options | — | — | ||||||||||||||||||
| Issuance and settlement of restricted stock | ( | — | — | |||||||||||||||||
| Issuance of common stock related to stock purchase plan | — | — | ||||||||||||||||||
| Common stock repurchased and retired | ( | ( | ( | — | ( | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Balances at May 31, 2024 | $ | $ | $ | $ | $ | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended May 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Cash provided by operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of financing costs | |||||||||||
| Non-cash operating lease expense | |||||||||||
| Provision for credit losses | |||||||||||
| Non-cash share-based compensation | |||||||||||
| Gain on the sale or disposal of property and equipment | ( | ( | |||||||||
| Deferred income taxes and tax credits | |||||||||||
Changes in operating capital: | |||||||||||
| Receivables | |||||||||||
| Inventory | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other assets and liabilities, net | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | ( | ( | |||||||||
| Accrued income taxes | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
Cash used by investing activities: | |||||||||||
| Capital and intangible asset expenditures | ( | ( | |||||||||
Payments for purchases of U.S. Treasury Bills | ( | ||||||||||
Proceeds from maturity of U.S. Treasury Bills | |||||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Net cash used by investing activities | ( | ( | |||||||||
Cash used by financing activities: | |||||||||||
| Proceeds from revolving loans | |||||||||||
| Repayment of revolving loans | ( | ( | |||||||||
Repayment of long-term debt | ( | ( | |||||||||
| Payment of financing costs | ( | ||||||||||
| Proceeds from share issuances under share-based compensation plans | |||||||||||
| Payments for repurchases of common stock | ( | ( | |||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning balance | |||||||||||
| Cash and cash equivalents, ending balance | $ | $ | |||||||||
| Supplemental non-cash investing activity: | |||||||||||
Capital expenditures included in accounts payable and accrued expenses | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
6
HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
May 31, 2024
Note 1 - Basis of Presentation and Related Information
Corporate Overview
The accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of May 31, 2024 and February 29, 2024, and the results of our consolidated operations for the interim periods presented. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 29, 2024 (“Form 10-K”), and our other reports on file with the Securities and Exchange Commission (the “SEC”).
When used in these notes, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries, which are all wholly-owned. We refer to our common shares, par value $0.10 per share, as “common stock.” References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to accounting principles generally accepted in the United States of America (the “U.S.”). References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global consumer products company offering creative products and solutions for our customers through a diversified portfolio of brands. Our portfolio of brands include OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools, Drybar, Curlsmith and Revlon, among others. As of May 31, 2024, we operated two reportable segments: Home & Outdoor and Beauty & Wellness.
Our Home & Outdoor segment offers a broad range of outstanding world-class brands that help consumers enjoy everyday living inside their homes and outdoors. Our innovative products for home activities include food preparation and storage, cooking, cleaning, organization, and beverage service. Our outdoor performance range, on-the-go food storage, and beverageware includes lifestyle hydration products, coolers and food storage solutions, backpacks, and travel gear. The Beauty & Wellness segment provides consumers with a broad range of outstanding world-class brands for beauty and wellness. In Beauty, we deliver innovation through products such as hair styling appliances, grooming tools, and liquid and aerosol personal care products that help consumers look and feel more beautiful. In Wellness, we are there when you need us most with highly regarded humidifiers, thermometers, water and air purifiers, heaters, and fans.
Our business is seasonal due to different calendar events, holidays and seasonal weather and illness patterns. Our fiscal reporting period ends on the last day in February. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico, Vietnam and the U.S.
7
During fiscal 2023, we initiated a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and effectiveness and reduce costs (referred to as “Project Pegasus”). See Note 6 for additional information.
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in accordance with GAAP and include all of our subsidiaries. Our condensed consolidated financial statements are prepared in U.S. Dollars. All intercompany balances and transactions are eliminated in consolidation.
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results may differ materially from those estimates.
Note 2 - New Accounting Pronouncements
There have been no changes in the information provided in our Form 10-K.
Note 3 - Accrued Expenses and Other Current Liabilities
A summary of accrued expenses and other current liabilities was as follows:
| (in thousands) | May 31, 2024 | February 29, 2024 | |||||||||
| Accrued compensation, benefits and payroll taxes | $ | $ | |||||||||
| Accrued sales discounts and allowances | |||||||||||
| Accrued sales returns | |||||||||||
| Accrued advertising | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
Note 4 - Share-Based Compensation Plans
As part of our compensation structure, we grant share-based compensation awards to certain employees and non-employee members of our Board of Directors during the fiscal year. These awards may be subject to attainment of certain service conditions, performance conditions and/or market conditions. During the first quarter of fiscal 2025, we granted 94,900 service condition awards (“Service Condition Awards”) with a weighted average grant date fair value of $124.37 . Additionally, we granted 157,797 performance-based awards during the first quarter of fiscal 2025, of which 94,586 contained performance conditions (“Performance Condition Awards”) and 63,211 contained market conditions (“Market Condition Awards”), with weighted average grant date fair values of $124.37 and $91.19 , respectively. Refer to our Form 10-K for further information on the Company's share-based compensation plans.
8
We recorded share-based compensation expense in SG&A as follows:
| Three Months Ended May 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Directors stock compensation | $ | $ | |||||||||
| Service Condition Awards | |||||||||||
| Performance Condition Awards | |||||||||||
| Market Condition Awards | |||||||||||
| Employee stock purchase plan | |||||||||||
| Share-based compensation expense | |||||||||||
Less: income tax benefits | ( | ( | |||||||||
| Share-based compensation expense, net of income tax benefits | $ | $ | |||||||||
Unrecognized Share-Based Compensation Expense
As of May 31, 2024, our total unrecognized share-based compensation for all awards was $33.5 million, which will be recognized over a weighted average amortization period of 2.5 years. The total unrecognized share-based compensation reflects an estimate of target achievement for Performance Condition Awards granted during fiscal 2025 and fiscal 2024 and an estimate of zero percent of target achievement for Performance Condition Awards granted during fiscal 2023.
Note 5 - Repurchases of Common Stock
In August 2021, our Board of Directors authorized the repurchase of up to $500 million of our outstanding common stock. The authorization became effective August 25, 2021, for a period of three years , and replaced our former repurchase authorization. As of May 31, 2024, our repurchase authorization allowed for the purchase of $245.4 million of common stock.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option or other share-based award holders are settled by having the holder tender back to us a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares.
The following table summarizes our share repurchase activity for the periods shown:
| Three Months Ended May 31, | |||||||||||
| (in thousands, except share and per share data) | 2024 | 2023 | |||||||||
| Common stock repurchased on the open market: | |||||||||||
| Number of shares | |||||||||||
| Aggregate value of shares | $ | $ | |||||||||
| Average price per share | $ | $ | |||||||||
| Common stock received in connection with share-based compensation: | |||||||||||
| Number of shares | |||||||||||
| Aggregate value of shares | $ | $ | |||||||||
| Average price per share | $ | $ | |||||||||
9
Note 6 - Restructuring Plan
During fiscal 2023, we initiated Project Pegasus, a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and effectiveness and reduce costs. Project Pegasus includes initiatives to further optimize our brand portfolio, streamline and simplify the organization, accelerate and amplify cost of goods savings projects, enhance the efficiency of our supply chain network, optimize our indirect spending and improve our cash flow and working capital, as well as other activities. We anticipate these initiatives will create operating efficiencies, as well as provide a platform to fund future growth investments.
During the fourth quarter of fiscal 2023, we made changes to the structure of our organization. These changes resulted in our previous Health & Wellness and Beauty operating segments being combined into a single reportable segment, the creation of a North America Regional Market Organization (“RMO”) responsible for sales and go-to-market strategies for all categories and channels in the U.S. and Canada, and further centralization of certain functions under shared services, particularly in operations and finance to better support our business segments and RMOs. This new structure reduced the size of our global workforce by approximately 10 %. We believe that these changes better focus business segment resources on brand development, consumer-centric innovation and marketing, the RMOs on sales and go to market strategies, and shared services on their respective areas of expertise while also creating a more efficient and effective organizational structure.
During the second quarter of fiscal 2024, we announced plans to geographically consolidate the U.S. Beauty business, currently located in El Paso, Texas, and Irvine, California, and co-locate it with our Wellness business in the Boston, Massachusetts area. This geographic consolidation and relocation is the next step in our initiative to streamline and simplify the organization and is expected to be completed during fiscal 2025. We expect these changes will enable a greater opportunity to capture synergies and enhance collaboration and innovation within the Beauty & Wellness segment.
As previously disclosed, we continue to have the following expectations regarding Project Pegasus charges:
•Total one-time pre-tax restructuring charges of approximately $50 million to $55 million over the duration of the plan, expected to be completed during fiscal 2025.
•Pre-tax restructuring charges to be comprised of approximately $15 million to $19 million of severance and employee related costs, $28 million of professional fees, $3 million to $4 million of contract termination costs, and $4 million of other exit and disposal costs.
•All of our operating segments and shared services will be impacted by the plan and pre-tax restructuring charges include approximately $16 million to $17 million in Home & Outdoor and $34 million to $38 million in Beauty & Wellness.
•Pre-tax restructuring charges represent primarily cash expenditures, which are expected to be substantially paid by the end of fiscal 2025.
We also continue to have the following expectations regarding Project Pegasus savings:
•Targeted annualized pre-tax operating profit improvements of approximately $75 million to $85 million, which began in fiscal 2024 and we expect to be substantially achieved by the end of fiscal 2027.
•Estimated cadence of the recognition of the savings will be approximately 25 % in fiscal 2024, which was achieved, approximately 35 % in fiscal 2025, approximately 25 % in fiscal 2026 and approximately 15 % in fiscal 2027.
•Total profit improvements to be realized approximately 60 % through reduced cost of goods sold and 40 % through lower SG&A.
10
During the three month periods ended May 31, 2024 and 2023, we incurred $1.8 million and $7.4 million, respectively, of pre-tax restructuring costs in connection with Project Pegasus, which were recorded as “Restructuring charges” in the condensed consolidated statements of income.
The following tables summarize restructuring charges recorded as a result of Project Pegasus for the periods presented:
| Three Months Ended May 31, 2024 | Total Incurred Since Inception | ||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||||||||
| Severance and employee related costs | $ | $ | $ | $ | |||||||||||||||||||
| Professional fees | |||||||||||||||||||||||
| Contract termination | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total restructuring charges | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended May 31, 2023 | |||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||
| Severance and employee related costs | $ | $ | $ | ||||||||||||||
| Professional fees | |||||||||||||||||
| Contract termination | |||||||||||||||||
| Other | |||||||||||||||||
| Total restructuring charges | $ | $ | $ | ||||||||||||||
The tables below present a rollforward of our accruals related to Project Pegasus, which are included in accounts payable and accrued expenses and other current liabilities:
| (in thousands) | Balance at February 29, 2024 | Charges | Payments | Balance at May 31, 2024 | |||||||||||||||||||
| Severance and employee related costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Professional fees | ( | ||||||||||||||||||||||
| Contract termination | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| (in thousands) | Balance at February 28, 2023 | Charges | Payments | Balance at May 31, 2023 | |||||||||||||||||||
| Severance and employee related costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Professional fees | ( | ||||||||||||||||||||||
| Contract termination | ( | ||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Note 7 - Commitments and Contingencies
Legal Matters
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity, except as described below.
11
On December 23, 2021, Brita LP filed a complaint against Kaz USA, Inc. and Helen of Troy Limited in the United States District Court for the Western District of Texas (the “Patent Litigation”), alleging patent infringement by the Company relating to its PUR gravity-fed water filtration systems. In the Patent Litigation, Brita LP seeks monetary damages and injunctive relief relating to the alleged infringement. Brita LP simultaneously filed a complaint with the United States International Trade Commission (“ITC”) against Kaz USA, Inc., Helen of Troy Limited and five other unrelated companies that sell water filtration systems (the “ITC Action”). The complaint in the ITC Action also alleged patent infringement by the Company with respect to a limited set of PUR gravity-fed water filtration systems. In the ITC Action, Brita LP requested the ITC to initiate an unfair import investigation relating to such filtration systems. This action sought injunctive relief to prevent entry of certain accused PUR products (and certain other products) into the U.S. and cessation of marketing and sales of existing inventory that is already in the U.S. On January 25, 2022, the ITC instituted the investigation requested by the ITC Action. Discovery closed in the ITC Action in May 2022, and approximately half of the originally identified PUR gravity-fed water filters were removed from the case and are no longer included in the ITC Action. In August 2022, the parties participated in the evidentiary hearing, with additional supplemental hearings in October 2022. On February 28, 2023, the ITC issued an Initial Determination in the ITC Action, tentatively ruling against the Company and the other unrelated respondents. The ITC has a guaranteed review process, and thus all respondents, including the Company, filed a petition with the ITC for a full review of the Initial Determination. On September 19, 2023, the ITC issued its Final Determination in the Company’s favor. The ITC determined there was no violation by the Company and terminated the investigation. Brita LP is appealing the ITC's decision to the Federal Circuit (“CAFC Appeal”) and filed its Notice of Appeal on October 24, 2023. The Company intervened in the CAFC Appeal, but as of the filing date of this Form 10-Q, no hearings have been scheduled. The Patent Litigation remains stayed for the time being. We cannot predict the outcome of these legal proceedings, the amount or range of any potential loss, when the proceedings will be resolved, or customer acceptance of any replacement water filter. Litigation is inherently unpredictable, and the resolution or disposition of these proceedings could, if adversely determined, have a material and adverse impact on our financial position and results of operations.
Regulatory Matters
During fiscal 2022 and 2023, we were in discussions with the U.S. Environmental Protection Agency (the “EPA”) regarding the compliance of packaging claims on certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Beauty & Wellness segment that are sold in the U.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, we voluntarily implemented a temporary stop shipment action on the impacted products as we worked with the EPA towards an expedient resolution. We resumed normalized levels of shipping of the affected inventory during fiscal 2022 and we completed the repackaging and relabeling of our existing inventory of impacted products during fiscal 2023. Additionally, as a result of continuing dialogue with the EPA, we executed further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration products, which were also completed during fiscal 2023. Ongoing settlement discussions with the EPA related to this matter may result in the imposition of fines or penalties in the future. Such potential fines or penalties cannot be estimated. For additional information refer to Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “EPA Compliance Costs”.
12
Note 8 - Long-Term Debt
A summary of our long-term debt follows:
| (in thousands) | May 31, 2024 | February 29, 2024 | |||||||||
| Credit Agreement (1): | |||||||||||
| Revolving loans | $ | $ | |||||||||
| Term loans | |||||||||||
| Total borrowings under Credit Agreement | |||||||||||
| Unamortized prepaid financing fees | ( | ( | |||||||||
| Total long-term debt | |||||||||||
| Less: current maturities of long-term debt | ( | ( | |||||||||
| Long-term debt, excluding current maturities | $ | $ | |||||||||
(1)The weighted average interest rates on borrowings outstanding under the Credit Agreement (defined below) inclusive of the impact of our interest rate swaps as of May 31, 2024 and February 29, 2024 were 6.4 % and 6.0 %, respectively.
Capitalized Interest
During the three month period ended May 31, 2024, we incurred interest costs totaling $12.5 million, of which none was capitalized, compared to $14.9 million for the same period last year, of which we capitalized $0.9 million as part of property and equipment in connection with the construction of a new distribution facility.
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 aggregate commitments of $1.5 billion, which are available through (i) a $1.0 billion revolving credit facility, which includes a $50 million sublimit for the issuance of letters of credit, (ii) a $250 million term loan facility, and (iii) a committed $250 million delayed draw term loan facility, which may be borrowed in multiple drawdowns until August 15, 2025. Proceeds can be used for working capital and other general corporate purposes, including funding permitted acquisitions. At the closing date, February 15, 2024, we borrowed $457.5 million under the revolving credit facility and $250.0 million under the term loan facility and utilized the proceeds to repay all debt outstanding under our prior credit agreement. The Credit Agreement matures on February 15, 2029. The Credit Agreement includes an accordion feature, which permits the Company to request to increase its borrowing capacity by an additional $300 million plus an unlimited amount when the Leverage Ratio (as defined in the Credit Agreement) on a pro-forma basis is less than 3.25 to 1.00. The term loans are payable at the end of each fiscal quarter in equal installments of 0.625 % through February 28, 2025, 0.9375 % through February 28, 2026, and 1.25 % thereafter of the original principal balance of the term loans, which began in the first quarter of fiscal 2025, with the remaining balance due at the maturity date. Borrowings under the Credit Agreement bear floating interest at either the Base Rate or Term SOFR (as defined in the Credit Agreement), plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0 % to 1.125 % and 1.0 % to 2.125 % for Base Rate and Term SOFR borrowings, respectively.
The floating interest rates on our borrowings under the Credit Agreement are hedged with interest rate swaps to effectively fix interest rates on $300 million and $500 million of the outstanding principal balance under the revolving loans as of May 31, 2024 and February 29, 2024, respectively. See Notes 9, 10, and 11 for additional information regarding our interest rate swaps.
As of May 31, 2024, the balance of outstanding letters of credit was $15.6 million and the amount available for revolving loans under the Credit Agreement was $478.5 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of May 31, 2024, these covenants
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effectively limited our ability to incur more than $336.9 million of additional debt from all sources, including the Credit Agreement, or $478.5 million in the event a qualified acquisition is consummated.
Debt Covenants
As of May 31, 2024, we were in compliance with all covenants as defined under the terms of the Credit Agreement.
Note 9 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. These inputs are classified into the following hierarchy:
Level 1:Quoted prices for identical assets or liabilities in active markets;
Level 2:Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3:Unobservable inputs that reflect the reporting entity’s own assumptions.
All of our financial assets and liabilities, except for our investments in U.S. Treasury Bills, are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable. Our investments in U.S. Treasury Bills are classified as Level 1 because their value is based on quoted prices in active markets for identical assets.
The following table presents the fair value of our financial assets and liabilities:
Fair Value | |||||||||||
| (in thousands) | May 31, 2024 | February 29, 2024 | |||||||||
| Assets: | |||||||||||
| Cash equivalents (money market accounts) | $ | $ | |||||||||
U.S. Treasury Bills | |||||||||||
| Interest rate swaps | |||||||||||
| Foreign currency derivatives | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
| Foreign currency derivatives | |||||||||||
| Total liabilities | $ | $ | |||||||||
All of our financial assets and liabilities, except for our investments in U.S. Treasury Bills, are measured and recorded at fair value on a recurring basis. Our investments in U.S. Treasury Bills are recorded at amortized cost. As of both May 31, 2024 and February 29, 2024, the current and non-current carrying amounts of our U.S. Treasury Bills were $2.5 6.6
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within Prepaid expenses and other current assets and Other assets, respectively, in our condensed consolidated balance sheets.
The carrying amounts of cash, accounts payable, accrued expenses and other current liabilities and income taxes payable approximate fair value because of the short maturity of these items. The carrying amounts of receivables approximate fair value due to the effect of the related allowance for credit losses. The carrying amount of our floating rate long-term debt approximates its fair value.
Our investments in U.S. Treasury Bills are classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. We invest in U.S. Treasury Bills with maturities ranging from less than to five years . Gross unrealized losses were $0.1 million for the three months ended May 31, 2024. During the three month period ended May 31, 2024, we recognized an immaterial amount of interest income on these investments, which is included in “Non-operating income, net” in our condensed consolidated statement of income.
We use foreign currency forward contracts and interest rate swaps to manage our exposure to changes in foreign currency exchange rates and interest rates, respectively. All of our derivative assets and liabilities are recorded at fair value. See Notes 10 and 11 for more information on our derivatives.
Note 10 - Financial Instruments and Risk Management
Foreign Currency Risk
The U.S. Dollar is the functional currency for the Company and all of its subsidiaries and is also the reporting currency for the Company. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales and operating expenses. As a result of such transactions, portions of our cash, accounts receivable and accounts payable are denominated in foreign currencies. Approximately 16 % and 15 % of our net sales revenue was denominated in foreign currencies during the three month periods ended May 31, 2024 and 2023, respectively. These sales were primarily denominated in Euros, British Pounds and Canadian Dollars. We make most of our inventory purchases from manufacturers in Asia and primarily use the U.S. Dollar for such purchases.
In our condensed consolidated statements of income, foreign currency exchange rate gains and losses resulting from the remeasurement of foreign income tax receivables and payables, and deferred income tax assets and liabilities are recognized in income tax expense, and all other foreign currency exchange rate gains and losses are recognized in SG&A. During the three month periods ended May 31, 2024 and 2023, we recorded foreign currency exchange rate net losses of $0.1 million and net gains of $0.2 million, respectively, in income tax expense. During the three month periods ended May 31, 2024 and 2023, we recorded foreign currency exchange rate net gains of an immaterial amount and $0.4 million, respectively, in SG&A. We mitigate certain foreign currency exchange rate risk by using forward contracts to protect against the foreign currency exchange rate risk inherent in our transactions denominated in foreign currencies. We do not enter into any derivatives or similar instruments for trading or other speculative purposes. Certain of our forward contracts are designated as cash flow hedges (“foreign currency contracts”) and are recorded on the balance sheet at fair value with changes in fair value recorded in Other Comprehensive Income (Loss) (“OCI”) until the hedge transaction is settled, at which point amounts are reclassified from Accumulated Other Comprehensive Income (Loss) (“AOCI”) to our condensed consolidated statements of income. Foreign currency derivatives for which we have not elected hedge accounting consist of certain forward contracts, and any changes in the fair value of these derivatives are recorded in our condensed consolidated statements of income. These undesignated derivatives are used to hedge monetary net asset and liability positions. Cash flows from our foreign currency derivatives are classified as cash flows from operating activities in our condensed consolidated
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statements of cash flows, which is consistent with the classification of the cash flows from the underlying hedged item. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness.
Interest Rate Risk
Interest on our outstanding debt as of May 31, 2024 and February 29, 2024 is based on floating interest rates. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. Floating interest rates are hedged with interest rate swaps to effectively fix interest rates on a portion of our outstanding principal balance under the Credit Agreement, which totaled $754.3 million and $672.0 million as of May 31, 2024 and February 29, 2024, respectively. As of May 31, 2024 and February 29, 2024, $300.0 million and $500.0 million of the outstanding principal balance under the Credit Agreement, respectively, was hedged with interest rate swaps to fix the interest rate we pay. Our interest rate swaps are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in OCI until the hedge transaction is settled, at which point amounts are reclassified from AOCI to our condensed consolidated statements of income. Cash flows from our interest rate swaps are classified as cash flows from operating activities in our condensed consolidated statements of cash flows, which is consistent with the classification of the cash flows from the underlying hedged item. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness.
The following tables summarize the fair values of our derivative instruments as of the end of the periods presented:
| (in thousands) | May 31, 2024 | ||||||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | Hedge Type | Final Settlement Date | Notional Amount | Prepaid Expenses and Other Current Assets | Other Assets | Accrued Expenses and Other Current Liabilities | Other Liabilities, Non- Current | ||||||||||||||||||||||||||||||||||
| Forward contracts - sell Euro | Cash flow | 2/2025 | € | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Forward contracts - sell Canadian Dollars | Cash flow | 2/2025 | $ | ||||||||||||||||||||||||||||||||||||||
| Forward contracts - sell Pounds | Cash flow | 11/2025 | £ | ||||||||||||||||||||||||||||||||||||||
| Forward contracts - sell Norwegian Kroner | Cash flow | 2/2025 | kr | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Cash flow | 2/2026 | $ | ||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated under hedge accounting | |||||||||||||||||||||||||||||||||||||||||
Forward contracts - sell Euro | (1) | 6/2024 | € | ||||||||||||||||||||||||||||||||||||||
Forward contracts - buy Pounds | (1) | 6/2024 | £ | ||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
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| (in thousands) | February 29, 2024 | ||||||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | Hedge Type | Final Settlement Date | Notional Amount | Prepaid Expenses and Other Current Assets | Other Assets | Accrued Expenses and Other Current Liabilities | Other Liabilities Non- Current | ||||||||||||||||||||||||||||||||||
| Forward contracts - sell Euro | Cash flow | 2/2025 | € | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Forward contracts - sell Canadian Dollars | Cash flow | 2/2025 | $ | ||||||||||||||||||||||||||||||||||||||
| Forward contracts - sell Pounds | Cash flow | 2/2025 | £ | ||||||||||||||||||||||||||||||||||||||
| Forward contracts - sell Norwegian Kroner | Cash flow | 8/2024 | kr | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Cash flow | 2/2026 | $ | ||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated under hedge accounting | |||||||||||||||||||||||||||||||||||||||||
Forward contracts - sell Euro | (1) | 3/2024 | € | ||||||||||||||||||||||||||||||||||||||
Forward contracts - sell Pounds | (1) | 3/2024 | £ | ||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
The pre-tax effects of derivative instruments designated as cash flow hedges were as follows for the periods presented:
| Three Months Ended May 31, | |||||||||||||||||||||||||||||
| Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | Location | 2024 | 2023 | ||||||||||||||||||||||||
| Foreign currency contracts - cash flow hedges | $ | ( | $ | ( | Sales revenue, net | $ | $ | ||||||||||||||||||||||
| Interest rate swaps - cash flow hedges | ( | Interest expense | |||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
The pre-tax effects of derivative instruments not designated under hedge accounting were as follows for the periods presented:
| Gain (Loss) Recognized in Income | |||||||||||||||||
| Three Months Ended May 31, | |||||||||||||||||
| (in thousands) | Location | 2024 | 2023 | ||||||||||||||
| Forward contracts | SG&A | $ | $ | ( | |||||||||||||
| Total | $ | $ | ( | ||||||||||||||
We expect a net gain of $2.0 million associated with foreign currency contracts and interest rate swaps currently recorded in AOCI to be reclassified into income over the next twelve months . The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle. See Notes 9 and 11 for more information.
Counterparty Credit Risk
Financial instruments, including foreign currency contracts, forward contracts, and interest rate swaps, expose us to counterparty credit risk for non-performance. We manage our exposure to counterparty credit risk by only dealing with counterparties who are substantial international financial institutions with
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significant experience using such derivative instruments. We believe that the risk of incurring credit losses is remote.
Note 11 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCI by component and related tax effects for the periods presented were as follows:
| (in thousands) | Interest Rate Swaps | Foreign Currency Contracts | Total | ||||||||||||||
| Balance at February 28, 2023 | $ | $ | $ | ||||||||||||||
Other comprehensive loss before reclassification | ( | ( | ( | ||||||||||||||
| Amounts reclassified out of AOCI | ( | ( | ( | ||||||||||||||
| Tax effects | |||||||||||||||||
Other comprehensive loss | ( | ( | ( | ||||||||||||||
| Balance at May 31, 2023 | $ | $ | ( | $ | |||||||||||||
| Balance at February 29, 2024 | $ | $ | $ | ||||||||||||||
Other comprehensive income (loss) before reclassification | ( | ||||||||||||||||
| Amounts reclassified out of AOCI | ( | ( | ( | ||||||||||||||
| Tax effects | ( | ( | |||||||||||||||
Other comprehensive income (loss) | ( | ||||||||||||||||
| Balance at May 31, 2024 | $ | $ | ( | $ | |||||||||||||
See Notes 9 and 10 for additional information regarding our cash flow hedges.
Note 12 - Segment and Geographic Information
The following tables summarize segment information for the periods presented:
| Three Months Ended May 31, 2024 | |||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||
| Sales revenue, net | $ | $ | $ | ||||||||||||||
| Restructuring charges | |||||||||||||||||
| Operating income | |||||||||||||||||
| Capital and intangible asset expenditures | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Three Months Ended May 31, 2023 | |||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||
| Sales revenue, net | $ | $ | $ | ||||||||||||||
| Restructuring charges | |||||||||||||||||
| Operating income | |||||||||||||||||
| Capital and intangible asset expenditures | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
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The following table presents net sales revenue by geographic region, in U.S. Dollars:
| Three Months Ended May 31, | |||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | |||||||||||||||||||||
Domestic sales revenue, net (1) | $ | % | $ | % | |||||||||||||||||||
| International sales revenue, net | % | % | |||||||||||||||||||||
| Total sales revenue, net | $ | % | $ | % | |||||||||||||||||||
Note 13 - Income Taxes
We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results and transfer pricing and tax regulations in the related jurisdictions.
For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions and other items.
The Organisation for Economic Co-operation and Development has introduced a framework to implement a global minimum corporate income tax of 15%, referred to as “Pillar Two.” Many aspects of Pillar Two are effective for tax years beginning after January 1, 2024, with certain remaining aspects to be effective for tax years beginning January 1, 2025 or later. Certain countries have adopted legislation to implement Pillar Two, and other countries are in the process of introducing legislation to implement Pillar Two. We will continue to assess the impact of Pillar Two and monitor developments in legislation, regulation, and interpretive guidance.
In response to Pillar Two, on May 24, 2024, Barbados enacted a domestic corporate income tax rate of 9%, effective beginning with our fiscal year 2025. As a result, we incorporated this corporate income tax into our estimated annual effective tax rate increasing our income tax provision during the first quarter of fiscal 2025. In addition, we revalued our existing deferred tax liabilities subject to the Barbados legislation, which resulted in a discrete tax charge of $6.0 million during the first quarter of fiscal 2025. Additionally, Barbados enacted a domestic minimum top-up tax (“DMTT”) of 15% which applies to Barbados businesses that are part of multinational enterprise groups with annual revenue of €750 million or more and is effective beginning with our fiscal year 2026. We will continue to monitor and evaluate impacts as further regulatory guidance becomes available.
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Note 14 - Earnings Per Share
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities. Dilutive securities at any given point in time may consist of outstanding options to purchase common stock and issued and contingently issuable unvested restricted stock units, performance stock units, restricted stock awards and performance restricted stock awards and other stock-based awards. Anti-dilutive securities are not included in the computation of diluted earnings per share under the treasury stock method. See Note 4 to these condensed consolidated financial statements for more information regarding stock-based awards.
The following table presents our weighted average basic and diluted shares outstanding for the periods shown:
| Three Months Ended May 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Weighted average shares outstanding, basic | |||||||||||
| Incremental shares from share-based compensation arrangements | |||||||||||
| Weighted average shares outstanding, diluted | |||||||||||
| Anti-dilutive securities | |||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1., “Financial Statements.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations. Actual results may differ materially due to a number of factors, including those discussed in the section entitled “Information Regarding Forward-Looking Statements” following this MD&A, and in Part I, Item 3., “Quantitative and Qualitative Disclosures About Market Risk” in this report, as well as in Part I, Item IA., “Risk Factors” in the Company’s most recent annual report on Form 10-K for the fiscal year ended February 29, 2024 (“Form 10-K”) and its other filings with the Securities and Exchange Commission (the “SEC”). When used in this MD&A, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries.
This MD&A, including the tables under the headings “Operating Income, Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment” and “Net Income, Diluted EPS, Adjusted Income (non-GAAP), and Adjusted Diluted EPS (non-GAAP),” reports operating income, operating margin, net income and diluted earnings per share (“EPS”) without the impact of a discrete tax charge to revalue existing deferred tax liabilities due to Barbados enacting domestic corporate income tax legislation (“Barbados tax reform”), a charge for uncollectible receivables due to the bankruptcy of Bed, Bath & Beyond (“Bed, Bath & Beyond bankruptcy”), restructuring charges, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial measures as defined by SEC Regulation G, Rule 100. The tables reconcile these measures to their corresponding GAAP-based financial measures presented in our condensed consolidated statements of income. We believe that adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS 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 and benefits on applicable income, margin and earnings per share measures. We also believe that these non-GAAP measures facilitate a more direct comparison of our performance to our competitors. We further believe that including the excluded charges and benefits would not accurately reflect the underlying performance of our operations for the period in which the charges and benefits were incurred and reflected in our GAAP financial results. 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 EPS are not prepared in accordance with GAAP, are not an alternative to GAAP financial measures and may be calculated differently than non-GAAP financial measures disclosed by other companies. Accordingly, undue reliance should not be placed on non-GAAP financial measures. These non-GAAP financial measures are discussed further and reconciled to their applicable GAAP-based financial measures contained in this MD&A beginning on page 32.
There were no material changes to the key financial measures discussed in our Form 10-K.
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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 brands. Our portfolio of brands includes OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools, Drybar, Curlsmith and Revlon, among others. We have built leading market positions through new product innovation, product quality and competitive pricing. As of May 31, 2024, we operated two reportable segments: Home & Outdoor and Beauty & Wellness.
During fiscal 2023, we initiated a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and effectiveness and reduce costs (referred to as “Project Pegasus”). Project Pegasus includes initiatives to further optimize our brand portfolio, streamline and simplify the organization, accelerate and amplify cost of goods savings projects, enhance the efficiency of our supply chain network, optimize our indirect spending and improve our cash flow and working capital, as well as other activities. We anticipate these initiatives will create operating efficiencies, as well as provide a platform to fund future growth investments. During the three month periods ended May 31, 2024 and 2023, we incurred $1.8 million and $7.4 million, respectively, of pre-tax restructuring costs in connection with Project Pegasus, which were recorded as “Restructuring charges” in the condensed consolidated statements of income. See further discussion below within “Significant Trends Impacting the Business” under “Project Pegasus” and Note 6 to the accompanying condensed consolidated financial statements.
Fiscal 2024 concluded Phase II of our transformation strategy, which produced net sales and organic net sales growth and gross profit margin expansion. We expanded our portfolio of leading brands and international footprint with the acquisitions of Drybar, Osprey and Curlsmith. We completed the divestiture of our personal care business and extended our Revlon trademark license for a period of up to 100 years. We strategically and effectively deployed capital to construct our new distribution facility in Gallaway, Tennessee, repurchased shares of our common stock, and repaid amounts outstanding under our long-term debt agreement. We began publishing an annual environmental, social and governance (“ESG”) Report, which summarizes our ESG strategy and performance, providing further transparency into our ESG efforts. During Phase II, we also initiated Project Pegasus, which included the creation of a North America Regional Market Organization (“RMO”) responsible for sales and go-to-market strategies for all categories and channels in the United States of America (“U.S.”) and Canada, and further centralization of certain functions under shared services, particularly in operations and finance to better support our business segments and RMOs.
Fiscal 2025 begins our Elevate for Growth Strategy, which provides our strategic roadmap through fiscal 2030. The long-term objectives of Elevate for Growth include continued organic sales growth, further margin expansion, and accretive capital deployment through strategic acquisitions, share repurchases and capital structure management. The Elevate for Growth Strategy includes an enhanced portfolio management strategy to invest in our brands and grow internationally based upon defined criteria with an emphasis on brand building, new product introductions and expanded distribution. We are continuing to execute our initiatives under Project Pegasus, which we expect to generate incremental fuel to invest in our brand portfolio and new capabilities. We intend to further leverage our operational scale and assets, including our new state-of-the-art distribution center, improved go-to-market structure with our North America RMO, and our expanded shared services capabilities. We also plan to complete the geographic consolidation of our Beauty & Wellness businesses, create a centralized marketing organization that embraces next-level data analytics and consumer insight capabilities, and further integrate our supply chain and finance functions within our shared services. Additionally, we are committed to fostering a winning culture and continuing our ESG and diversity, equity, inclusion and belonging (“DEI&B”) efforts to support our Elevate for Growth Strategy.
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Significant Trends Impacting the Business
Project Pegasus
During fiscal 2023, we initiated Project Pegasus, a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and effectiveness and reduce costs. Project Pegasus includes initiatives to further optimize our brand portfolio, streamline and simplify the organization, accelerate and amplify cost of goods savings projects, enhance the efficiency of our supply chain network, optimize our indirect spending and improve our cash flow and working capital, as well as other activities. We anticipate these initiatives will create operating efficiencies, as well as provide a platform to fund future growth investments. During the fourth quarter of fiscal 2023, we made changes to the structure of our organization. These changes resulted in our previous Health & Wellness and Beauty operating segments being combined into a single reportable segment, the creation of a North America Regional Market Organization (“RMO”) responsible for sales and go-to-market strategies for all categories and channels in the U.S. and Canada, and further centralization of certain functions under shared services, particularly in operations and finance to better support our business segments and RMOs. This new structure reduced the size of our global workforce by approximately 10%. We believe that these changes better focus business segment resources on brand development, consumer-centric innovation and marketing, the RMOs on sales and go to market strategies, and shared services on their respective areas of expertise while also creating a more efficient and effective organizational structure.
During the second quarter of fiscal 2024, we announced plans to geographically consolidate the U.S. Beauty business, currently located in El Paso, Texas, and Irvine, California, and co-locate it with our Wellness business in the Boston, Massachusetts area. This geographic consolidation and relocation is the next step in our initiative to streamline and simplify the organization and is expected to be completed during fiscal 2025. We expect these changes will enable a greater opportunity to capture synergies and enhance collaboration and innovation within the Beauty & Wellness segment.
As previously disclosed, we continue to have the following expectations regarding Project Pegasus charges:
•Total one-time pre-tax restructuring charges of approximately $50 million to $55 million over the duration of the plan, expected to be completed during fiscal 2025.
•Pre-tax restructuring charges to be comprised of approximately $15 million to $19 million of severance and employee related costs, $28 million of professional fees, $3 million to $4 million of contract termination costs, and $4 million of other exit and disposal costs.
•All of our operating segments and shared services will be impacted by the plan and pre-tax restructuring charges include approximately $16 million to $17 million in Home & Outdoor and $34 million to $38 million in Beauty & Wellness.
•Pre-tax restructuring charges represent primarily cash expenditures, which are expected to be substantially paid by the end of fiscal 2025.
We also continue to have the following expectations regarding Project Pegasus savings:
•Targeted annualized pre-tax operating profit improvements of approximately $75 million to $85 million, which began in fiscal 2024 and we expect to be substantially achieved by the end of fiscal 2027.
•Estimated cadence of the recognition of the savings will be approximately 25% in fiscal 2024, which was achieved, approximately 35% in fiscal 2025, approximately 25% in fiscal 2026 and approximately 15% in fiscal 2027.
•Total profit improvements to be realized approximately 60% through reduced cost of goods sold and 40% through lower SG&A.
In addition, we implemented plans to reduce inventory levels, increase inventory turns, and improve cash flow and working capital during fiscal 2023. Improvements related to these initiatives began in the
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second half of fiscal 2023, and continued during fiscal 2024, enabling us to repay amounts outstanding under our long-term debt agreement and reduce our interest expense during fiscal 2024. During the first quarter of fiscal 2024, our gross margin was favorably impacted by our SKU rationalization efforts in Beauty & Wellness. In addition, during the first quarter of fiscal 2025, our gross margin and operating margins were favorably impacted by lower commodity and product costs driven by our cost of goods savings projects. Expectations regarding our Project Pegasus initiatives and our ability to realize targeted savings, including expectations concerning costs and savings, are based on management’s estimates available at the time and are subject to a number of assumptions that could materially impact our estimates.
During the three month periods ended May 31, 2024 and 2023, we incurred $1.8 million and $7.4 million, respectively, of pre-tax restructuring costs in connection with Project Pegasus, which were recorded as “Restructuring charges” in the condensed consolidated statements of income. We made total cash restructuring payments of $3.0 million and $9.4 million during the three month periods ended May 31, 2024 and 2023, respectively, and had a remaining liability of $3.6 million as of May 31, 2024. See Note 6 to the accompanying condensed consolidated financial statements for additional information.
Water Filtration Patent Litigation
On December 23, 2021, Brita LP filed a complaint against Kaz USA, Inc. and Helen of Troy Limited in the United States District Court for the Western District of Texas (the “Patent Litigation”), alleging patent infringement by the Company relating to its PUR gravity-fed water filtration systems. Brita LP simultaneously filed a complaint with the United States International Trade Commission (“ITC”) against Kaz USA, Inc., Helen of Troy Limited and five other unrelated companies that sell water filtration systems (the “ITC Action”). The complaint in the ITC Action also alleged patent infringement by the Company with respect to a limited set of PUR gravity-fed water filtration systems. This action sought injunctive relief to prevent entry of certain accused PUR products (and certain other products) into the U.S. and cessation of marketing and sales of existing inventory that is already in the U.S. On February 28, 2023, the ITC issued an Initial Determination in the ITC Action, tentatively ruling against the Company and the other unrelated respondents. The ITC has a guaranteed review process, and thus all respondents, including the Company, filed a petition with the ITC for a full review of the Initial Determination. On September 19, 2023, the ITC issued its Final Determination in the Company’s favor. The ITC determined there was no violation by the Company and terminated the investigation. Brita LP is appealing the ITC's decision to the Federal Circuit (“CAFC Appeal”) and filed its Notice of Appeal on October 24, 2023. The Company intervened in the CAFC Appeal, but as of the date of the filing of this Form 10-Q, no hearings have been scheduled. The Patent Litigation remains stayed for the time being. We cannot predict the outcome of these legal proceedings, the amount or range of any potential loss, when the proceedings will be resolved, or customer acceptance of any replacement water filter. Litigation is inherently unpredictable, and the resolution or disposition of these proceedings could, if adversely determined, have a material and adverse impact on our financial position and results of operations. For additional information regarding the Patent Litigation and the ITC Action, see Note 7 to the accompanying condensed consolidated financial statements.
Impact of Macroeconomic Trends
The Federal Open Market Committee increased the benchmark interest rate by 50 basis points and 25 basis points during the first and second quarters of fiscal 2024, respectively. As a result, we incurred higher average interest rates during the first quarter of fiscal 2025 compared to the same period last year. The Federal Open Market Committee has indicated that it may lower interest rates in fiscal 2025. While the actual timing and extent of future changes in interest rates remains unknown, lower average interest rates would reduce interest expense on our outstanding variable rate debt. The financial markets, the global economy and global supply chain may also be adversely affected by the current or anticipated impact of military conflicts or other geopolitical events. High inflation and interest rates have also negatively impacted consumer disposable income, credit availability and spending, among others, which have adversely impacted our business, financial condition, cash flows and results of operations during
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fiscal 2024 and the first quarter of fiscal 2025 and may continue to have an adverse impact during the remainder of fiscal year 2025. See further discussion below under “Consumer Spending and Changes in Shopping Preferences.” We expect continued uncertainty in our business and the global economy due to pressure from inflation and consumer confidence, any of which may adversely impact our results.
Consumer Spending and Changes in Shopping Preferences
Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy. Approximately 67% and 72% of our consolidated net sales revenue was from U.S. shipments during the three month periods ended May 31, 2024 and 2023, respectively.
Among other things, high levels of inflation and interest rates may negatively impact consumer disposable income, credit availability and spending. Consumer purchases of discretionary items, including the products that we offer, generally decline during recessionary periods or periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Dynamic changes in consumer spending and shopping patterns are also having an impact on retailer inventory levels. Our ability to sell to retailers is predicated on their ability to sell to the end consumer. During fiscal year 2024, we experienced some improvement in replenishment orders from certain retail customers in certain product categories relative to fiscal 2023. However, during the first quarter of fiscal 2025, we experienced reduced replenishment orders from retail customers in line with softer consumer demand and discretionary spending, which adversely impacted our sales, results of operations and cash flows. If orders from our retail customers continue to be adversely impacted, our sales, results of operations and cash flows may continue to be adversely impacted. We expect continued uncertainty in our business and the global economy due to inflation and changes in consumer spending patterns. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Our concentration of sales reflects the continued evolution of consumer shopping preferences. Our net sales to pure-play online retailers and retail customers fulfilling end-consumer online orders, as well as our own online sales directly to consumers (collectively “online channel net sales”) comprised approximately 25% of our total consolidated net sales revenue for the three month period ended May 31, 2024, and declined approximately 14% compared to the same period in the prior year. For the three month period ended May 31, 2023, our online channel net sales comprised approximately 26% of our total consolidated net sales revenue, and grew approximately 8% as compared to the same period in the prior year.
With the continued importance of online sales in 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 has become increasingly important for us to leverage our distribution capabilities in order to meet the changing demands of our customers, including increasing our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers. In March 2023, we completed the construction of an additional distribution facility in Gallaway, Tennessee that became operational during the first quarter of fiscal 2024 and includes state-of-the-art automation suited to fulfill direct-to-consumer and online channel orders. During the first quarter of fiscal 2025, we experienced automation system startup issues at the Tennessee distribution facility which impacted some of our Home & Outdoor segment's small retail customer and direct-to-consumer orders. As a result, our sales were adversely impacted due to shipping disruptions, and we incurred additional costs and lost efficiency as we worked to remediate the issues. We expect the shipping disruption to continue through the second quarter of fiscal 2025. Additionally, we have invested in a centralized cloud-based e-commerce platform, which some of our brands are currently utilizing. The centralized cloud-based e-commerce platform will enable us to leverage a common system and rapidly
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deploy new capabilities across all of our brands, as well as more easily integrate new brands. We believe this platform enhances the customer experience by strengthening the digital presentation and product browsing capabilities and improving the checkout process, order delivery and post-order customer care.
EPA Compliance Costs
During fiscal 2022 and 2023, we were in discussions with the U.S. Environmental Protection Agency (the “EPA”) regarding the compliance of packaging claims on certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Beauty & Wellness segment that are sold in the U.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, we voluntarily implemented a temporary stop shipment action on the impacted products as we worked with the EPA towards an expedient resolution. We resumed normalized levels of shipping of the affected inventory during fiscal 2022 and we completed the repackaging and relabeling of our existing inventory of impacted products during fiscal 2023. Additionally, as a result of continuing dialogue with the EPA, we executed further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration products, which were also completed during fiscal 2023. Ongoing settlement discussions with the EPA related to this matter may result in the imposition of fines or penalties in the future. Such potential fines or penalties cannot be estimated. See Note 7 to our condensed consolidated financial statements for additional information.
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 functional currency (the U.S. Dollar). Such transactions include sales and operating expenses. The most significant currencies affecting our operating results are the Euro, British Pound and Canadian Dollar.
For the three months ended May 31, 2024, changes in foreign currency exchange rates had a favorable year-over-year impact on consolidated U.S. Dollar reported net sales revenue of approximately $0.4 million, or 0.1%, compared to an unfavorable year-over-year impact of $0.5 million, or 0.1%, for the same period last year.
Variability of the Cough/Cold/Flu Season
Sales in several of our Beauty & Wellness 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. The 2023-2024 cough/cold/flu season was below historical averages seen prior to the impact of COVID-19. The 2022-2023 cough/cold/flu season was above historical averages, primarily early in the season, as respiratory infections surged in both children and adults and COVID-19 continued to be prevalent.
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RESULTS OF OPERATIONS
The following table provides selected operating data, in U.S. Dollars, as a percentage of net sales revenue, and as a year-over-year percentage change.
| Three Months Ended May 31, | % of Sales Revenue, net | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ Change | % Change | 2024 | 2023 | |||||||||||||||||||||||||||||
| Sales revenue by segment, net | |||||||||||||||||||||||||||||||||||
| Home & Outdoor | $ | 198,459 | $ | 217,144 | $ | (18,685) | (8.6) | % | 47.6 | % | 45.7 | % | |||||||||||||||||||||||
| Beauty & Wellness | 218,388 | 257,528 | (39,140) | (15.2) | % | 52.4 | % | 54.3 | % | ||||||||||||||||||||||||||
| Total sales revenue, net | 416,847 | 474,672 | (57,825) | (12.2) | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||
| Cost of goods sold | 213,768 | 259,041 | (45,273) | (17.5) | % | 51.3 | % | 54.6 | % | ||||||||||||||||||||||||||
| Gross profit | 203,079 | 215,631 | (12,552) | (5.8) | % | 48.7 | % | 45.4 | % | ||||||||||||||||||||||||||
SG&A | 170,481 | 167,635 | 2,846 | 1.7 | % | 40.9 | % | 35.3 | % | ||||||||||||||||||||||||||
| Restructuring charges | 1,835 | 7,355 | (5,520) | (75.1) | % | 0.4 | % | 1.5 | % | ||||||||||||||||||||||||||
| Operating income | 30,763 | 40,641 | (9,878) | (24.3) | % | 7.4 | % | 8.6 | % | ||||||||||||||||||||||||||
| Non-operating income, net | 100 | 137 | (37) | (27.0) | % | — | % | — | % | ||||||||||||||||||||||||||
| Interest expense | 12,543 | 14,052 | (1,509) | (10.7) | % | 3.0 | % | 3.0 | % | ||||||||||||||||||||||||||
| Income before income tax | 18,320 | 26,726 | (8,406) | (31.5) | % | 4.4 | % | 5.6 | % | ||||||||||||||||||||||||||
| Income tax expense | 12,116 | 4,145 | 7,971 | * | 2.9 | % | 0.9 | % | |||||||||||||||||||||||||||
| Net income | $ | 6,204 | $ | 22,581 | $ | (16,377) | (72.5) | % | 1.5 | % | 4.8 | % | |||||||||||||||||||||||
* Calculation is not meaningful.
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First Quarter Fiscal 2025 Financial Results
•Consolidated net sales revenue decreased 12.2%, or $57.8 million, to $416.8 million for the three months ended May 31, 2024, compared to $474.7 million for the same period last year.
•Consolidated operating income decreased 24.3%, or $9.9 million, to $30.8 million for the three months ended May 31, 2024, compared to $40.6 million for the same period last year. Consolidated operating margin decreased 1.2 percentage points to 7.4% of consolidated net sales revenue for the three months ended May 31, 2024, compared to 8.6% for the same period last year.
•Consolidated adjusted operating income decreased 35.1%, or $23.2 million, to $43.0 million for the three months ended May 31, 2024, compared to $66.2 million for the same period last year. Consolidated adjusted operating margin decreased 3.6 percentage points to 10.3% of consolidated net sales revenue for the three months ended May 31, 2024, compared to 13.9% for the same period last year.
•Net income decreased 72.5%, or $16.4 million, to $6.2 million for the three months ended May 31, 2024, compared to $22.6 million for the same period last year. Diluted EPS decreased 72.3% to $0.26 for the three months ended May 31, 2024, compared to $0.94 for the same period last year.
•Adjusted income decreased 50.0%, or $23.4 million, to $23.3 million for the three months ended May 31, 2024, compared to $46.7 million for the same period last year. Adjusted diluted EPS decreased 49.0% to $0.99 for the three months ended May 31, 2024, compared to $1.94 for the same period last year.
Consolidated and Segment Net Sales Revenue
The following table summarizes the impact that Organic business and foreign currency had on our net sales revenue by segment:
| Three Months Ended May 31, | |||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||
Fiscal 2024 sales revenue, net | $ | 217,144 | $ | 257,528 | $ | 474,672 | |||||||||||
| Organic business | (18,654) | (39,528) | (58,182) | ||||||||||||||
| Impact of foreign currency | (31) | 388 | 357 | ||||||||||||||
| Change in sales revenue, net | (18,685) | (39,140) | (57,825) | ||||||||||||||
Fiscal 2025 sales revenue, net | $ | 198,459 | $ | 218,388 | $ | 416,847 | |||||||||||
| Total net sales revenue growth (decline) | (8.6) | % | (15.2) | % | (12.2) | % | |||||||||||
| Organic business | (8.6) | % | (15.3) | % | (12.3) | % | |||||||||||
| Impact of foreign currency | — | % | 0.2 | % | 0.1 | % | |||||||||||
In the above tables, Organic 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 was acquired, excluding the impact that foreign currency remeasurement had on reported net sales revenue. Net sales revenue from internally developed brands or product lines is considered Organic business activity.
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Consolidated Net Sales Revenue
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Consolidated net sales revenue decreased $57.8 million, or 12.2%, to $416.8 million, compared to $474.7 million, primarily driven by a decrease from Organic business. The decline in Organic business was primarily due to:
•a decline in sales of hair appliances, prestige hair care products and humidifiers in Beauty & Wellness primarily driven by softer consumer demand, shifts in consumer spending, increased competition in hair appliances and prestige hair care products, and reduced orders from retail customers; and
•a decline in Home & Outdoor primarily due to lower replenishment orders from retail customers, softer consumer demand, shifts in consumer spending, a slowdown in the technical and everyday lifestyle pack categories, increased competition in the insulated beverageware category, and the impact of the shipping disruption at our Tennessee distribution facility due to automation startup issues affecting some of the segment's small retail customer and direct-to-consumer orders.
These factors were partially offset by international growth and higher sales of fans in Beauty & Wellness.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $0.4 million, or 0.1%.
Segment Net Sales Revenue
Home & Outdoor
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Net sales revenue decreased $18.7 million, or 8.6%, to $198.5 million, compared to $217.1 million. The decrease was driven by a decline from Organic business primarily due to:
•lower replenishment orders from retail customers;
•softer consumer demand;
•shifts in consumer spending;
•a slowdown in the technical and everyday lifestyle pack categories;
•increased competition in the insulated beverageware category; and
•the impact of the shipping disruption at our Tennessee distribution facility due to automation startup issues affecting some of the segment's small retail customer and direct-to-consumer orders.
These factors were partially offset by:
•new distribution, which substantially began during the second quarter of fiscal 2024, benefiting our home category sales in comparison to the prior year period;
•incremental sales from the launch of the travel tumbler in the second quarter of fiscal 2024; and
•an increase in international sales primarily driven by expanded retailer distribution in the insulated beverageware category.
The impact of net foreign currency fluctuations on net sales revenue was not meaningful.
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Beauty & Wellness
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Net sales revenue decreased $39.1 million, or 15.2%, to $218.4 million, compared to $257.5 million. The decrease was driven by a decline from Organic business, primarily due to:
•a decline in sales of hair appliances and prestige hair care products primarily due to softer consumer demand, shifts in consumer spending, increased competition and shipping disruption from Curlsmith system integration challenges;
•lower sales of humidifiers, primarily driven by reduced replenishment orders from retail customers due to a softer 2023/2024 illness season;
•higher sales dilution from trade discounts, allowances and promotional programs; and
•a decrease in water filtration product revenue primarily driven by the expiration of an out-license relationship.
These factors were partially offset by an increase in fan sales.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $0.4 million, or 0.2%.
Consolidated Gross Profit Margin
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Consolidated gross profit margin increased 3.3 percentage points to 48.7%, compared to 45.4%. The increase in consolidated gross profit margin was primarily due to:
•a favorable segment mix with a higher percentage of Home & Outdoor sales at a higher margin;
•favorable inventory obsolescence expense year-over-year; and
•lower commodity and product costs, partly driven by Project Pegasus initiatives.
These factors were partially offset by:
•a less favorable product mix within the segments;
•a less favorable customer mix within Home & Outdoor; and
•higher sales dilution from trade discounts, allowances and promotional programs in Beauty & Wellness.
Consolidated SG&A
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Consolidated SG&A ratio increased 5.6 percentage points to 40.9%, compared to 35.3%. The increase in the consolidated SG&A ratio was primarily due to:
•higher marketing expense as we reinvested back into our brands;
•additional costs and lost efficiency associated with automation startup issues at our Tennessee distribution facility impacting small retail customer and direct-to-consumer orders;
•an increase in depreciation expense primarily related to our new distribution facility;
•unfavorable health insurance and product liability expense; and
•the impact of unfavorable operating leverage due to the decrease in net sales.
These factors were partially offset by the favorable comparative impact of a charge of $4.2 million related to the bankruptcy of Bed, Bath & Beyond incurred in the prior year period and lower share-based compensation expense.
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Restructuring Charges
During the three month periods ended May 31, 2024 and 2023, we incurred $1.8 million and $7.4 million, respectively, of pre-tax restructuring costs in connection with Project Pegasus, which were primarily comprised of severance and employee related costs and professional fees, and made total cash restructuring payments of $3.0 million and $9.4 million, respectively. We had a remaining liability of $3.6 million as of May 31, 2024.
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Operating Income, Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment
In order to provide a better understanding of the impact of certain items on our operating income, the tables that follow report the comparative pre-tax impact of Bed, Bath & Beyond bankruptcy, restructuring charges, amortization of intangible assets, and non-cash share-based compensation, as applicable, on operating income and operating margin for each segment and in total for the periods presented below. Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. For additional information regarding management’s decision to present this non-GAAP financial information, see the introduction to this Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Three Months Ended May 31, 2024 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 15,850 | 8.0 | % | $ | 14,913 | 6.8 | % | $ | 30,763 | 7.4 | % | |||||||||||||||||||||||
| Restructuring charges | 440 | 0.2 | % | 1,395 | 0.6 | % | 1,835 | 0.4 | % | ||||||||||||||||||||||||||
| Subtotal | 16,290 | 8.2 | % | 16,308 | 7.5 | % | 32,598 | 7.8 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 1,765 | 0.9 | % | 2,755 | 1.3 | % | 4,520 | 1.1 | % | ||||||||||||||||||||||||||
| Non-cash share-based compensation | 3,013 | 1.5 | % | 2,820 | 1.3 | % | 5,833 | 1.4 | % | ||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 21,068 | 10.6 | % | $ | 21,883 | 10.0 | % | $ | 42,951 | 10.3 | % | |||||||||||||||||||||||
| Three Months Ended May 31, 2023 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Beauty & Wellness | Total | ||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 22,116 | 10.2 | % | $ | 18,525 | 7.2 | % | $ | 40,641 | 8.6 | % | |||||||||||||||||||||||
Bed, Bath & Beyond bankruptcy | 3,087 | 1.4 | % | 1,126 | 0.4 | % | 4,213 | 0.9 | % | ||||||||||||||||||||||||||
| Restructuring charges | 2,790 | 1.3 | % | 4,565 | 1.8 | % | 7,355 | 1.5 | % | ||||||||||||||||||||||||||
| Subtotal | 27,993 | 12.9 | % | 24,216 | 9.4 | % | 52,209 | 11.0 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 1,777 | 0.8 | % | 2,880 | 1.1 | % | 4,657 | 1.0 | % | ||||||||||||||||||||||||||
| Non-cash share-based compensation | 4,498 | 2.1 | % | 4,799 | 1.9 | % | 9,297 | 2.0 | % | ||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 34,268 | 15.8 | % | $ | 31,895 | 12.4 | % | $ | 66,163 | 13.9 | % | |||||||||||||||||||||||
Consolidated Operating Income
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Consolidated operating income was $30.8 million, or 7.4% of net sales revenue, compared to $40.6 million, or 8.6% of net sales revenue. The 1.2 percentage point decrease in consolidated operating margin was primarily due to:
•higher marketing expense as we reinvested back into our brands;
•additional costs and lost efficiency associated with automation startup issues at our Tennessee distribution facility impacting small retail customer and direct-to-consumer orders;
•higher sales dilution from trade discounts, allowances, and promotional programs;
•an increase in depreciation expense primarily related to our new distribution facility;
•unfavorable health insurance and product liability expense;
•a less favorable product mix within the segments and a less favorable customer mix within Home & Outdoor; and
•the impact of unfavorable operating leverage due to the decrease in net sales.
These factors were partially offset by:
•a favorable segment mix with a higher percentage of Home & Outdoor sales at a higher margin;
•favorable inventory obsolescence expense year-over-year;
•lower commodity and product costs, partly driven by Project Pegasus initiatives; and
•a decrease in restructuring charges of $5.5 million.
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Consolidated adjusted operating income decreased 35.1% to $43.0 million, or 10.3% of net sales revenue, compared to $66.2 million, or 13.9% of net sales revenue.
Home & Outdoor
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Operating income was $15.9 million, or 8.0% of segment net sales revenue, compared to $22.1 million, or 10.2% of segment net sales revenue. The 2.2 percentage point decrease in segment operating margin was primarily due to:
•higher marketing expense as we reinvested back into our brands;
•additional costs and lost efficiency associated with automation startup issues at our Tennessee distribution facility impacting small retail customer and direct-to-consumer orders;
•an increase in depreciation expense primarily related to our new distribution facility;
•the impact of unfavorable operating leverage due to the decrease in net sales; and
•a less favorable customer and product mix
These factors were partially offset by:
•favorable inventory obsolescence expense year-over-year;
•lower commodity and product costs, partly driven by Project Pegasus initiatives; and
•the favorable comparative impact of a charge of $3.1 million related to the bankruptcy of Bed, Bath & Beyond incurred in the prior year period.
Adjusted operating income decreased 38.5% to $21.1 million, or 10.6% of segment net sales revenue, compared to $34.3 million, or 15.8% of segment net sales revenue.
Beauty & Wellness
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Operating income was $14.9 million, or 6.8% of segment net sales revenue, compared to $18.5 million, or 7.2% of segment net sales revenue. The 0.4 percentage point decrease in segment operating margin was primarily due to:
•higher marketing expense as we reinvested back into our brands;
•a less favorable product mix;
•higher sales dilution from trade discounts, allowances and promotional programs;
•unfavorable health insurance and product liability expense; and
•the impact of unfavorable operating leverage due to the decrease in net sales.
These factors were partially offset by:
•favorable inventory obsolescence expense year-over-year;
•lower commodity and product costs, partly driven by Project Pegasus initiatives; and
•a decrease in restructuring charges of $3.2 million.
Adjusted operating income decreased 31.4% to $21.9 million, or 10.0% of segment net sales revenue, compared to $31.9 million, or 12.4% of segment net sales revenue.
Interest Expense
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Interest expense was $12.5 million, compared to $14.1 million. The decrease in interest expense was primarily due to lower average borrowings outstanding, partially offset by a higher average effective interest rate compared to the same period last year.
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Income Tax Expense
The period-over-period comparison of our effective tax rate is often impacted by the mix of 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.
The Organisation for Economic Co-operation and Development has introduced a framework to implement a global minimum corporate income tax of 15%, referred to as “Pillar Two.” Many aspects of Pillar Two are effective for tax years beginning after January 1, 2024, with certain remaining aspects to be effective for tax years beginning January 1, 2025 or later. Certain countries have adopted legislation to implement Pillar Two, and other countries are in the process of introducing legislation to implement Pillar Two. We will continue to assess the impact of Pillar Two and monitor developments in legislation, regulation, and interpretive guidance.
In response to Pillar Two, on May 24, 2024, Barbados enacted a domestic corporate income tax rate of 9%, effective beginning with our fiscal year 2025. As a result, we incorporated this corporate income tax into our estimated annual effective tax rate increasing our income tax provision during the first quarter of fiscal 2025. In addition, we revalued our existing deferred tax liabilities subject to the Barbados legislation, which resulted in a discrete tax charge of $6.0 million during the first quarter of fiscal 2025. Additionally, Barbados enacted a domestic minimum top-up tax (“DMTT”) of 15% which applies to Barbados businesses that are part of multinational enterprise groups with annual revenue of €750 million or more and is effective beginning with our fiscal year 2026. We will continue to monitor and evaluate impacts as further regulatory guidance becomes available.
For the three months ended May 31, 2024, income tax expense as a percentage of income before income tax was 66.1% compared to 15.5% for the same period last year. The year-over-year increase in the effective tax rate is primarily due to the Barbados tax legislation enacted during the first quarter of fiscal 2025, which resulted in a discrete tax charge of $6.0 million to revalue deferred tax liabilities and an increase in our income tax expense due to the change to our estimated annual effective tax rate arising from the legislation, partially offset by shifts in the mix of income in our various tax jurisdictions.
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Net Income, Diluted EPS, Adjusted Income (non-GAAP), and Adjusted Diluted EPS (non-GAAP)
In order to provide a better understanding of the impact of certain items on our income and diluted EPS, the tables that follow report the comparative after-tax impact of Barbados tax reform, Bed, Bath & Beyond bankruptcy, restructuring charges, amortization of intangible assets, and non-cash share-based compensation, as applicable, on income and diluted EPS for the periods presented below. Adjusted income and adjusted diluted EPS may be considered non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. For additional information regarding management’s decision to present this non-GAAP financial information, see the introduction to this Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Three Months Ended May 31, 2024 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 18,320 | $ | 12,116 | $ | 6,204 | $ | 0.78 | $ | 0.51 | $ | 0.26 | |||||||||||||||||||||||
Barbados tax reform | — | (6,045) | 6,045 | — | (0.26) | 0.26 | |||||||||||||||||||||||||||||
| Restructuring charges | 1,835 | 165 | 1,670 | 0.08 | 0.01 | 0.07 | |||||||||||||||||||||||||||||
| Subtotal | 20,155 | 6,236 | 13,919 | 0.85 | 0.26 | 0.59 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,520 | 661 | 3,859 | 0.19 | 0.03 | 0.16 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 5,833 | 264 | 5,569 | 0.25 | 0.01 | 0.24 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 30,508 | $ | 7,161 | $ | 23,347 | $ | 1.29 | $ | 0.30 | $ | 0.99 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 23,633 | ||||||||||||||||||||||||||||||||||
| Three Months Ended May 31, 2023 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 26,726 | $ | 4,145 | $ | 22,581 | $ | 1.11 | $ | 0.17 | $ | 0.94 | |||||||||||||||||||||||
Bed, Bath & Beyond bankruptcy | 4,213 | 53 | 4,160 | 0.17 | — | 0.17 | |||||||||||||||||||||||||||||
| Restructuring charges | 7,355 | 92 | 7,263 | 0.30 | — | 0.30 | |||||||||||||||||||||||||||||
| Subtotal | 38,294 | 4,290 | 34,004 | 1.59 | 0.18 | 1.41 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,657 | 606 | 4,051 | 0.19 | 0.03 | 0.17 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 9,297 | 641 | 8,656 | 0.39 | 0.03 | 0.36 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 52,248 | $ | 5,537 | $ | 46,711 | $ | 2.16 | $ | 0.23 | $ | 1.94 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 24,134 | ||||||||||||||||||||||||||||||||||
Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024
Net income was $6.2 million, compared to $22.6 million. Diluted EPS was $0.26, compared to $0.94. Diluted EPS decreased primarily due to lower operating income and an increase in the effective income tax rate, partially offset by a decrease in interest expense.
Adjusted income decreased $23.4 million, or 50.0%, to $23.3 million, compared to $46.7 million. Adjusted diluted EPS decreased 49.0% to $0.99, compared to $1.94.
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Liquidity and Capital Resources
We principally rely on our cash flow from operations and borrowings under our Credit Agreement (as defined below) to finance our operations, capital and intangible asset expenditures, acquisitions and share repurchases. Historically, our principal uses of cash to fund our operations have included operating expenses, primarily SG&A, and working capital, predominantly for inventory purchases and the extension of credit to our retail customers. We have typically been able to generate positive cash flow from operations sufficient to fund our operating activities. In the past, we have utilized a combination of available cash and existing, or additional, sources of financing to fund strategic acquisitions, share repurchases and capital investments. We generated $25.3 million in cash from operations during the first quarter of fiscal 2025 and had $16.1 million in cash and cash equivalents at May 31, 2024, substantially all of which was held by our foreign subsidiaries. We have no existing activities involving special purpose entities or off-balance sheet financing.
We believe our short-term liquidity requirements will primarily consist of operating and working capital requirements, capital expenditures and interest payments on our debt.
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 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 under our Board of Directors' authorization, subject to limitations contained in our debt agreement and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. We may finance share repurchases with available cash, additional debt or other sources of financing. For additional information, see Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in our Form 10-K and Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” in this report.
Operating Activities
Operating activities provided net cash of $25.3 million for the three months ended May 31, 2024, compared to net cash provided of $121.1 million for the same period last year. The decrease in cash provided by operating activities was primarily driven by increases in payments for inventory, annual incentive compensation, and income taxes, as well as a decrease in cash earnings, partially offset by decreases in cash used primarily for accounts receivable, restructuring activities and interest payments.
Investing Activities
Investing activities used net cash of $9.2 million during the three months ended May 31, 2024, compared to net cash used of $11.6 million for the same period last year. The decrease in cash used by investing activities was primarily due to a decrease in capital and intangible asset expenditures during the first quarter of fiscal 2025. The decrease in capital and intangible asset expenditures was primarily due to the substantial completion of our new two million square foot distribution facility in March 2023 for which we incurred higher capital expenditures during the prior year period. Capital and intangible asset
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expenditures during both periods also included expenditures for computer, furniture and other equipment and tooling, molds, and other production equipment.
Financing Activities
Financing activities used net cash of $18.5 million during the three months ended May 31, 2024, compared to net cash used of $99.6 million for the same period last year. The decrease in cash used by financing activities is primarily due to net borrowings on our revolving loans of $84.0 million to help fund payments for repurchases of common stock of $103.0 million during the three months ended May 31, 2024 in comparison to net repayments of $96.0 million during the same period last year.
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 aggregate commitments of $1.5 billion, which are available through (i) a $1.0 billion revolving credit facility, which includes a $50 million sublimit for the issuance of letters of credit, (ii) a $250 million term loan facility, and (iii) a committed $250 million delayed draw term loan facility, which may be borrowed in multiple drawdowns until August 15, 2025. Proceeds can be used for working capital and other general corporate purposes, including funding permitted acquisitions. At the closing date, February 15, 2024, we borrowed $457.5 million under the revolving credit facility and $250.0 million under the term loan facility and utilized the proceeds to repay all debt outstanding under our prior credit agreement. The Credit Agreement matures on February 15, 2029. The Credit Agreement includes an accordion feature, which permits the Company to request to increase its borrowing capacity by an additional $300 million plus an unlimited amount when the Leverage Ratio (as defined in the Credit Agreement) on a pro-forma basis is less than 3.25 to 1.00. The term loans are payable at the end of each fiscal quarter in equal installments of 0.625% through February 28, 2025, 0.9375% through February 28, 2026, and 1.25% thereafter of the original principal balance of the term loans, which began in the first quarter of fiscal 2025, with the remaining balance due at the maturity date. Borrowings under the Credit Agreement bear floating interest at either the Base Rate or Term SOFR (as defined in the Credit Agreement), plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.125% and 1.0% to 2.125% for Base Rate and Term SOFR borrowings, respectively.
The floating interest rates on our borrowings under the Credit Agreement are hedged with interest rate swaps to effectively fix interest rates on $300 million and $500 million of the outstanding principal balance under the revolving loans as of May 31, 2024 and February 29, 2024, respectively. For additional information regarding our interest rate swaps, see Notes 9, 10, and 11 to the accompanying condensed consolidated financial statements.
As of May 31, 2024, the outstanding Credit Agreement principal balance was $754.3 million (excluding prepaid financing fees), the balance of outstanding letters of credit was $15.6 million and the amount available for revolving loans under the Credit Agreement was $478.5 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of May 31, 2024, these covenants effectively limited our ability to incur more than $336.9 million of additional debt from all sources, including the Credit Agreement, or $478.5 million in the event a qualified acquisition is consummated.
As of May 31, 2024, we were in compliance with all covenants as defined under the terms of the Credit Agreement.
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Critical Accounting Policies and Estimates
The SEC defines critical accounting estimates as those made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on a company's financial condition or results of operations. For a discussion of the estimates that we consider to meet this definition and represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, see the section entitled “Critical Accounting Policies and Estimates” in our Form 10-K. Since the filing of our Form 10-K, there have been no material changes in our critical accounting policies and estimates from those disclosed therein.
Information Regarding Forward-Looking Statements
Certain statements in this report, including those in documents and our other filings with the SEC referenced herein, may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Generally, the words “anticipates”, “assumes”, “believes”, “expects”, “plans”, “may”, “will”, “might”, “would”, “should”, “seeks”, “estimates”, “project”, “predict”, “potential”, “currently”, “continue”, “intends”, “outlook”, “forecasts”, “targets”, “reflects”, “could”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate may occur in the future, including statements related to sales, expenses, EPS results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are only as of the date they are made and are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described or referenced in this report and that are otherwise described from time to time in our SEC reports as filed. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.
Such risks are not limited to, but may include:
•the geographic concentration of certain U.S. distribution facilities which increases our risk to disruptions that could affect our ability to deliver products in a timely manner;
•the occurrence of cyber incidents, or failure by us or our third-party service providers to maintain cybersecurity and the integrity of confidential internal or customer data;
•a cybersecurity breach, obsolescence or interruptions in the operation of our central global Enterprise Resource Planning systems and other peripheral information systems;
•our ability to develop and introduce a continuing stream of innovative new products to meet changing consumer preferences;
•actions taken by large customers that may adversely affect our gross profit and operating results;
•our dependence on sales to several large customers and the risks associated with any loss of, or substantial decline in, sales to top customers;
•our dependence on third-party manufacturers, most of which are located in Asia, and any inability to obtain products from such manufacturers;
•our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;
•the risks associated with trade barriers, exchange controls, expropriations, and other risks associated with domestic and foreign operations including uncertainty and business interruptions resulting from political changes and events in the U.S. and abroad, and volatility in the global credit and financial markets and economy;
•our dependence on the strength of retail economies and vulnerabilities to any prolonged
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economic downturn, including a downturn from the effects of macroeconomic conditions, any public health crises or similar conditions;
•the risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors;
•our reliance on our CEO and a limited number of other key senior officers to operate our business;
•the risks associated with the use of licensed trademarks from or to third parties;
•our ability to execute and realize expected synergies from strategic business initiatives such as acquisitions, divestitures and global restructuring plans, including Project Pegasus;
•the risks of potential changes in laws and regulations, including environmental, employment and health and safety and tax laws, and the costs and complexities of compliance with such laws;
•the risks associated with increased focus and expectations on climate change and other environmental, social and governance matters;
•the risks associated with significant changes in or our compliance with regulations, interpretations or product certification requirements;
•the risks associated with global legal developments regarding privacy and data security that could result in changes to our business practices, penalties, increased cost of operations, or otherwise harm our business;
•the risks of significant tariffs or other restrictions being placed on imports from China, Mexico or Vietnam or any retaliatory trade measures taken by China, Mexico or Vietnam;
•our dependence on whether we are classified as a “controlled foreign corporation” for U.S. federal income tax purposes which impacts the tax treatment of its non-U.S. income;
•the risks associated with legislation enacted in Bermuda and Barbados in response to the European Union’s review of harmful tax competition;
•the risks associated with accounting for tax positions and the resolution of tax disputes;
•the risks associated with product recalls, product liability and other claims against us;
•associated financial risks including but not limited to, increased costs of raw materials, energy and transportation;
•significant impairment of our goodwill, indefinite-lived and definite-lived intangible assets or other long-lived assets;
•the risks associated with foreign currency exchange rate fluctuations;
•the risks to our liquidity or cost of capital which may be materially adversely affected by constraints or changes in the capital and credit markets, interest rates and limitations under our financing arrangements; and
•projections of product demand, sales and net income, which are highly subjective in nature, and from which future sales and net income could vary by a material amount.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. Additional information regarding our risk management activities can be found in Notes 8, 9 and 10 to the accompanying condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Company’s Chief Executive Officer and Chief Financial Officer have concluded that our Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective at the reasonable assurance level. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity, except as described in Part 1, Item 3. “Legal Proceedings” of our Form 10-K. Since the filing of our Form 10-K, there have been no material changes in our legal proceedings from those disclosed therein except as updated herein in the discussion in Note 7 to the accompanying condensed consolidated financial statements.
ITEM 1A. RISK FACTORS
The ownership of our common stock involves a number of risks and uncertainties. When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. “Risk Factors” of our Form 10-K. Since the filing of our Form 10-K, there have been no material changes in our risk factors from those disclosed therein.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2021, our Board of Directors authorized the repurchase of up to $500 million of our outstanding common stock. The authorization became effective August 25, 2021, for a period of three years, and replaced our former repurchase authorization. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. See Note 5 to the accompanying condensed consolidated financial statements for additional information.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option or other share-based award holders are settled by having the holder tender back to us a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares. The following table summarizes our share repurchase activity for the periods shown:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in thousands) (2) | |||||||||||||||||||
| March 1 through March 31, 2024 | 18,744 | $ | 124.37 | 18,744 | $ | 346,070 | |||||||||||||||||
| April 1 through April 30, 2024 | 270,305 | 92.73 | 270,305 | 321,005 | |||||||||||||||||||
| May 1 through May 31, 2024 | 747,566 | 101.18 | 747,566 | 245,366 | |||||||||||||||||||
| Total | 1,036,615 | $ | 99.40 | 1,036,615 | |||||||||||||||||||
(1)The number of shares includes shares of common stock acquired from associates who tendered shares to: (i) satisfy the tax withholding on equity awards as part of our long-term incentive plans or (ii) satisfy the exercise price on stock option exercises. For the three months ended May 31, 2024, 25,372 shares were acquired from associates at an average per share price of $118.85.
(2)Reflects the remaining dollar value of shares that could be purchased under our current stock repurchase authorization through the expiration or termination of the plan. For additional information, see Note 5 to the accompanying condensed consolidated financial statements.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three month period ended May 31, 2024, none of our officers or directors adopted terminated
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| ITEM 6. | EXHIBITS | |||||||||||||||||||||||||
| (a) | Exhibits | |||||||||||||||||||||||||
Amended and Restated Severance Agreement between Helen of Troy Nevada Corporation and Tessa Judge, dated March 1, 2024 (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the Securities and Exchange Commission on April 24, 2024). | ||||||||||||||||||||||||||
| 101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended May 31, 2024, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders' Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to the Condensed Consolidated Financial Statements. | |||||||||||||||||||||||||
| 104 | Cover Page, Interactive Data File formatted in iXBRL and contained in Exhibit 101. | |||||||||||||||||||||||||
| * Filed herewith. | ||||||||||||||||||||||||||
| ** Furnished herewith. | ||||||||||||||||||||||||||
| † Management contract or compensatory plan or arrangement. | ||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HELEN OF TROY LIMITED | ||||||||
| (Registrant) | ||||||||
| Date: | July 9, 2024 | /s/ Noel M. Geoffroy | ||||||
Noel M. Geoffroy | ||||||||
| Chief Executive Officer, Director and Principal Executive Officer | ||||||||
| Date: | July 9, 2024 | /s/ Brian L. Grass | ||||||
| Brian L. Grass | ||||||||
| Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer | ||||||||
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