HELEN OF TROY LTD - Quarter Report: 2021 November (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number: 001-14669
HELEN OF TROY LIMITED
(Exact name of registrant as specified in its charter)
| Bermuda | 74-2692550 | |||||||
| (State or other jurisdiction | (I.R.S. Employer | |||||||
| of incorporation or organization) | Identification No.) | |||||||
2 Church Street
Hamilton, Bermuda
(Address of principal executive offices)
1 Helen of Troy Plaza
El Paso, Texas 79912
(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 | ||||||||||||
| Common Shares, $0.10 par value per share | HELE | The NASDAQ Stock Market LLC | ||||||||||||
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.
Large accelerated filer | ☒ | 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 December 29, 2021, there were 24,137,065 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) | November 30, 2021 | February 28, 2021 | |||||||||
| Assets | |||||||||||
| Assets, current: | |||||||||||
| Cash and cash equivalents | $ | 44,344 | $ | 45,120 | |||||||
Receivables - principally trade, less allowances of $627 and $998 | 505,933 | 382,449 | |||||||||
| Inventory | 585,811 | 481,611 | |||||||||
| Prepaid expenses and other current assets | 23,062 | 16,170 | |||||||||
| Income taxes receivable | 3,574 | 6,720 | |||||||||
| Assets held for sale | 2,265 | 39,867 | |||||||||
| Total assets, current | 1,164,989 | 971,937 | |||||||||
Property and equipment, net of accumulated depreciation of $157,287 and $140,379 | 165,061 | 136,535 | |||||||||
| Goodwill | 739,901 | 739,901 | |||||||||
Other intangible assets, net of accumulated amortization of $160,204 and $151,240 | 349,328 | 357,264 | |||||||||
| Operating lease assets | 30,314 | 32,533 | |||||||||
| Deferred tax assets, net | 29,311 | 21,748 | |||||||||
| Other assets | 8,501 | 3,570 | |||||||||
| Total assets | $ | 2,487,405 | $ | 2,263,488 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Liabilities, current: | |||||||||||
| Accounts payable, principally trade | $ | 306,049 | $ | 334,807 | |||||||
| Accrued expenses and other current liabilities | 296,362 | 271,179 | |||||||||
| Income taxes payable | 20,727 | 7,022 | |||||||||
| Long-term debt, current maturities | 1,884 | 1,884 | |||||||||
| Liabilities held for sale | 286 | — | |||||||||
| Total liabilities, current | 625,308 | 614,892 | |||||||||
| Long-term debt, excluding current maturities | 445,584 | 341,746 | |||||||||
| Lease liabilities, non-current | 35,595 | 38,352 | |||||||||
| Deferred tax liabilities, net | 7,136 | 5,735 | |||||||||
| Other liabilities, non-current | 18,824 | 23,416 | |||||||||
| Total liabilities | 1,132,447 | 1,024,141 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued | — | — | |||||||||
Common stock, $0.10 par. Authorized 50,000,000 shares; 24,136,351 and 24,405,921 shares issued and outstanding | 2,414 | 2,441 | |||||||||
| Additional paid in capital | 298,708 | 283,396 | |||||||||
| Accumulated other comprehensive loss | (1,066) | (11,656) | |||||||||
| Retained earnings | 1,054,902 | 965,166 | |||||||||
| Total stockholders' equity | 1,354,958 | 1,239,347 | |||||||||
| Total liabilities and stockholders' equity | $ | 2,487,405 | $ | 2,263,488 | |||||||
See accompanying notes to condensed consolidated financial statements.
2
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Sales revenue, net | $ | 624,884 | $ | 637,737 | $ | 1,641,335 | $ | 1,589,424 | |||||||||||||||
| Cost of goods sold | 351,051 | 350,410 | 936,322 | 892,460 | |||||||||||||||||||
| Gross profit | 273,833 | 287,327 | 705,013 | 696,964 | |||||||||||||||||||
Selling, general and administrative expense (“SG&A”) | 183,788 | 186,630 | 482,467 | 439,646 | |||||||||||||||||||
| Restructuring charges | 5 | (12) | 380 | 355 | |||||||||||||||||||
| Operating income | 90,040 | 100,709 | 222,166 | 256,963 | |||||||||||||||||||
| Non-operating income, net | 52 | 93 | 185 | 440 | |||||||||||||||||||
| Interest expense | 3,206 | 2,926 | 9,508 | 9,568 | |||||||||||||||||||
| Income before income tax | 86,886 | 97,876 | 212,843 | 247,835 | |||||||||||||||||||
| Income tax expense | 11,203 | 13,721 | 28,873 | 16,061 | |||||||||||||||||||
| Net income | $ | 75,683 | $ | 84,155 | $ | 183,970 | $ | 231,774 | |||||||||||||||
Earnings per share (“EPS”): | |||||||||||||||||||||||
| Basic | $ | 3.14 | $ | 3.37 | $ | 7.60 | $ | 9.20 | |||||||||||||||
| Diluted | 3.10 | 3.34 | 7.52 | 9.14 | |||||||||||||||||||
| Weighted average shares used in computing EPS: | |||||||||||||||||||||||
| Basic | 24,129 | 24,965 | 24,193 | 25,182 | |||||||||||||||||||
| Diluted | 24,399 | 25,192 | 24,461 | 25,350 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income | $ | 75,683 | $ | 84,155 | $ | 183,970 | $ | 231,774 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Cash flow hedge activity - interest rate swaps | 1,787 | 1,180 | 3,623 | (696) | |||||||||||||||||||
| Cash flow hedge activity - foreign currency contracts | 3,358 | 855 | 6,967 | (4,584) | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 5,145 | 2,035 | 10,590 | (5,280) | |||||||||||||||||||
| Comprehensive income | $ | 80,828 | $ | 86,190 | $ | 194,560 | $ | 226,494 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||
| (in thousands, including shares) | Shares | Par Value | ||||||||||||||||||
| Balances at February 28, 2021 | 24,406 | $ | 2,441 | $ | 283,396 | $ | (11,656) | $ | 965,166 | $ | 1,239,347 | |||||||||
| Net income | — | — | — | — | 56,972 | 56,972 | ||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (797) | — | (797) | ||||||||||||||
| Exercise of stock options | 4 | — | 275 | — | — | 275 | ||||||||||||||
| Issuance and settlement of restricted stock | 177 | 18 | (18) | — | — | — | ||||||||||||||
| Issuance of common stock related to stock purchase plan | 13 | 1 | 2,337 | — | — | 2,338 | ||||||||||||||
| Common stock repurchased and retired | (502) | (50) | (16,616) | — | (93,408) | (110,074) | ||||||||||||||
| Share-based compensation | — | — | 14,020 | — | — | 14,020 | ||||||||||||||
| Balances at May 31, 2021 | 24,098 | $ | 2,410 | $ | 283,394 | $ | (12,453) | $ | 928,730 | $ | 1,202,081 | |||||||||
| Net income | — | — | — | — | 51,315 | 51,315 | ||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 6,242 | — | 6,242 | ||||||||||||||
| Exercise of stock options | 6 | 1 | 519 | — | — | 520 | ||||||||||||||
| Issuance and settlement of restricted stock | 2 | — | — | — | — | — | ||||||||||||||
| Common stock repurchased and retired | (1) | — | (104) | — | (12) | (116) | ||||||||||||||
| Share-based compensation | — | — | 7,780 | — | — | 7,780 | ||||||||||||||
| Balances at August 31, 2021 | 24,105 | $ | 2,411 | $ | 291,589 | $ | (6,211) | $ | 980,033 | $ | 1,267,822 | |||||||||
| Net income | — | — | — | — | 75,683 | 75,683 | ||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 5,145 | — | 5,145 | ||||||||||||||
| Exercise of stock options | 11 | 1 | 664 | — | — | 665 | ||||||||||||||
| Issuance and settlement of restricted stock | 22 | 2 | (2) | — | — | — | ||||||||||||||
| Issuance of common stock related to stock purchase plan | 10 | 1 | 1,922 | — | — | 1,923 | ||||||||||||||
| Common stock repurchased and retired | (12) | (1) | (2,014) | — | (814) | (2,829) | ||||||||||||||
| Share-based compensation | — | — | 6,549 | — | — | 6,549 | ||||||||||||||
| Balances at November 30, 2021 | 24,136 | $ | 2,414 | $ | 298,708 | $ | (1,066) | $ | 1,054,902 | $ | 1,354,958 | |||||||||
See accompanying notes to condensed consolidated financial statements.
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HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity - Continued (Unaudited)
| Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||
| (in thousands, including shares) | Shares | Par Value | ||||||||||||||||||
| Balances at February 29, 2020 | 25,194 | $ | 2,519 | $ | 268,043 | $ | (7,005) | $ | 898,166 | $ | 1,161,723 | |||||||||
| Net income | — | — | — | — | 60,286 | 60,286 | ||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (1,912) | — | (1,912) | ||||||||||||||
| Exercise of stock options | 8 | 1 | 475 | — | — | 476 | ||||||||||||||
| Issuance and settlement of restricted stock | 165 | 17 | (17) | — | — | — | ||||||||||||||
| Issuance of common stock related to stock purchase plan | 15 | 1 | 1,900 | — | — | 1,901 | ||||||||||||||
| Common stock repurchased and retired | (61) | (6) | (9,895) | — | (112) | (10,013) | ||||||||||||||
| Share-based compensation | — | — | 9,291 | — | — | 9,291 | ||||||||||||||
| Balances at May 31, 2020 | 25,321 | $ | 2,532 | $ | 269,797 | $ | (8,917) | $ | 958,340 | $ | 1,221,752 | |||||||||
| Net income | — | — | — | — | 87,333 | 87,333 | ||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (5,403) | — | (5,403) | ||||||||||||||
| Exercise of stock options | 4 | 1 | 370 | — | — | 371 | ||||||||||||||
| Issuance and settlement of restricted stock | 4 | — | — | — | — | — | ||||||||||||||
| Common stock repurchased and retired | (1) | — | (148) | — | — | (148) | ||||||||||||||
| Share-based compensation | — | — | 4,624 | — | — | 4,624 | ||||||||||||||
| Balances at August 31, 2020 | 25,328 | $ | 2,533 | $ | 274,643 | $ | (14,320) | $ | 1,045,673 | $ | 1,308,529 | |||||||||
| Net income | — | — | — | — | 84,155 | 84,155 | ||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 2,035 | — | 2,035 | ||||||||||||||
| Exercise of stock options | 1 | — | 70 | — | — | 70 | ||||||||||||||
| Issuance and settlement of restricted stock | 20 | 2 | (2) | — | — | — | ||||||||||||||
| Issuance of common stock related to stock purchase plan | 12 | 1 | 1,709 | — | — | 1,710 | ||||||||||||||
| Common stock repurchased and retired | (967) | (97) | (5,870) | — | (186,833) | (192,800) | ||||||||||||||
| Share-based compensation | — | — | 6,739 | — | — | 6,739 | ||||||||||||||
| Balances at November 30, 2020 | 24,394 | $ | 2,439 | $ | 277,289 | $ | (12,285) | $ | 942,995 | $ | 1,210,438 | |||||||||
See accompanying notes to condensed consolidated financial statements.
6
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Nine Months Ended November 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Cash (used) provided by operating activities: | |||||||||||
| Net income | $ | 183,970 | $ | 231,774 | |||||||
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | |||||||||||
| Depreciation and amortization | 26,082 | 27,995 | |||||||||
| Amortization of financing costs | 738 | 772 | |||||||||
| Non-cash operating lease expense | 6,910 | 4,910 | |||||||||
| Provision for credit losses | 292 | 3,445 | |||||||||
| Non-cash share-based compensation | 28,349 | 20,654 | |||||||||
| Gain on sale of North America Personal Care business | (513) | — | |||||||||
| (Gain) loss on the sale or disposal of property and equipment | (2,274) | 75 | |||||||||
| Deferred income taxes and tax credits | (8,721) | (4,132) | |||||||||
| Changes in operating capital: | |||||||||||
| Receivables | (139,292) | (155,492) | |||||||||
| Inventory | (103,821) | (121,629) | |||||||||
| Prepaid expenses and other current assets | (6,765) | (2,915) | |||||||||
| Other assets and liabilities, net | (6,110) | (6,617) | |||||||||
| Accounts payable | (30,549) | 148,501 | |||||||||
| Accrued expenses and other current liabilities | 29,198 | 95,612 | |||||||||
| Accrued income taxes | 17,452 | 6,793 | |||||||||
| Net cash (used) provided by operating activities | (5,054) | 249,746 | |||||||||
| Cash provided (used) by investing activities: | |||||||||||
| Capital and intangible asset expenditures | (41,529) | (19,423) | |||||||||
| Proceeds from sale of North America Personal Care business | 44,700 | — | |||||||||
| Proceeds from the sale of property and equipment | 5,305 | — | |||||||||
| Net cash provided (used) by investing activities | 8,476 | (19,423) | |||||||||
| Cash used by financing activities: | |||||||||||
| Proceeds from line of credit | 461,400 | 917,400 | |||||||||
| Repayment of line of credit | (356,400) | (811,400) | |||||||||
| Repayment of long-term debt | (1,900) | (1,900) | |||||||||
| Payment of financing costs | — | (3,796) | |||||||||
| Proceeds from share issuances under share-based compensation plans | 5,721 | 4,528 | |||||||||
| Payments for repurchases of common stock | (113,019) | (202,961) | |||||||||
| Net cash used by financing activities | (4,198) | (98,129) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (776) | 132,194 | |||||||||
| Cash and cash equivalents, beginning balance | 45,120 | 24,467 | |||||||||
| Cash and cash equivalents, ending balance | $ | 44,344 | $ | 156,661 | |||||||
| Supplemental non-cash investing activity: | |||||||||||
| Capital expenditures included in accounts payable | $ | 8,140 | $ | — | |||||||
See accompanying notes to condensed consolidated financial statements.
7
HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
November 30, 2021
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 November 30, 2021 and February 28, 2021, 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 28, 2021 (“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 consumer products company offering creative products and solutions for our customers through a diversified portfolio of brands. As of November 30, 2021, we operated three segments: Housewares, Health & Home, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home and on the go to help with food preparation, cooking, cleaning, organization, beverage service, and other tasks to ease everyday living for families. The Health & Home segment provides healthcare and home environment products including health care devices, water filtration systems, and small home appliances. Our Beauty segment provides mass and prestige market beauty appliance and personal care products including hair styling appliances, grooming tools, decorative haircare accessories, and liquid personal care products.
Our business is seasonal due to different calendar events, holidays and seasonal weather 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 and the U.S.
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Beauty segment's mass channel personal care business, which included liquid, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium (“Personal Care”). On June 7, 2021, we completed the sale of our Personal Care business, not including the Latin America and Caribbean regions, to HRB Brands LLC, for $44.7 million in cash. The net assets sold included intangible assets, inventory, certain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our North America Personal Care business. During the second quarter of fiscal 2022, we recognized a gain on the sale in SG&A totaling $0.5 million. We are continuing to negotiate the sale of the Latin America and Caribbean Personal Care businesses to HRB Brands LLC, which we expect to close no later than the end of fiscal 2022. Accordingly, we have continued to classify the identified net assets of the Latin
8
America and Caribbean Personal Care businesses as held for sale. See Note 3 for additional information.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) to be a pandemic. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores or limited hours of operation, and materially lower store traffic, primarily during fiscal 2021. Additionally, COVID-19 has disrupted certain parts of our supply chain. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in higher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill some orders on a timely basis. Additionally, the extent of COVID-19's impact on the demand for certain of our product lines in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to source and distribute our products, as well as any future government actions affecting consumers and the global economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
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.
Reclassifications
We have reclassified, combined or separately disclosed certain amounts in the prior years’ condensed consolidated financial statements and accompanying footnotes to conform with the current period’s presentation.
Note 2 - New Accounting Pronouncements
Except for the changes discussed below, there have been no changes in the information provided in our Form 10-K.
Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Prior to the issuance of this guidance, contract assets and contract liabilities were recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted and should be applied prospectively to acquisitions occurring on or after the effective date. This ASU will be effective for us in the first quarter of fiscal 2024. We believe that the adoption of this ASU will not have a material impact on our consolidated financial statements.
9
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy to other accounting guidance due to the lack of specific authoritative guidance in GAAP, (for example, a grant model within International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance, or Subtopic 958-605, Not-For-Profit Entities - Revenue Recognition). This guidance excludes transactions in the scope of specific GAAP, such as tax incentives accounted for under ASC 740, Income Taxes. This new ASU is effective for annual periods beginning after December 15, 2021, with early adoption and retrospective or prospective application permitted. This ASU will be effective for us in our Form 10-K for fiscal 2023. We believe that the adoption of this ASU will not have a material impact on our consolidated financial statement disclosures.
Note 3 - Assets and Liabilities Held for Sale
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care business and accordingly, we classified the identified net assets of the disposal group as held for sale. On June 7, 2021, we completed the sale of our Personal Care business, not including the Latin America and Caribbean regions, to HRB Brands LLC, for $44.7 million in cash. The net assets sold included intangible assets, inventory, certain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our North America Personal Care business. During the second quarter of fiscal 2022, we recognized a gain on the sale in SG&A totaling $0.5 million. We are continuing to negotiate the sale of the Latin America and Caribbean Personal Care businesses to HRB Brands LLC, which we expect to close no later than the end of fiscal 2022. Accordingly, we have continued to classify the identified net assets of the Latin America and Caribbean Personal Care businesses as held for sale.
The carrying amounts of the major classes of assets and liabilities for our Personal Care business that were classified as held for sale are as follows:
| (in thousands) | November 30, 2021 | February 28, 2021 | |||||||||
Receivables, net of allowance of $34 and $30 | $ | 1,555 | $ | 7,979 | |||||||
| Inventory | 644 | 12,667 | |||||||||
Property and equipment, net of accumulated depreciation of $152 and $403 | 66 | 100 | |||||||||
Goodwill (1) | — | 1,397 | |||||||||
Other intangible assets (1) | — | 17,724 | |||||||||
| Assets held for sale | $ | 2,265 | $ | 39,867 | |||||||
| Accrued sales discounts and allowances | $ | 286 | $ | — | |||||||
| Liabilities held for sale | $ | 286 | $ | — | |||||||
(1)Goodwill and other intangible assets as of February 28, 2021 are presented net of accumulated impairment and accumulated amortization of $80,445 and $4,474, respectively.
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Note 4 - Accrued Expenses and Other Current Liabilities
A summary of accrued expenses and other current liabilities is as follows:
| (in thousands) | November 30, 2021 | February 28, 2021 | |||||||||
| Accrued compensation, benefits and payroll taxes | $ | 41,107 | $ | 66,385 | |||||||
| Accrued sales discounts and allowances | 68,729 | 59,426 | |||||||||
| Accrued sales returns | 34,960 | 29,434 | |||||||||
| Accrued advertising | 72,183 | 50,923 | |||||||||
| Other | 79,383 | 65,011 | |||||||||
| Total accrued expenses and other current liabilities | $ | 296,362 | $ | 271,179 | |||||||
Note 5 - 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 2022, we granted 83,227 service condition awards (“Service Condition Awards”) with a weighted average grant date fair value of $219.02. Additionally, we granted 143,340 performance-based awards during the first quarter of fiscal 2022, of which 71,670 contained performance conditions (“Performance Condition Awards”) and 71,670 contained market conditions (“Market Condition Awards”) with weighted average grant date fair values of $216.20 and $156.08, respectively. Refer to our Form 10-K for further information on the Company's share-based compensation plans.
We recorded share-based compensation expense in SG&A as follows:
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Stock options | $ | — | $ | 3 | $ | — | $ | 18 | |||||||||||||||
| Directors stock compensation | 160 | 161 | 483 | 525 | |||||||||||||||||||
| Service Condition Awards | 3,117 | 1,677 | 8,353 | 5,261 | |||||||||||||||||||
| Performance Condition Awards | 1,622 | 4,407 | 14,706 | 13,873 | |||||||||||||||||||
| Market Condition Awards | 1,115 | — | 3,504 | — | |||||||||||||||||||
| Employee stock purchase plan | 535 | 491 | 1,303 | 977 | |||||||||||||||||||
| Share-based compensation expense | 6,549 | 6,739 | 28,349 | 20,654 | |||||||||||||||||||
| Less income tax benefits | (784) | (403) | (2,355) | (1,406) | |||||||||||||||||||
| Share-based compensation expense, net of tax | $ | 5,765 | $ | 6,336 | $ | 25,994 | $ | 19,248 | |||||||||||||||
Unrecognized Share-Based Compensation Expense
As of November 30, 2021, our total unrecognized share-based compensation for all awards was $33.8 million, which will be recognized over a weighted average amortization period of 2.2 years. The total unrecognized share-based compensation reflects an estimate of target achievement for Performance Condition Awards granted during the first quarter of fiscal 2022 and fiscal 2021, and a weighted average estimate of 175% of target achievement for Performance Condition Awards granted in fiscal 2020.
Note 6 - 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
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replaced our former repurchase authorization, of which approximately $79.5 million remained. As of November 30, 2021, our repurchase authorization allowed for the purchase of $497.2 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 equity holder can be 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 November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Common stock repurchased on the open market: | |||||||||||||||||||||||
| Number of shares | — | 960,829 | 436,842 | 960,829 | |||||||||||||||||||
| Aggregate value of shares | $ | — | $ | 191,606 | $ | 95,484 | $ | 191,606 | |||||||||||||||
| Average price per share | $ | — | $ | 199.42 | $ | 218.58 | $ | 199.42 | |||||||||||||||
| Common stock received in connection with share-based compensation: | |||||||||||||||||||||||
| Number of shares | 12,059 | 6,115 | 78,206 | 67,740 | |||||||||||||||||||
| Aggregate value of shares | $ | 2,829 | $ | 1,194 | $ | 17,535 | $ | 11,355 | |||||||||||||||
| Average price per share | $ | 234.56 | $ | 195.26 | $ | 224.22 | $ | 167.63 | |||||||||||||||
Note 7 - Restructuring Plan
In October 2017, we announced a restructuring plan (referred to as “Project Refuel”) intended to enhance performance primarily in the Beauty and former Nutritional Supplements segments. Project Refuel includes charges for a reduction-in-force and the elimination of certain contracts. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $10.5 million to $12.5 million over the duration of the plan. We estimate the plan to be completed during fiscal 2022 and expect to incur total restructuring charges of approximately $10.3 million over the duration of the plan, of which $9.6 million have been incurred through the third quarter of fiscal 2022. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically.
We incurred an insignificant amount and $0.4 million of pre-tax restructuring costs during the three and nine months ended November 30, 2021, respectively, which are recorded as “Restructuring charges” in the condensed consolidated statements of income. During the three and nine month periods ended November 30, 2021, we made total cash restructuring payments of $0.1 million and $0.5 million, respectively. Since implementing Project Refuel, we have made total cash restructuring payments of $9.6 million as of November 30, 2021.
Note 8 - 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.
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Regulatory Matters
As a global company, we are subject to U.S. and foreign regulations, including environmental, health and safety laws, and industry-specific product certifications. Many of the products we sell are subject to product safety laws and regulations in various jurisdictions. These laws and regulations specify the maximum allowable levels of certain materials that may be contained in our products, provide statutory prohibitions against misbranded and adulterated products, establish ingredients and manufacturing procedures for certain products, specify product safety testing requirements, and set product identification, labeling and claim requirements. Additionally, some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “EPA”), U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
In our quarterly report on Form 10-Q for our first quarter of fiscal 2022, we disclosed that we were in discussions with 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 Health & Home 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, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. as we worked with the EPA towards an expedient resolution. In July 2021, the EPA approved modest changes to our labeling claims on packaging of existing water filtration products, which we implemented, and subsequently began shipping in limited quantities during the second quarter of fiscal 2022. The shipping volume for these products has continued to increase and, in September 2021, we returned to a more normalized level of shipping activity. In August 2021, the EPA approved changes to our air filtration packaging and we implemented a repackaging plan. We began shipping limited quantities of the impacted products at the end of August 2021 and returned to a more normalized level of shipping activity in November 2021. We have also resolved the majority of the packaging compliance concerns on the limited subset of humidifier products and do not expect them to have a material impact on our consolidated financial results. Our consolidated and Health & Home segment’s net sales revenue, gross profit and operating income for the nine months ended November 30, 2021, have been materially and adversely impacted by the stop shipment actions and the time needed to execute repackaging plans after changes were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of repackaging our existing inventory of affected products. If we are not able to execute our repackaging plans on schedule to meet demand, our net sales revenue, gross profit and operating income could continue to be materially and adversely impacted. At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
During the first quarter of fiscal 2022, we recorded a $13.1 million charge to cost of goods sold to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. During the second and third quarters of fiscal 2022, we incurred additional compliance costs of $3.0 million and $4.9 million, respectively, comprised of incremental warehouse storage costs and legal fees of $2.6 million and $4.6 million, respectively, which were recognized in SG&A, and storage and obsolete packaging charges from vendors of $0.4 million and $0.3 million, respectively, which were recognized in cost of goods sold. These charges are referred to throughout this Form 10-Q as “EPA compliance costs.” In addition, during the second and third quarters of fiscal 2022, we incurred and capitalized into inventory costs to repackage a portion of our existing inventory of the affected products and expect to continue to incur and capitalize such costs as we continue to repackage the remainder of the inventory during the fourth quarter of fiscal 2022. We also expect to incur additional compliance costs, which may include incremental freight, warehouse storage costs, charges from
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vendors, and legal fees, among other things. Such potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Health & Home segment’s gross profit and operating income. In addition, our net sales revenue could be materially and adversely impacted by customer returns, an increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our business, results of operations and financial condition could be adversely and materially impacted in ways that we are not able to predict today. 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” and to Part II, Item 1A., “Risk Factors” included within this Form 10-Q.
Note 9 - Long-Term Debt
A summary of our long-term debt follows:
| (in thousands) | November 30, 2021 | February 28, 2021 | |||||||||
Mississippi Business Finance Corporation Loan (the “MBFC Loan”) (1) | $ | 16,707 | $ | 18,607 | |||||||
| Credit Agreement (2) | 434,000 | 329,000 | |||||||||
| Subtotal | 450,707 | 347,607 | |||||||||
| Unamortized prepaid financing fees | (3,239) | (3,977) | |||||||||
| Total long-term debt | 447,468 | 343,630 | |||||||||
| Less: current maturities of long-term debt | (1,884) | (1,884) | |||||||||
| Long-term debt, excluding current maturities | $ | 445,584 | $ | 341,746 | |||||||
(1)The MBFC Loan is unsecured and bears floating interest based on either the London Interbank Offered Rate (“LIBOR”) plus a margin of up to 2.0%, or a Base Rate plus a margin of up to 1.0%, as determined by the interest rate elected and the Net Leverage Ratio defined in the loan agreement. The weighted average interest rate on borrowings outstanding was 1.1% at both November 30, 2021 and February 28, 2021.
(2)The Credit Agreement (defined below) is unsecured and bears floating interest at either the Base Rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0% for Base Rate and LIBOR borrowings, respectively. These floating interest rates are hedged with interest rate swaps to effectively fix interest rates on $225 million of the outstanding principal balance under the Credit Agreement (see Notes 10, 11, and 12 for additional information regarding interest rate swaps). The weighted average interest rate on borrowings outstanding was 1.1% at both November 30, 2021 and February 28, 2021.
Credit Agreement
We have a credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $1.25 billion. As of November 30, 2021, the balance of outstanding letters of credit was $32.7 million and the amount available for borrowings was $783.3 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of November 30, 2021, these covenants effectively limited our ability to incur more than $735.8 million of additional debt from all sources, including the Credit Agreement, or $783.3 million in the event a qualified acquisition is consummated.
Debt Covenants
As of November 30, 2021, we were in compliance with all covenants as defined under the terms of the Credit Agreement and our other debt agreements.
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Note 10 - 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.
Our financial assets and liabilities 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. The following tables present the carrying amount and fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis and classified as Level 2 as follows:
| Carrying Amount and Fair Value | |||||||||||
| (in thousands) | November 30, 2021 | February 28, 2021 | |||||||||
| Assets: | |||||||||||
| Cash equivalents (money market accounts) | $ | 791 | $ | 1,631 | |||||||
| Foreign currency derivatives | 3,448 | 33 | |||||||||
| Total assets | $ | 4,239 | $ | 1,664 | |||||||
| Liabilities: | |||||||||||
| Interest rate swaps | $ | 5,186 | $ | 9,941 | |||||||
| Foreign currency derivatives | 658 | 6,550 | |||||||||
| Total liabilities | $ | 5,844 | $ | 16,491 | |||||||
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 debt approximates its fair value.
We use derivatives to manage our exposure to changes in foreign currency exchange rates, which can include foreign currency forward contracts, zero cost collars and cross-currency debt swaps. In addition, we use interest rate swaps to manage our exposure to changes in interest rates. All of our derivative assets and liabilities are recorded at fair value. See Notes 11 and 12 for more information on our derivatives.
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Note 11 - 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, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. For both the three and nine month periods ended November 30, 2021, approximately 10% of our net sales revenue was denominated in foreign currencies, compared to 11% and 12%, respectively, for the same periods last year. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. We make most of our inventory purchases from vendors in the Asia Pacific market 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 taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines, and all other foreign currency exchange rate gains and losses are recognized in SG&A. During the three and nine month periods ended November 30, 2021, we recorded foreign currency exchange rate net losses of $0.3 million and $0.8 million, respectively, in SG&A compared to foreign currency exchange rate net gains of $0.4 million and $0.5 million, respectively, for the same periods last year.
We mitigate certain foreign currency exchange rate risk by using a series of foreign currency contracts, which can include forward contracts and zero-cost collars, designated as cash flow hedges, and mark-to-market cross-currency debt swaps to protect against the foreign currency exchange rate risk inherent in our forecasted transactions denominated in foreign currencies. We do not enter into any derivatives or similar instruments for trading or other speculative purposes. Our foreign currency contracts are designated as cash flow hedges 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. Derivatives for which we have not elected hedge accounting consist of our cross-currency debt swaps, and any changes in the fair value of the derivatives are recorded in our condensed consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any period presented, is immediately recognized in our condensed consolidated statements of income.
Interest Rate Risk
Interest on our outstanding debt as of November 30, 2021 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 $225.0 million of the outstanding principal balance under the Credit Agreement, which totaled $434.0 million as of November 30, 2021. 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. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any period presented, is immediately recognized in our condensed consolidated statements of income.
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The following tables summarize the fair values of our derivative instruments as of the end of the periods presented:
| (in thousands) | November 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
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 | 2/2023 | € | 30,500 | $ | 1,494 | $ | 157 | $ | — | $ | — | |||||||||||||||||||||||||||||
| Forward contracts - sell Canadian Dollars | Cash flow | 2/2023 | $ | 34,700 | 344 | 148 | — | — | |||||||||||||||||||||||||||||||||
| Forward contracts - sell Pounds | Cash flow | 2/2023 | £ | 28,250 | 953 | 352 | — | — | |||||||||||||||||||||||||||||||||
| Interest rate swaps | Cash flow | 1/2024 | $ | 225,000 | — | — | 2,411 | 2,775 | |||||||||||||||||||||||||||||||||
| Subtotal | 2,791 | 657 | 2,411 | 2,775 | |||||||||||||||||||||||||||||||||||||
| Derivatives not designated under hedge accounting | |||||||||||||||||||||||||||||||||||||||||
| Cross-currency debt swaps - Euro | (1) | 4/2022 | € | 6,000 | — | — | 272 | — | |||||||||||||||||||||||||||||||||
| Cross-currency debt swaps - Pounds | (1) | 4/2022 | £ | 4,500 | — | — | 386 | — | |||||||||||||||||||||||||||||||||
| Subtotal | — | — | 658 | — | |||||||||||||||||||||||||||||||||||||
| Total fair value | $ | 2,791 | $ | 657 | $ | 3,069 | $ | 2,775 | |||||||||||||||||||||||||||||||||
| (in thousands) | February 28, 2021 | ||||||||||||||||||||||||||||||||||||||||
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 | 2/2022 | € | 39,000 | $ | — | $ | — | $ | 1,851 | $ | — | |||||||||||||||||||||||||||||
| Forward contracts - sell Canadian Dollars | Cash flow | 2/2023 | $ | 34,000 | — | 33 | 1,061 | — | |||||||||||||||||||||||||||||||||
| Forward contracts - sell Pounds | Cash flow | 2/2023 | £ | 34,500 | — | — | 2,026 | 21 | |||||||||||||||||||||||||||||||||
| Forward contracts - sell Australian Dollars | Cash flow | 11/2021 | A$ | 4,000 | — | — | 18 | — | |||||||||||||||||||||||||||||||||
| Interest rate swaps | Cash flow | 1/2024 | $ | 225,000 | — | — | 4,407 | 5,534 | |||||||||||||||||||||||||||||||||
| Subtotal | — | 33 | 9,363 | 5,555 | |||||||||||||||||||||||||||||||||||||
| Derivatives not designated under hedge accounting | |||||||||||||||||||||||||||||||||||||||||
| Cross-currency debt swaps - Euro | (1) | 4/2022 | € | 6,000 | — | — | — | 817 | |||||||||||||||||||||||||||||||||
| Cross-currency debt swaps - Pounds | (1) | 4/2022 | £ | 4,500 | — | — | — | 756 | |||||||||||||||||||||||||||||||||
| Subtotal | — | — | — | 1,573 | |||||||||||||||||||||||||||||||||||||
| Total fair value | $ | — | $ | 33 | $ | 9,363 | $ | 7,128 | |||||||||||||||||||||||||||||||||
(1)These cross-currency debt swaps, for which we have not elected hedge accounting, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements.
The pre-tax effects of derivative instruments designated as cash flow hedges were as follows for the periods presented:
| Three Months Ended November 30, | |||||||||||||||||
| Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||
| (in thousands) | 2021 | Location | 2021 | ||||||||||||||
| Foreign currency contracts - cash flow hedges | $ | 3,686 | Sales revenue, net | $ | (354) | ||||||||||||
| Interest rate swaps - cash flow hedges | 1,045 | Interest expense | (1,300) | ||||||||||||||
| Total | $ | 4,731 | $ | (1,654) | |||||||||||||
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| Three Months Ended November 30, | |||||||||||||||||
| Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||
| (in thousands) | 2020 | Location | 2020 | ||||||||||||||
| Foreign currency contracts - cash flow hedges | $ | 452 | SG&A | $ | (549) | ||||||||||||
| Interest rate swaps - cash flow hedges | 250 | Interest expense | (1,289) | ||||||||||||||
| Total | $ | 702 | $ | (1,838) | |||||||||||||
| Nine Months Ended November 30, | |||||||||||||||||
| Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||
| (in thousands) | 2021 | Location | 2021 | ||||||||||||||
| Foreign currency contracts - cash flow hedges | $ | 5,951 | Sales revenue, net | $ | (2,441) | ||||||||||||
| Interest rate swaps - cash flow hedges | 821 | Interest expense | (3,934) | ||||||||||||||
| Total | $ | 6,772 | $ | (6,375) | |||||||||||||
| Nine Months Ended November 30, | |||||||||||||||||
| Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||
| (in thousands) | 2020 | Location | 2020 | ||||||||||||||
| Foreign currency contracts - cash flow hedges | $ | (5,405) | SG&A | $ | 124 | ||||||||||||
| Interest rate swaps - cash flow hedges | (4,132) | Interest expense | (3,222) | ||||||||||||||
| Total | $ | (9,537) | $ | (3,098) | |||||||||||||
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 November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||||||||
| (in thousands) | Location | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
| Cross-currency debt swaps - principal | SG&A | $ | 575 | $ | 23 | $ | 915 | $ | (1,075) | ||||||||||||||||||||
| Cross-currency debt swaps - interest | Interest expense | (1) | (2) | (3) | 72 | ||||||||||||||||||||||||
| Total | $ | 574 | $ | 21 | $ | 912 | $ | (1,003) | |||||||||||||||||||||
We expect a net gain of $0.4 million associated with foreign currency contracts and interest rate swaps currently reported 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 10 and 12 to these condensed consolidated financial statements for more information.
Counterparty Credit Risk
Financial instruments, including foreign currency contracts, cross-currency debt swaps 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
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institutions with significant experience using such derivative instruments. We believe that the risk of incurring credit losses is remote.
Note 12 - 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 29, 2020 | $ | (8,199) | $ | 1,194 | $ | (7,005) | |||||||||||
| Other comprehensive loss before reclassification | (4,132) | (5,405) | (9,537) | ||||||||||||||
| Amounts reclassified out of AOCI | 3,222 | (124) | 3,098 | ||||||||||||||
| Tax effects | 214 | 945 | 1,159 | ||||||||||||||
| Other comprehensive loss | (696) | (4,584) | (5,280) | ||||||||||||||
| Balance at November 30, 2020 | $ | (8,895) | $ | (3,390) | $ | (12,285) | |||||||||||
| Balance at February 28, 2021 | $ | (7,576) | $ | (4,080) | $ | (11,656) | |||||||||||
| Other comprehensive income before reclassification | 821 | 5,951 | 6,772 | ||||||||||||||
| Amounts reclassified out of AOCI | 3,934 | 2,441 | 6,375 | ||||||||||||||
| Tax effects | (1,132) | (1,425) | (2,557) | ||||||||||||||
| Other comprehensive income | 3,623 | 6,967 | 10,590 | ||||||||||||||
| Balance at November 30, 2021 | $ | (3,953) | $ | 2,887 | $ | (1,066) | |||||||||||
See Notes 9, 10 and 11 to these condensed consolidated financial statements for additional information regarding our cash flow hedges.
Note 13 - Segment Information
The following tables summarize segment information for the periods presented:
| Three Months Ended November 30, 2021 | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
| Sales revenue, net | $ | 246,135 | $ | 203,900 | $ | 174,849 | $ | 624,884 | |||||||||||||||
| Restructuring charges | — | — | 5 | 5 | |||||||||||||||||||
| Operating income | 43,239 | 13,573 | 33,228 | 90,040 | |||||||||||||||||||
| Capital and intangible asset expenditures | 16,159 | 633 | 783 | 17,575 | |||||||||||||||||||
| Depreciation and amortization | 2,894 | 2,529 | 3,218 | 8,641 | |||||||||||||||||||
| Three Months Ended November 30, 2020 | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
| Sales revenue, net | $ | 222,400 | $ | 250,158 | $ | 165,179 | $ | 637,737 | |||||||||||||||
| Restructuring charges | (12) | — | — | (12) | |||||||||||||||||||
| Operating income | 37,658 | 30,478 | 32,573 | 100,709 | |||||||||||||||||||
| Capital and intangible asset expenditures | 1,375 | 2,441 | 370 | 4,186 | |||||||||||||||||||
| Depreciation and amortization | 2,371 | 4,106 | 3,042 | 9,519 | |||||||||||||||||||
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| Nine Months Ended November 30, 2021 | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
| Sales revenue, net | $ | 654,997 | $ | 549,475 | $ | 436,863 | $ | 1,641,335 | |||||||||||||||
| Restructuring charges | 369 | — | 11 | 380 | |||||||||||||||||||
| Operating income | 112,303 | 29,616 | 80,247 | 222,166 | |||||||||||||||||||
| Capital and intangible asset expenditures | 36,196 | 3,613 | 1,720 | 41,529 | |||||||||||||||||||
| Depreciation and amortization | 8,257 | 7,879 | 9,946 | 26,082 | |||||||||||||||||||
| Nine Months Ended November 30, 2020 | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
| Sales revenue, net | $ | 564,891 | $ | 661,568 | $ | 362,965 | $ | 1,589,424 | |||||||||||||||
| Restructuring charges | 251 | — | 104 | 355 | |||||||||||||||||||
| Operating income | 106,294 | 95,782 | 54,887 | 256,963 | |||||||||||||||||||
| Capital and intangible asset expenditures | 6,912 | 10,346 | 2,165 | 19,423 | |||||||||||||||||||
| Depreciation and amortization | 6,743 | 12,331 | 8,921 | 27,995 | |||||||||||||||||||
Note 14 - 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.
On March 11, 2021, the American Rescue Plan Act (the “ARP”) was enacted and signed into law. The ARP is an economic stimulus package in response to the COVID-19 outbreak which contains tax provisions that did not have a material impact to our condensed consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.
Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.
For the three months ended November 30, 2021, income tax expense as a percentage of income before income tax was 12.9% compared to 14.0% for the same period last year. The year-over-year decrease in the effective tax rate is primarily due to increases in liabilities related to uncertain tax positions in the prior
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year period, partially offset by shifts in the mix of income in our various tax jurisdictions. For the nine months ended November 30, 2021, income tax expense as a percentage of income before income tax was 13.6% compared to 6.5% for the same period last year, primarily due to the mix of income in our various tax jurisdictions and the benefit of the CARES Act in fiscal 2021, partially offset by the favorable comparative impact of increases in liabilities related to uncertain tax positions in the prior year period.
Note 15 - 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 5 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 November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Weighted average shares outstanding, basic | 24,129 | 24,965 | 24,193 | 25,182 | |||||||||||||||||||
| Incremental shares from share-based compensation arrangements | 270 | 227 | 268 | 168 | |||||||||||||||||||
| Weighted average shares outstanding, diluted | 24,399 | 25,192 | 24,461 | 25,350 | |||||||||||||||||||
| Anti-dilutive securities | 20 | 4 | 16 | 149 | |||||||||||||||||||
Note 16 - Subsequent Events
On December 29, 2021, we completed the acquisition of Osprey Packs, Inc., a longtime U.S. leader in technical and everyday packs. The total purchase consideration, net of cash acquired, was $414.7 million in cash, including the impact of a $5.3 million favorable customary closing net working capital adjustment. The acquisition was funded with cash on hand and a $435.0 million borrowing under our existing revolving credit facility. After giving effect to the borrowing, as of December 29, 2021, the remaining amount available for borrowings under our Credit Agreement was $351.8 million. The initial accounting for this business combination is in process. We incurred acquisition-related expenses of $1.6 million during the third quarter of fiscal 2022, which were recognized in SG&A within our condensed consolidated statements of income.
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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 Part II, Item 1A.,“Risk Factors,” and 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 II, Item IA., “Risk Factors” in the Company’s most recent annual report on Form 10-K for the fiscal year ended February 28, 2021 (“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. Throughout this MD&A, we refer to our Leadership Brands, which are brands that have number-one and number-two positions in their respective categories and include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools and Drybar.
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 acquisition-related expenses, EPA compliance costs, restructuring charges, tax reform, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The tables reconcile these measures to their corresponding GAAP-based 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 are incurred, even though such charges and benefits may be incurred and reflected in our GAAP financial results in the near future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of our activities. Our adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS are not prepared in accordance with GAAP, are not an alternative to GAAP financial information and may be calculated differently than non-GAAP financial information disclosed by other companies. Accordingly, undue reliance should not be placed on non-GAAP information. These non-GAAP measures are discussed further and reconciled to their applicable GAAP-based measures contained in this MD&A beginning on page 37.
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. We have built leading market positions through new product innovation, product quality and competitive pricing. We currently operate in three segments consisting of Housewares, Health & Home, and Beauty.
In fiscal 2015, we launched a five-year transformational strategy designed to improve the performance of our business segments and strengthen our shared service capabilities. Fiscal 2019 marked the completion of Phase I of our multi-year transformation strategy, which delivered performance across a wide range of measures. We improved organic sales growth by focusing on our Leadership Brands, made strategic acquisitions, became a more efficient operating company with strong global shared services, upgraded our organization and culture, improved inventory turns and return on invested capital, and returned capital to shareholders.
Fiscal 2020 began Phase II of our transformation, which is designed to drive the next five years of progress. The long-term objectives of Phase II include improved organic sales growth, continued margin expansion, and strategic and effective capital deployment. Phase II includes continued investment in our Leadership Brands, with a focus on growing them through consumer-centric innovation, expanding them more aggressively outside the United States of America (the “U.S.”), and adding new brands through acquisition. We are building further shared service capability and operating efficiency, as well as focusing on attracting, retaining, unifying and training the best people. Additionally, we are enhancing and consolidating our environmental, social and governance efforts and accelerating programs related to diversity, equity and inclusion to support our Phase II transformation.
In fiscal 2018, we announced a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance primarily in the Beauty and former Nutritional Supplements segments. Project Refuel includes charges for a reduction-in-force and the elimination of certain contracts. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $10.5 million to $12.5 million over the duration of the plan. We estimate the plan to be completed during fiscal 2022 and expect to incur total restructuring charges of approximately $10.3 million over the duration of the plan, of which $9.6 million have been incurred through the third quarter of fiscal 2022. See Note 7 to the accompanying condensed consolidated financial statements for additional information.
Consistent with our strategy of focusing resources on our Leadership Brands, during the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Beauty segment's mass channel personal care business, which included liquid, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium (“Personal Care”). On June 7, 2021, we completed the sale of our Personal Care business, not including the Latin America and Caribbean regions, to HRB Brands LLC, for $44.7 million in cash. The net assets sold included intangible assets, inventory, certain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our North America Personal Care business. During the second quarter of fiscal 2022, we recognized a gain on the sale in selling, general and administrative expense (“SG&A”) totaling $0.5 million. We are continuing to negotiate the sale of the Latin America and Caribbean Personal Care businesses to HRB Brands LLC, which we expect to close no later than the end of fiscal 2022. Accordingly, we have continued to classify the identified net assets of the Latin America and Caribbean Personal Care businesses as held for sale. See Note 3 to the accompanying condensed consolidated financial statements for additional information.
Subsequent to the end of our third quarter, on December 29, 2021, we completed the acquisition of Osprey Packs, Inc. (“Osprey”), a longtime U.S. leader in technical and everyday packs. The total
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purchase consideration, net of cash acquired, was $414.7 million in cash, including the impact of a $5.3 million favorable customary closing net working capital adjustment. The acquisition was funded with cash on hand and borrowings from our existing revolving credit facility. We incurred acquisition-related expenses of $1.6 million during the third quarter of fiscal 2022, which were recognized in SG&A within our condensed consolidated statements of income.
Significant Trends Impacting the Business
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) to be a pandemic. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores, or limited hours of operation, and materially lower store traffic, primarily during fiscal 2021. Additionally, COVID-19 has disrupted certain parts of our supply chain. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in higher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill some orders on a timely basis. Additionally, the extent of COVID-19’s impact on the demand for certain of our product lines in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to source and distribute our products, as well as any future government actions affecting consumers and the global economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Future developments are outside of our control, are highly uncertain and cannot be predicted. If the COVID-19 impact or potential economic downturn is prolonged, then it can further increase the difficulty of planning for operations. These and other potential impacts of the current public health crisis could therefore materially and adversely affect our business, financial condition, cash flows and results of operations.
Global Supply Chain and Cost Inflation Trends
Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have continued to strain the global supply chain network, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times. Demand for Chinese imports has caused shipment receiving and unloading backlogs at many U.S. ports that have been unable to keep pace with unprecedented inbound container volume. The situation has been further exacerbated by COVID-19 illness and protocols at many port locations. Due to the backlog and increasing trade imbalance with China, many shipping containers are not being sent back to China, or are being sent to China empty. With continued increases in demand for containers, limited supply and freight vendors bearing the cost of shipping empty containers, the market cost of inbound freight has increased by several multiples compared to calendar year 2020 averages. In addition to increasing cost trends, our third party manufacturing partners are not equipped to hold meaningful amounts of inventory and if shipping container capacity remains limited or unavailable, they could pause manufacturing, which could ultimately impact our ability to meet consumer demand on a timely basis. Demand for raw materials, components and semiconductor chips impacted by the supply chain challenges described above have created surges in prices and shortages of these materials may become more significant which could further increase our costs. Further, in the U.S., the surge in demand along with COVID-19 related government stimulus and rising hourly labor wages, have created labor shortages and higher labor costs. The majority of our hourly labor is employed in our distribution centers and these factors may increase our costs and negatively impact our ability to attract and retain qualified associates.
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EPA Compliance Costs
Some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “EPA”), U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
In our quarterly report on Form 10-Q for our first quarter of fiscal 2022, we disclosed that we were in discussions with 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 Health & Home 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, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. as we worked with the EPA towards an expedient resolution. In July 2021, the EPA approved modest changes to our labeling claims on packaging of existing water filtration products, which we implemented, and subsequently began shipping in limited quantities during the second quarter of fiscal 2022. The shipping volume for these products has continued to increase and, in September 2021, we returned to a more normalized level of shipping activity. In August 2021, the EPA approved changes to our air filtration packaging and we implemented a repackaging plan. We began shipping limited quantities of the impacted products at the end of August 2021 and returned to a more normalized level of shipping activity in November 2021. We have also resolved the majority of the packaging compliance concerns on the limited subset of humidifier products and do not expect them to have a material impact on our consolidated financial results. Our consolidated and Health & Home segment’s net sales revenue, gross profit and operating income for the nine months ended November 30, 2021, have been materially and adversely impacted by the stop shipment actions and the time needed to execute repackaging plans after changes were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of executing our repackaging plans. If we are not able to execute our repackaging plans on schedule to meet demand, our net sales revenue, gross profit and operating income could continue to be materially and adversely impacted. The extent to which net sales revenue, gross profit and operating income could be impacted will primarily depend on product demand and the duration of time required to repackage the affected inventory. In addition, our net sales revenue could be materially and adversely impacted by customer returns, an increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers.
During the first quarter of fiscal 2022, we recorded a $13.1 million charge to cost of goods sold to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. During the second and third quarters of fiscal 2022, we incurred additional compliance costs of $3.0 million and $4.9 million, respectively, comprised of incremental warehouse storage costs and legal fees of $2.6 million and $4.6 million, respectively, which were recognized in SG&A, and storage and obsolete packaging charges from vendors of $0.4 million and $0.3 million, respectively, which were recognized in cost of goods sold. These charges are referred to throughout this Form 10-Q as “EPA compliance costs.” In addition, during the second and third quarters of fiscal 2022, we incurred and capitalized into inventory costs to repackage a portion of our existing inventory of the affected products and expect to continue to incur and capitalize such costs as we continue to repackage the remainder of the inventory during the fourth quarter of fiscal 2022. We also expect to incur additional compliance costs, which may include incremental freight, warehouse storage costs, charges from vendors, and legal fees, among other things. Such potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Heath & Home segment's gross profit and operating income. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our business, results of operations and financial condition could be adversely and materially impacted in ways that we are not able to predict today.
At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
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See Note 8 to our condensed consolidated financial statements for additional information and Part II, Item 1A., “Risk Factors” in this Form 10-Q for additional information on our related material risks.
Potential Impact of Tariffs
Since 2019, the Office of the U.S. Trade Representative (“USTR”) has imposed, and in certain cases subsequently reduced or removed, additional tariffs on products imported from China. We purchase a high concentration of our products from unaffiliated manufacturers located in China. This concentration exposes us to risks associated with doing business globally, including changes in tariffs. Any alteration of trade agreements and terms between China and the U.S., including limiting trade with China, imposing additional tariffs on imports from China and potentially imposing other restrictions on exports from China to the U.S. may result in further and/or higher tariffs or retaliatory trade measures by China. Furthermore, in certain cases, we have been successful in obtaining tariff exclusions from the USTR on certain products that we import. These exclusions generally expire after a designated period of time. In the case that a tariff exclusion is not granted or extended, higher tariffs would be assessed on the related products.
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, certain inventory purchases and operating expenses. The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso.
For the three months ended November 30, 2021, changes in foreign currency exchange rates had a favorable year-over-year impact on consolidated U.S. Dollar reported net sales revenue of approximately $1.2 million, or 0.2%, compared to $1.7 million, or 0.4% for the same period last year. For the nine months ended November 30, 2021, changes in foreign currency exchange rates had a favorable year-over-year impact on consolidated U.S. Dollar reported net sales revenue of approximately $8.8 million, or 0.6%, compared to an unfavorable impact of $3.2 million, or 0.3% for the same period last year.
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 79% and 80% of our consolidated net sales revenue was from U.S. shipments during the three month periods ended November 30, 2021 and 2020, respectively. For the nine month periods ended November 30, 2021 and 2020, U.S. shipments were approximately 77% and 79% of our consolidated net sales revenue.
Our concentration of sales reflects the evolution of consumer shopping preferences to online or multichannel shopping experiences. Our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 23% and 22% of our total consolidated net sales revenue for the three and nine month periods ended November 30, 2021, respectively, and both declined approximately 7%, compared to the same periods in the prior year.
For the three and nine month periods ended November 30, 2020, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 24% and 25%, respectively, of our total consolidated net sales revenue, and grew approximately 34% and 33%, respectively, compared to the same periods in the prior year.
With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution
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capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. The 2020-2021 cough/cold/flu season experienced historically low incidence levels due to COVID-19 prevention measures including mask-wearing, remote learning, work from home, and reduced travel, brick and mortar shopping, and group gatherings. For the 2019-2020 season, cough/cold/flu incidence was slightly higher than the 2018-2019 season, which was a below average season.
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RESULTS OF OPERATIONS
The following tables provide 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 November 30, | % of Sales Revenue, net | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | % Change | 2021 | 2020 | |||||||||||||||||||||||||||||
| Sales revenue by segment, net | |||||||||||||||||||||||||||||||||||
| Housewares | $ | 246,135 | $ | 222,400 | $ | 23,735 | 10.7 | % | 39.4 | % | 34.9 | % | |||||||||||||||||||||||
| Health & Home | 203,900 | 250,158 | (46,258) | (18.5) | % | 32.6 | % | 39.2 | % | ||||||||||||||||||||||||||
| Beauty | 174,849 | 165,179 | 9,670 | 5.9 | % | 28.0 | % | 25.9 | % | ||||||||||||||||||||||||||
| Total sales revenue, net | 624,884 | 637,737 | (12,853) | (2.0) | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||
| Cost of goods sold | 351,051 | 350,410 | 641 | 0.2 | % | 56.2 | % | 54.9 | % | ||||||||||||||||||||||||||
| Gross profit | 273,833 | 287,327 | (13,494) | (4.7) | % | 43.8 | % | 45.1 | % | ||||||||||||||||||||||||||
SG&A | 183,788 | 186,630 | (2,842) | (1.5) | % | 29.4 | % | 29.3 | % | ||||||||||||||||||||||||||
| Restructuring charges | 5 | (12) | 17 | * | — | % | — | % | |||||||||||||||||||||||||||
| Operating income | 90,040 | 100,709 | (10,669) | (10.6) | % | 14.4 | % | 15.8 | % | ||||||||||||||||||||||||||
| Non-operating income, net | 52 | 93 | (41) | (44.1) | % | — | % | — | % | ||||||||||||||||||||||||||
| Interest expense | 3,206 | 2,926 | 280 | 9.6 | % | 0.5 | % | 0.5 | % | ||||||||||||||||||||||||||
| Income before income tax | 86,886 | 97,876 | (10,990) | (11.2) | % | 13.9 | % | 15.3 | % | ||||||||||||||||||||||||||
| Income tax expense | 11,203 | 13,721 | (2,518) | (18.4) | % | 1.8 | % | 2.2 | % | ||||||||||||||||||||||||||
| Net income | $ | 75,683 | $ | 84,155 | $ | (8,472) | (10.1) | % | 12.1 | % | 13.2 | % | |||||||||||||||||||||||
| Nine Months Ended November 30, | % of Sales Revenue, net | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | % Change | 2021 | 2020 | |||||||||||||||||||||||||||||
| Sales revenue by segment, net | |||||||||||||||||||||||||||||||||||
| Housewares | $ | 654,997 | $ | 564,891 | $ | 90,106 | 16.0 | % | 39.9 | % | 35.5 | % | |||||||||||||||||||||||
| Health & Home | 549,475 | 661,568 | (112,093) | (16.9) | % | 33.5 | % | 41.6 | % | ||||||||||||||||||||||||||
| Beauty | 436,863 | 362,965 | 73,898 | 20.4 | % | 26.6 | % | 22.8 | % | ||||||||||||||||||||||||||
| Total sales revenue, net | 1,641,335 | 1,589,424 | 51,911 | 3.3 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||
| Cost of goods sold | 936,322 | 892,460 | 43,862 | 4.9 | % | 57.0 | % | 56.1 | % | ||||||||||||||||||||||||||
| Gross profit | 705,013 | 696,964 | 8,049 | 1.2 | % | 43.0 | % | 43.9 | % | ||||||||||||||||||||||||||
SG&A | 482,467 | 439,646 | 42,821 | 9.7 | % | 29.4 | % | 27.7 | % | ||||||||||||||||||||||||||
| Restructuring charges | 380 | 355 | 25 | 7.0 | % | — | % | — | % | ||||||||||||||||||||||||||
| Operating income | 222,166 | 256,963 | (34,797) | (13.5) | % | 13.5 | % | 16.2 | % | ||||||||||||||||||||||||||
| Non-operating income, net | 185 | 440 | (255) | (58.0) | % | — | % | — | % | ||||||||||||||||||||||||||
| Interest expense | 9,508 | 9,568 | (60) | (0.6) | % | 0.6 | % | 0.6 | % | ||||||||||||||||||||||||||
| Income before income tax | 212,843 | 247,835 | (34,992) | (14.1) | % | 13.0 | % | 15.6 | % | ||||||||||||||||||||||||||
| Income tax expense | 28,873 | 16,061 | 12,812 | 79.8 | % | 1.8 | % | 1.0 | % | ||||||||||||||||||||||||||
| Net income | $ | 183,970 | $ | 231,774 | $ | (47,804) | (20.6) | % | 11.2 | % | 14.6 | % | |||||||||||||||||||||||
* Calculation is not meaningful.
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Third Quarter Fiscal 2022 Financial Results
•Consolidated net sales revenue decreased 2.0%, or $12.9 million, to $624.9 million for the three months ended November 30, 2021, compared to $637.7 million for the same period last year.
•Consolidated operating income decreased 10.6%, or $10.7 million, to $90.0 million for the three months ended November 30, 2021, compared to $100.7 million for the same period last year. Consolidated operating margin decreased 1.4 percentage points to 14.4% of consolidated net sales revenue for the three months ended November 30, 2021, compared to 15.8% for the same period last year.
•Consolidated adjusted operating income decreased 5.2%, or $5.8 million, to $106.1 million for the three months ended November 30, 2021, compared to $111.9 million for the same period last year. Consolidated adjusted operating margin decreased 0.6 percentage points to 17.0% of consolidated net sales revenue for the three months ended November 30, 2021, compared to 17.6% for the same period last year.
•Net income decreased 10.1%, or $8.5 million, to $75.7 million for the three months ended November 30, 2021, compared to $84.2 million for the same period last year. Diluted EPS decreased 7.2% to $3.10 for the three months ended November 30, 2021, compared to $3.34 for the same period last year.
•Adjusted income decreased 4.4%, or $4.1 million, to $90.6 million for the three months ended November 30, 2021, compared to $94.8 million for the same period last year. Adjusted diluted EPS decreased 1.1% to $3.72 for the three months ended November 30, 2021, compared to $3.76 for the same period last year.
Year-To-Date Fiscal 2022 Financial Results
•Consolidated net sales revenue increased 3.3%, or $51.9 million, to $1,641.3 million for the nine months ended November 30, 2021, compared to $1,589.4 million for the same period last year.
•Consolidated operating income decreased 13.5%, or $34.8 million, to $222.2 million for the nine months ended November 30, 2021, compared to $257.0 million for the same period last year. Consolidated operating margin decreased 2.7 percentage points to 13.5% of consolidated net sales revenue for the nine months ended November 30, 2021, compared to 16.2% for the same period last year.
•Consolidated adjusted operating income decreased 3.1%, or $9.0 million, to $282.5 million for the nine months ended November 30, 2021, compared to $291.5 million for the same period last year. Consolidated adjusted operating margin decreased 1.1 percentage points to 17.2% of consolidated net sales revenue for the nine months ended November 30, 2021, compared to 18.3% for the same period last year.
•Net income decreased 20.6%, or $47.8 million, to $184.0 million for the nine months ended November 30, 2021, compared to $231.8 million for the same period last year. Diluted EPS decreased 17.7% to $7.52 for the nine months ended November 30, 2021, compared to $9.14 for the same period last year.
•Adjusted income decreased 5.5%, or $14.0 million, to $240.9 million for the nine months ended November 30, 2021, compared to $254.9 million for the same period last year. Adjusted diluted
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EPS decreased 2.0% to $9.85 for the nine months ended November 30, 2021, compared to $10.05 for the same period last year.
Consolidated and Segment Net Sales Revenue
The following tables summarize the impact that Organic business and foreign currency had on our net sales revenue by segment:
| Three Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 222,400 | $ | 250,158 | $ | 165,179 | $ | 637,737 | |||||||||||||||
| Organic business | 23,601 | (46,595) | 8,943 | (14,051) | |||||||||||||||||||
| Impact of foreign currency | 134 | 337 | 727 | 1,198 | |||||||||||||||||||
| Change in sales revenue, net | 23,735 | (46,258) | 9,670 | (12,853) | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 246,135 | $ | 203,900 | $ | 174,849 | $ | 624,884 | |||||||||||||||
| Total net sales revenue growth (decline) | 10.7 | % | (18.5) | % | 5.9 | % | (2.0) | % | |||||||||||||||
| Organic business | 10.6 | % | (18.6) | % | 5.4 | % | (2.2) | % | |||||||||||||||
| Impact of foreign currency | 0.1 | % | 0.1 | % | 0.4 | % | 0.2 | % | |||||||||||||||
| Nine Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 564,891 | $ | 661,568 | $ | 362,965 | $ | 1,589,424 | |||||||||||||||
| Organic business | 88,812 | (116,302) | 70,640 | 43,150 | |||||||||||||||||||
| Impact of foreign currency | 1,294 | 4,209 | 3,258 | 8,761 | |||||||||||||||||||
| Change in sales revenue, net | 90,106 | (112,093) | 73,898 | 51,911 | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 654,997 | $ | 549,475 | $ | 436,863 | $ | 1,641,335 | |||||||||||||||
| Total net sales revenue growth (decline) | 16.0 | % | (16.9) | % | 20.4 | % | 3.3 | % | |||||||||||||||
| Organic business | 15.7 | % | (17.6) | % | 19.5 | % | 2.7 | % | |||||||||||||||
| Impact of foreign currency | 0.2 | % | 0.6 | % | 0.9 | % | 0.6 | % | |||||||||||||||
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.
We define Core business as strategic business that we expect to be an ongoing part of our operations, and Non-Core business as business or net assets (including net assets held for sale) that we expect to divest within a year of its designation as Non-Core. During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care business. As a result, sales from our Personal Care business are included in Non-Core business for all periods presented. On June 7, 2021, we completed the sale of our North America Personal Care business. Sales from our Latin America and Caribbean Personal Care businesses continue to be included in Non-Core business for all periods presented as the related net assets continue to be classified as held for sale.
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The following tables summarize the impact that Core business and Non-Core (Personal Care) business had on our net sales revenue by segment:
| Three Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 222,400 | $ | 250,158 | $ | 165,179 | $ | 637,737 | |||||||||||||||
| Core business | 23,735 | (46,258) | 25,266 | 2,743 | |||||||||||||||||||
| Non-Core business (Personal Care) | — | — | (15,596) | (15,596) | |||||||||||||||||||
| Change in sales revenue, net | 23,735 | (46,258) | 9,670 | (12,853) | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 246,135 | $ | 203,900 | $ | 174,849 | $ | 624,884 | |||||||||||||||
| Total net sales revenue growth (decline) | 10.7 | % | (18.5) | % | 5.9 | % | (2.0) | % | |||||||||||||||
| Core business | 10.7 | % | (18.5) | % | 15.3 | % | 0.4 | % | |||||||||||||||
| Non-Core business (Personal Care) | — | % | — | % | (9.4) | % | (2.4) | % | |||||||||||||||
| Nine Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 564,891 | $ | 661,568 | $ | 362,965 | $ | 1,589,424 | |||||||||||||||
| Core business | 90,106 | (112,093) | 106,090 | 84,103 | |||||||||||||||||||
| Non-Core business (Personal Care) | — | — | (32,192) | (32,192) | |||||||||||||||||||
| Change in sales revenue, net | 90,106 | (112,093) | 73,898 | 51,911 | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 654,997 | $ | 549,475 | $ | 436,863 | $ | 1,641,335 | |||||||||||||||
| Total net sales revenue growth (decline) | 16.0 | % | (16.9) | % | 20.4 | % | 3.3 | % | |||||||||||||||
| Core business | 16.0 | % | (16.9) | % | 29.2 | % | 5.3 | % | |||||||||||||||
| Non-Core business (Personal Care) | — | % | — | % | (8.9) | % | (2.0) | % | |||||||||||||||
Leadership Brand and Other Net Sales Revenue
The following tables summarize our Leadership Brand and other net sales revenue:
| Three Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| Leadership Brand sales revenue, net | $ | 506,982 | $ | 508,210 | $ | (1,228) | (0.2) | % | |||||||||||||||
| All other sales revenue, net | 117,902 | 129,527 | (11,625) | (9.0) | % | ||||||||||||||||||
| Total sales revenue, net | $ | 624,884 | $ | 637,737 | $ | (12,853) | (2.0) | % | |||||||||||||||
| Nine Months Ended November 30, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| Leadership Brand sales revenue, net | $ | 1,329,858 | $ | 1,288,614 | $ | 41,244 | 3.2 | % | |||||||||||||||
| All other sales revenue, net | 311,477 | 300,810 | 10,667 | 3.5 | % | ||||||||||||||||||
| Total sales revenue, net | $ | 1,641,335 | $ | 1,589,424 | $ | 51,911 | 3.3 | % | |||||||||||||||
Consolidated Net Sales Revenue
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Consolidated net sales revenue decreased $12.9 million, or 2.0%, to $624.9 million, compared to $637.7 million. The decline was driven by a decrease from Organic business of $14.1 million, or 2.2%, primarily due to:
•a decrease in sales in our Health & Home segment as a result of the EPA packaging compliance matter and related stop shipment actions and stronger COVID-19 driven demand for healthcare
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and healthy living products, primarily in thermometry and air filtration, in the comparative prior year period; and
•a net sales revenue decline in Non-Core business primarily due to the sale of our North America Personal Care business during the second quarter of fiscal 2022.
These factors were partially offset by:
•higher brick and mortar and online channel sales in our Beauty and Housewares segments due primarily to strong consumer demand, earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season and the favorable comparative impact of COVID-19 reduced store traffic and a soft back to school season in the prior year period;
•the impact of customer price increases related to rising freight and product costs; and
•higher sales in the club and closeout channels.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $1.2 million, or 0.2%.
Net sales revenue from our Leadership Brands was $507.0 million, compared to $508.2 million for the same period last year, representing a decline of 0.2%.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Consolidated net sales revenue increased $51.9 million, or 3.3%, to $1,641.3 million, compared to $1,589.4 million. Growth was driven by an increase from Organic business of $43.2 million, or 2.7%, primarily reflecting:
•higher brick and mortar and online channel sales in our Beauty and Housewares segments due primarily to strong consumer demand, the favorable comparative impact of COVID-19 related store closures, reduced store traffic and a soft back to school season in the prior year period, and earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season;
•growth in consolidated international sales;
•higher sales in the club and closeout channels; and
•the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to the impact of the late-February winter storm in the U.S. (“Winter Storm Uri”).
These factors were partially offset by:
•a decrease in sales in our Health & Home segment as a result of the EPA packaging compliance matter and related stop shipment actions and stronger COVID-19 driven demand for healthcare and healthy living products, primarily in thermometry and air filtration, in the comparative prior year period; and
•a net sales revenue decline in Non-Core business primarily due to the sale of our North America Personal Care business during the second quarter of fiscal 2022.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $8.8 million, or 0.6%.
Net sales revenue from our Leadership Brands was $1,329.9 million, compared to $1,288.6 million for the same period last year, representing an increase of 3.2%.
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Segment Net Sales Revenue
Housewares
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Net sales revenue increased $23.7 million, or 10.7%, to $246.1 million, compared to $222.4 million. Growth was driven by an increase from Organic business of $23.6 million, or 10.6%, primarily due to:
•higher brick and mortar and online channel sales driven by strong consumer demand, earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season and the favorable comparative impact of COVID-19 reduced store traffic and a soft back to school season in the prior year period;
•the impact of customer price increases related to rising freight and product costs;
•higher sales in the club and closeout channels; and
•growth in international sales.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $0.1 million, or 0.1%.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Net sales revenue increased $90.1 million, or 16.0%, to $655.0 million, compared to $564.9 million. Growth was driven by an increase from Organic business of $88.8 million, or 15.7%, primarily due to:
•higher brick and mortar and online channel sales driven by strong consumer demand, the favorable comparative impact of COVID-19 related store closures, reduced store traffic and a soft back to school season in the prior year period, and earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season;
•growth in international sales;
•higher sales in the club and closeout channels; and
•the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $1.3 million, or 0.2%.
Health & Home
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Net sales revenue decreased $46.3 million, or 18.5%, to $203.9 million, compared to $250.2 million. The decline was driven by a decrease from Organic business of $46.6 million, or 18.6%, primarily due to a decrease in sales due to stronger COVID-19 driven demand for healthcare and healthy living products, primarily in thermometry and air filtration, in the comparative prior year period and a decrease in sales of air filtration products as a result of the EPA packaging compliance matter.
These factors were partially offset by an increase in sales of humidification products and new product introductions.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $0.3 million, or 0.1%.
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Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Net sales revenue decreased $112.1 million, or 16.9%, to $549.5 million, compared to $661.6 million. The decline was driven by a decrease from Organic business of $116.3 million, or 17.6%, primarily due to:
•a decrease in both brick and mortar and online sales of air filtration, water filtration, and humidification products as a result of the EPA packaging compliance matter and related stop shipment actions;
•a decline in sales of thermometers and air filtration products due to stronger COVID-19 driven demand for healthcare and healthy living products in the comparative prior year period; and
•the unfavorable impact on sales of air filtration products driven by greater wildfire activity on the west coast of the U.S. in the comparative prior year period.
These factors were partially offset by an increase in sales of fans, heaters and new product introductions, as well as the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $4.2 million, or 0.6%.
Beauty
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Net sales revenue increased $9.7 million, or 5.9%, to $174.8 million, compared to $165.2 million. The increase was driven by an increase from Organic business of $8.9 million, or 5.4%. The increase from Organic business primarily reflects higher appliance sales due to:
•higher brick and mortar and online channel sales driven by strong consumer demand, the favorable comparative impact of COVID-19 reduced store traffic in the prior year period, and earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season;
•new product introductions;
•higher international sales; and
•expanded distribution primarily in the club channel.
These factors were partially offset by a decline in Non-Core business net sales revenue primarily due to the sale of the North America Personal Care business during the second quarter of fiscal 2022.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $0.7 million, or 0.4%.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Net sales revenue increased $73.9 million, or 20.4%, to $436.9 million, compared to $363.0 million. The increase was driven by an increase from Organic business of $70.6 million, or 19.5%. The increase from Organic business primarily reflects:
•higher brick and mortar and online channel sales driven by strong consumer demand, the favorable comparative impact of COVID-19 related store closures and reduced store traffic in the prior year period, and earlier than typical customer orders as retailers accelerated orders into the third quarter to try to avoid supply chain disruptions during the holiday season;
•new product introductions;
•expanded distribution primarily in the club channel;
•the favorable comparative impact of constrained supply levels in the prior year period;
•higher international sales; and
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•the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri.
These factors were partially offset by a decline in Non-Core business net sales revenue primarily due to the sale of the North America Personal Care business during the second quarter of fiscal 2022.
Net sales revenue was favorably impacted by net foreign currency fluctuations of approximately $3.3 million, or 0.9%.
Consolidated Gross Profit Margin
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Consolidated gross profit margin decreased 1.3 percentage points to 43.8%, compared to 45.1%. The decrease in consolidated gross profit margin was primarily due to:
•the net unfavorable impact of higher inbound freight expense and related customer price increases;
•EPA compliance costs recognized in cost of goods sold in the Health & Home segment of $0.3 million; and
•a less favorable channel mix within the Housewares segment.
These factors were partially offset by a more favorable product mix within the Housewares and Beauty segments and a favorable mix of more Housewares and Beauty sales within our consolidated net sales revenue.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Consolidated gross profit margin decreased 0.9 percentage points to 43.0%, compared to 43.9%. The decrease in consolidated gross profit margin was primarily due to:
•the unfavorable impact of higher inbound freight expense;
•EPA compliance costs recognized in cost of goods sold in the Health & Home segment of $13.8 million; and
•a less favorable channel mix within the Housewares segment.
These factors were partially offset by a more favorable product mix within the Beauty segment and a favorable mix of more Housewares and Beauty sales within our consolidated net sales revenue.
Consolidated SG&A
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Consolidated SG&A ratio increased 0.1 percentage points to 29.4%, compared to 29.3%. The increase in the consolidated SG&A ratio was primarily due to:
•higher personnel expense;
•unfavorable operating leverage;
•higher distribution expense;
•EPA compliance costs of $4.6 million in the Health & Home segment; and
•higher acquisition-related expense in connection with the Osprey transaction.
These factors were partially offset by:
•lower royalty expense;
•reduced annual incentive compensation expense;
•lower marketing expense;
•lower amortization expense;
•a decrease in bad debt expense; and
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•the favorable leverage impact of customer price increases related to rising freight and product costs.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Consolidated SG&A ratio increased 1.7 percentage points to 29.4%, compared to 27.7%. The increase in the consolidated SG&A ratio was primarily due to:
•the comparative impact of higher personnel and marketing expenses due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19;
•higher distribution expense;
•higher share-based compensation expense; and
•EPA compliance costs of $7.2 million in the Health & Home segment as a result of the EPA packaging compliance matter and related stop shipment actions.
These factors were partially offset by:
•reduced royalty expense;
•decreased annual incentive compensation expense;
•reduced amortization expense; and
•the favorable leverage impact of customer price increases related to rising freight and product costs.
Restructuring Charges
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
We incurred insignificant amounts of pre-tax restructuring costs under Project Refuel during the three month periods ended November 30, 2021 and 2020.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
During both the nine months ended November 30, 2021 and 2020, we incurred $0.4 million of pre-tax restructuring costs under Project Refuel primarily related to employee severance and termination benefits. Restructuring costs incurred during the nine months ended November 30, 2020 also included contract termination costs.
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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 comparative impact of certain items on our operating income, the tables that follow report the comparative pre-tax impact of acquisition-related expenses, EPA compliance costs, 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 November 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 43,239 | 17.6 | % | $ | 13,573 | 6.7 | % | $ | 33,228 | 19.0 | % | $ | 90,040 | 14.4 | % | |||||||||||||||||||||||||||||||
| Acquisition-related expenses | 1,605 | 0.7 | % | — | — | % | — | — | % | 1,605 | 0.3 | % | |||||||||||||||||||||||||||||||||||
| EPA compliance costs | — | — | % | 4,926 | 2.4 | % | — | — | % | 4,926 | 0.8 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | — | — | % | — | — | % | 5 | — | % | 5 | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 44,844 | 18.2 | % | 18,499 | 9.1 | % | 33,233 | 19.0 | % | 96,576 | 15.5 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 525 | 0.2 | % | 572 | 0.3 | % | 1,897 | 1.1 | % | 2,994 | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 2,339 | 1.0 | % | 2,717 | 1.3 | % | 1,493 | 0.9 | % | 6,549 | 1.0 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 47,708 | 19.4 | % | $ | 21,788 | 10.7 | % | $ | 36,623 | 20.9 | % | $ | 106,119 | 17.0 | % | |||||||||||||||||||||||||||||||
| Three Months Ended November 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 37,658 | 16.9 | % | $ | 30,478 | 12.2 | % | $ | 32,573 | 19.7 | % | $ | 100,709 | 15.8 | % | |||||||||||||||||||||||||||||||
| Restructuring charges | (12) | — | % | — | — | % | — | — | % | (12) | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 37,646 | 16.9 | % | 30,478 | 12.2 | % | 32,573 | 19.7 | % | 100,697 | 15.8 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 523 | 0.2 | % | 2,454 | 1.0 | % | 1,524 | 1.0 | % | 4,501 | 0.7 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 2,712 | 1.2 | % | 2,359 | 0.9 | % | 1,668 | 1.0 | % | 6,739 | 1.1 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 40,881 | 18.4 | % | $ | 35,291 | 14.1 | % | $ | 35,765 | 21.7 | % | $ | 111,937 | 17.6 | % | |||||||||||||||||||||||||||||||
| Nine Months Ended November 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 112,303 | 17.1 | % | $ | 29,616 | 5.4 | % | $ | 80,247 | 18.4 | % | $ | 222,166 | 13.5 | % | |||||||||||||||||||||||||||||||
| Acquisition-related expenses | 1,605 | 0.2 | % | — | — | % | — | — | % | 1,605 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| EPA compliance costs | — | — | % | 20,998 | 3.8 | % | — | — | % | 20,998 | 1.3 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 369 | 0.1 | % | — | — | % | 11 | — | % | 380 | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 114,277 | 17.4 | % | 50,614 | 9.2 | % | 80,258 | 18.4 | % | 245,149 | 14.9 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 1,562 | 0.2 | % | 1,709 | 0.3 | % | 5,692 | 1.3 | % | 8,963 | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 11,047 | 1.7 | % | 10,229 | 1.9 | % | 7,073 | 1.6 | % | 28,349 | 1.7 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 126,886 | 19.4 | % | $ | 62,552 | 11.4 | % | $ | 93,023 | 21.3 | % | $ | 282,461 | 17.2 | % | |||||||||||||||||||||||||||||||
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| Nine Months Ended November 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Housewares | Health & Home | Beauty | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 106,294 | 18.8 | % | $ | 95,782 | 14.5 | % | $ | 54,887 | 15.1 | % | $ | 256,963 | 16.2 | % | |||||||||||||||||||||||||||||||
| Restructuring charges | 251 | — | % | — | — | % | 104 | — | % | 355 | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 106,545 | 18.9 | % | 95,782 | 14.5 | % | 54,991 | 15.2 | % | 257,318 | 16.2 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 1,541 | 0.3 | % | 7,415 | 1.1 | % | 4,571 | 1.3 | % | 13,527 | 0.9 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 8,024 | 1.4 | % | 7,166 | 1.1 | % | 5,464 | 1.5 | % | 20,654 | 1.3 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 116,110 | 20.6 | % | $ | 110,363 | 16.7 | % | $ | 65,026 | 17.9 | % | $ | 291,499 | 18.3 | % | |||||||||||||||||||||||||||||||
Consolidated Operating Income
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Consolidated operating income was $90.0 million, or 14.4% of net sales revenue, compared to $100.7 million, or 15.8% of net sales revenue. The 1.4 percentage point decrease in consolidated operating margin was primarily due to:
•the net unfavorable impact of higher inbound freight expense and related customer price increases;
•increased personnel expense;
•higher distribution expense;
•unfavorable operating leverage;
•EPA compliance costs of $4.9 million in the Health & Home segment;
•a less favorable channel mix within the Housewares segment; and
•higher acquisition-related expense in connection with the Osprey transaction.
These factors were partially offset by:
•a favorable product mix within the Housewares and Beauty segments and a favorable mix of more Housewares and Beauty sales within our consolidated net sales revenue;
•lower royalty expense;
•reduced annual incentive compensation expense;
•lower marketing expense;
•lower amortization expense; and
•a decrease in bad debt expense.
Consolidated adjusted operating income decreased 5.2% to $106.1 million, or 17.0% of net sales revenue, compared to $111.9 million, or 17.6% of net sales revenue.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Consolidated operating income was $222.2 million, or 13.5% of net sales revenue, compared to $257.0 million, or 16.2% of net sales revenue. The 2.7 percentage point decrease in consolidated operating margin was primarily due to:
•the comparative impact of higher personnel and marketing expenses due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19;
•higher inbound freight expense due to rising freight rates and container supply shortages;
•EPA compliance costs of $21.0 million in the Health & Home segment;
•increased distribution expense;
•a less favorable channel mix within the Housewares segment; and
•higher share-based compensation expense.
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These factors were partially offset by:
•a favorable product mix within the Beauty segment and a favorable mix of more Housewares and Beauty sales within our consolidated net sales revenue;
•reduced royalty expense;
•decreased annual incentive compensation expense; and
•reduced amortization expense.
Consolidated adjusted operating income decreased 3.1% to $282.5 million, or 17.2% of net sales revenue, compared to $291.5 million, or 18.3% of net sales revenue.
Housewares
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Operating income was $43.2 million, or 17.6% of segment net sales revenue, compared to $37.7 million, or 16.9% of segment net sales revenue. The 0.7 percentage point increase in segment operating margin was primarily due to:
•favorable operating leverage;
•favorable product mix; and
•reduced annual incentive compensation expense.
These factors were partially offset by:
•the net unfavorable impact of higher inbound freight expense and related customer price increases;
•a less favorable channel mix;
•an increase in marketing expense; and
•higher acquisition-related expense in connection with the Osprey transaction.
Adjusted operating income increased 16.7% to $47.7 million, or 19.4% of segment net sales revenue, compared to $40.9 million, or 18.4% of segment net sales revenue.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Operating income was $112.3 million, or 17.1% of segment net sales revenue, compared to $106.3 million, or 18.8% of segment net sales revenue. The 1.7 percentage point decrease in segment operating margin was primarily due to:
•a less favorable channel mix;
•the unfavorable impact of higher inbound freight expense;
•an increase in marketing expense;
•higher share-based compensation expense; and
•higher distribution expense.
These factors were partially offset by favorable operating leverage.
Adjusted operating income increased 9.3% to $126.9 million, or 19.4% of segment net sales revenue, compared to $116.1 million, or 20.6% of segment net sales revenue.
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Health & Home
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Operating income was $13.6 million, or 6.7% of segment net sales revenue, compared to $30.5 million, or 12.2% of segment net sales revenue. The 5.5 percentage point decrease in segment operating margin was primarily due to:
•unfavorable operating leverage;
•the net unfavorable impact of higher inbound ocean freight expense and related customer price increases;
•EPA compliance costs of $4.9 million;
•higher distribution expense; and
•increase in inventory obsolescence expense.
These factors were partially offset by:
•a decrease in marketing expenses;
•lower inbound air freight expense;
•reduced amortization expense; and
•decreased annual incentive compensation expense.
Adjusted operating income decreased 38.3% to $21.8 million, or 10.7% of segment net sales revenue, compared to $35.3 million, or 14.1% of segment net sales revenue.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Operating income was $29.6 million, or 5.4% of segment net sales revenue, compared to $95.8 million, or 14.5% of segment net sales revenue. The 9.1 percentage point decrease in segment operating margin was primarily due to:
•unfavorable operating leverage;
•the unfavorable impact of higher inbound ocean freight expense;
•EPA compliance costs of $21.0 million;
•higher personnel expense;
•increased distribution expense;
•increase in inventory obsolescence expense; and
•higher share-based compensation expense.
These factors were partially offset by:
•a decrease in marketing expenses;
•lower inbound air freight expense;
•the favorable comparative impact of tariff exclusion refunds received in fiscal 2022;
•reduced amortization expense; and
•decreased annual incentive compensation expense.
Adjusted operating income decreased 43.3% to $62.6 million, or 11.4% of segment net sales revenue, compared to $110.4 million, or 16.7% of segment net sales revenue.
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Beauty
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Operating income was $33.2 million, or 19.0% of segment net sales revenue, compared to $32.6 million, or 19.7% of segment net sales revenue. The 0.7 percentage point decrease in segment operating margin was primarily due to:
•the net unfavorable impact of higher inbound freight expense and related customer price increases;
•higher marketing expense;
•an increase in personnel expense; and
•the unfavorable impact of foreign currency exchange fluctuations.
These factors were partially offset by:
•a more favorable product mix;
•reduced royalty expense as a result of the amended Revlon trademark license;
•a decrease in outbound freight costs;
•lower bad debt expense;
•lower inventory obsolescence expense; and
•favorable operating leverage.
Adjusted operating income increased 2.4% to $36.6 million, or 20.9% of segment net sales revenue, compared to $35.8 million, or 21.7% of segment net sales revenue.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Operating income was $80.2 million, or 18.4% of segment net sales revenue, compared to $54.9 million, or 15.1% of segment net sales revenue. The 3.3 percentage point increase in segment operating margin was primarily due to:
•favorable operating leverage;
•a more favorable product mix;
•reduced royalty expense as a result of the amended Revlon trademark license;
•lower inventory obsolescence expense;
•a decrease in outbound freight costs; and
•a decrease in bad debt expense.
These factors were partially offset by:
•increased marketing expense;
•the unfavorable impact of higher inbound freight expense;
•higher personnel expense;
•higher share-based compensation expense; and
•the unfavorable impact of foreign currency exchange fluctuations.
Adjusted operating income increased 43.1% to $93.0 million, or 21.3% of segment net sales revenue, compared to $65.0 million, or 17.9% of segment net sales revenue.
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Interest Expense
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Interest expense was $3.2 million, compared to $2.9 million. The increase in interest expense was primarily due to higher average levels of debt outstanding and higher average interest rates compared to the same period last year.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Interest expense was $9.5 million, compared to $9.6 million. The decrease in interest expense was primarily due to lower average interest rates, partially offset by higher average levels of debt outstanding compared to the same period last year.
Income Tax Expense
The period-over-period comparison of our effective tax rate is often impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.
On March 11, 2021, the American Rescue Plan Act (the “ARP”) was enacted and signed into law. The ARP is an economic stimulus package in response to the COVID-19 outbreak which contains tax provisions that did not have a material impact to our condensed consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.
Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.
For the three months ended November 30, 2021, income tax expense as a percentage of income before income tax was 12.9% compared to 14.0% for the same period last year. The year-over-year decrease in the effective tax rate is primarily due to increases in liabilities related to uncertain tax positions in the prior year period, partially offset by shifts in the mix of income in our various tax jurisdictions. For the nine months ended November 30, 2021, income tax expense as a percentage of income before income tax was 13.6% compared to 6.5% for the same period last year, primarily due to the mix of income in our various tax jurisdictions and the benefit of the CARES Act in fiscal 2021, partially offset by the favorable comparative impact of increases in liabilities related to uncertain tax positions in the prior year period.
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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 acquisition-related expenses, EPA compliance costs, restructuring charges, tax reform, amortization of intangible assets, and non-cash share-based compensation, as applicable, on income and diluted EPS for the periods presented below. 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 November 30, 2021 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 86,886 | $ | 11,203 | $ | 75,683 | $ | 3.56 | $ | 0.46 | $ | 3.10 | |||||||||||||||||||||||
| Acquisition-related expenses | 1,605 | 58 | 1,547 | 0.07 | — | 0.06 | |||||||||||||||||||||||||||||
| EPA compliance costs | 4,926 | 74 | 4,852 | 0.20 | — | 0.20 | |||||||||||||||||||||||||||||
| Restructuring charges | 5 | — | 5 | — | — | — | |||||||||||||||||||||||||||||
| Subtotal | 93,422 | 11,335 | 82,087 | 3.83 | 0.46 | 3.36 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,994 | 197 | 2,797 | 0.12 | 0.01 | 0.11 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 6,549 | 784 | 5,765 | 0.27 | 0.03 | 0.24 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 102,965 | $ | 12,316 | $ | 90,649 | $ | 4.22 | $ | 0.50 | $ | 3.72 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 24,399 | ||||||||||||||||||||||||||||||||||
| Three Months Ended November 30, 2020 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 97,876 | $ | 13,721 | $ | 84,155 | $ | 3.89 | $ | 0.55 | $ | 3.34 | |||||||||||||||||||||||
| Restructuring charges | (12) | — | (12) | — | — | — | |||||||||||||||||||||||||||||
| Subtotal | 97,864 | 13,721 | 84,143 | 3.89 | 0.55 | 3.34 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,501 | 204 | 4,297 | 0.18 | 0.01 | 0.17 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 6,739 | 403 | 6,336 | 0.27 | 0.02 | 0.25 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 109,104 | $ | 14,328 | $ | 94,776 | $ | 4.33 | $ | 0.57 | $ | 3.76 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 25,192 | ||||||||||||||||||||||||||||||||||
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| Nine Months Ended November 30, 2021 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 212,843 | $ | 28,873 | $ | 183,970 | $ | 8.70 | $ | 1.18 | $ | 7.52 | |||||||||||||||||||||||
| Acquisition-related expenses | 1,605 | 58 | 1,547 | 0.07 | — | 0.06 | |||||||||||||||||||||||||||||
| EPA compliance costs | 20,998 | 315 | 20,683 | 0.86 | 0.01 | 0.85 | |||||||||||||||||||||||||||||
| Restructuring charges | 380 | 6 | 374 | 0.02 | — | 0.02 | |||||||||||||||||||||||||||||
| Subtotal | 235,826 | 29,252 | 206,574 | 9.64 | 1.20 | 8.45 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 8,963 | 603 | 8,360 | 0.37 | 0.02 | 0.34 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 28,349 | 2,355 | 25,994 | 1.16 | 0.10 | 1.06 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 273,138 | $ | 32,210 | $ | 240,928 | $ | 11.17 | $ | 1.32 | $ | 9.85 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 24,461 | ||||||||||||||||||||||||||||||||||
| Nine Months Ended November 30, 2020 | |||||||||||||||||||||||||||||||||||
| Income | Diluted EPS | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Before Tax | Tax | Net of Tax | Before Tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| As reported (GAAP) | $ | 247,835 | $ | 16,061 | $ | 231,774 | $ | 9.78 | $ | 0.63 | $ | 9.14 | |||||||||||||||||||||||
| Restructuring charges | 355 | 2 | 353 | 0.01 | — | 0.01 | |||||||||||||||||||||||||||||
| Tax reform | — | 9,357 | (9,357) | — | 0.37 | (0.37) | |||||||||||||||||||||||||||||
| Subtotal | 248,190 | 25,420 | 222,770 | 9.79 | 1.00 | 8.79 | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 13,527 | 651 | 12,876 | 0.53 | 0.03 | 0.51 | |||||||||||||||||||||||||||||
| Non-cash share-based compensation | 20,654 | 1,406 | 19,248 | 0.82 | 0.06 | 0.76 | |||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 282,371 | $ | 27,477 | $ | 254,894 | $ | 11.14 | $ | 1.08 | $ | 10.05 | |||||||||||||||||||||||
| Weighted average shares of common stock used in computing diluted EPS | 25,350 | ||||||||||||||||||||||||||||||||||
Comparison of Third Quarter Fiscal 2022 to Third Quarter Fiscal 2021
Net Income was $75.7 million, compared to $84.2 million. Diluted EPS was $3.10, compared to $3.34. Diluted EPS decreased primarily due to lower operating income in the Health & Home segment and higher interest expense, partially offset by higher operating income in the Housewares and Beauty segments, a decrease in the effective income tax rate and lower weighted average diluted shares outstanding.
Adjusted income decreased $4.1 million, or 4.4%, to $90.6 million, compared to $94.8 million. Adjusted diluted EPS decreased 1.1% to $3.72, compared to $3.76.
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Net Income was $184.0 million, compared to $231.8 million. Diluted EPS was $7.52, compared to $9.14. Diluted EPS decreased primarily due to lower operating income in the Health & Home segment and a higher effective income tax rate primarily due to the tax reform benefit recognized in the prior year period, partially offset by higher operating income in the Housewares and Beauty segments and lower weighted average diluted shares outstanding.
Adjusted income decreased $14.0 million, or 5.5%, to $240.9 million, compared to $254.9 million. Adjusted diluted EPS decreased 2.0% to $9.85, compared to $10.05.
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Financial Condition, Liquidity and Capital Resources
Selected measures of our liquidity and capital resources are shown for the periods below:
| Nine Months Ended November 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accounts receivable turnover (days) (1) | 76.4 | 70.0 | |||||||||
| Inventory turnover (times) (1) | 2.3 | 3.6 | |||||||||
Working capital (in thousands) | $ | 539,681 | $ | 491,563 | |||||||
| Current ratio | 1.9:1 | 1.8:1 | |||||||||
| Ending debt to ending equity ratio | 33.0% | 36.4% | |||||||||
| Return on average equity (1) | 16.4% | 18.9% | |||||||||
(1)Accounts receivable turnover, inventory turnover and return on average equity computations use 12 month trailing net sales revenue, cost of goods sold or net income components as required by the particular measure. The current and four prior quarters' ending balances of accounts receivable, inventory and equity are used for the purposes of computing the average balance component as required by the particular measure.
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 been able to typically 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 had $44.3 million in cash and cash equivalents at November 30, 2021. As of November 30, 2021, the amount of cash and cash equivalents held by our foreign subsidiaries was $23.9 million. We have no existing activities involving special purpose entities or off-balance sheet financing.
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. Subsequent to the end of our third quarter of fiscal 2022, we completed the acquisition of Osprey, which was funded with cash on hand and a $435.0 million borrowing under our existing revolving credit facility. For additional information, see Note 16 to the accompanying condensed consolidated financial statements.
We may also elect to repurchase additional shares of common stock under our Board of Directors' authorization, subject to limitations contained in our debt agreements and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, 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 Shareholder 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.
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Operating Activities
Operating activities used net cash of $5.1 million for the nine months ended November 30, 2021, compared to net cash provided of $249.7 million for the same period last year. The decrease in cash provided by operating activities was primarily driven by a decrease in cash earnings and increases in cash used for accounts payable primarily for inventory purchases, incentive compensation payments and tax withholding settlements, partially offset by an increase in accrued income taxes.
Investing Activities
Investing activities provided net cash of $8.5 million during the nine months ended November 30, 2021, compared to net cash used of $19.4 million for the same period last year. The increase in cash provided by investing activities was primarily due to proceeds received from the sale of our North America Personal Care business in the second quarter of fiscal 2022 and sale of property and equipment, partially offset by an increase in capital and intangible asset expenditures. We made investments in capital and intangible asset expenditures of $41.5 million during the nine months ended November 30, 2021, compared to $19.4 million for the same period last year. The increase in capital and intangible asset expenditures was primarily for land and initial construction expenditures related to a new 2 million square foot distribution center for our Housewares segment. Capital and intangible asset expenditures during both periods also included expenditures for tools, molds, and other production equipment and computer, software, furniture and other equipment.
Financing Activities
Financing activities used net cash of $4.2 million during the nine months ended November 30, 2021, compared to net cash used of $98.1 million for the same period last year. The decrease in cash used by financing activities is primarily due to a decrease in open market repurchases of common stock.
Credit and Other Debt Agreements
Credit Agreement
We have a credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $1.25 billion. As of November 30, 2021, the outstanding revolving loan principal balance was $434.0 million (excluding prepaid financing fees), the balance of outstanding letters of credit was $32.7 million and the amount available for borrowings was $783.3 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of November 30, 2021, these covenants effectively limited our ability to incur more than $735.8 million of additional debt from all sources, including the Credit Agreement, or $783.3 million in the event a qualified acquisition is consummated.
Subsequent to the end of our third quarter of fiscal 2022, we borrowed $435.0 million under our Credit Agreement in connection with the acquisition of Osprey. The proceeds of the borrowing and cash on hand were used to pay all of the cash consideration payable for the acquisition, including amounts for cash acquired. After giving effect to the borrowing, as of December 29, 2021, the remaining amount available for borrowings under our Credit Agreement was $351.8 million. As of December 29, 2021, covenants in the Credit Agreement did not limit our ability to incur $351.8 million of additional debt under the Credit Agreement.
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Other Debt Agreements
As of November 30, 2021, we have an aggregate principal balance of $16.7 million (excluding prepaid financing fees) under an unsecured loan agreement with the Mississippi Business Finance Corporation.
As of November 30, 2021, there have been no material changes to the information provided in our Form 10-K.
New Accounting Guidance
For information on recently adopted and issued accounting pronouncements, see Note 2 to the accompanying condensed consolidated financial statements.
Information Regarding Forward-Looking Statements
Certain written and oral statements may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the SEC, in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “would”, “should”, “seeks”, “estimates”, “project”, “predict”, “potential”, “currently”, “continue”, “intends”, “outlook”, “could”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that may occur in the future, including statements related to sales, earnings per share 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 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 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:
•our ability to successfully manage the demand, supply and operational challenges associated with the actual or perceived effects of COVID-19 and any similar future public health crisis, pandemic or epidemic;
•our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;
•actions taken by large customers that may adversely affect our gross profit and operating results;
•our dependence on the strength of retail economies and vulnerabilities to any prolonged economic downturn, including from the effects of COVID-19;
•our dependence on sales to several large customers and the risks associated with any loss of, or substantial decline in, sales to top customers;
•expectations regarding recent acquisitions (including Osprey) and any future acquisitions or divestitures, including our ability to realize related synergies along with our ability to effectively integrate acquired businesses or disaggregate divested businesses;
•our reliance on our Chief Executive Officer and a limited number of other key senior officers to operate our business;
•obsolescence or interruptions in the operation of our central global Enterprise Resource Planning systems and other peripheral information systems;
•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;
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•our dependence on third-party manufacturers, most of which are located in the Asia Pacific market, and any inability to obtain products from such manufacturers;
•the risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors;
•the geographic concentration and peak season capacity of certain U.S. distribution facilities which increase our risk to disruptions that could affect the our ability to deliver products in a timely manner;
•the risks associated with the use of licensed trademarks from or to third parties;
•our ability to develop and introduce a continuing stream of innovative new products to meet changing consumer preferences;
•the risks associated with trade barriers, exchange controls, expropriations, and other risks associated with domestic and foreign operations;
•the risks associated with significant changes in or our compliance with regulations, interpretations or product certification requirements;
•the risks associated with our discussions with the EPA on the implementation of compliance plans related to certain of our products within the Health & Home segment;
•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 associated with accounting for tax positions and the resolution of tax disputes;
•the risks of potential changes in laws and regulations, including environmental, health and safety and tax laws, and the costs and complexities of compliance with such laws;
•our ability to continue to avoid classification as a Controlled Foreign Corporation;
•the risks associated with legislation enacted in Bermuda and Barbados in response to the European Union’s review of harmful tax competition;
•the risks of significant tariffs or other restrictions being placed on imports from China or Mexico or any retaliatory trade measures taken by China or Mexico;
•the risks associated with product recalls, product liability and other claims against us;
•associated financial risks including but not limited to, 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;
•increased costs of raw materials, energy and transportation;
•projections of product demand, sales and net income, which are highly subjective in nature, and from which future sales and net income could vary in a material amount; and
•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 and limitations under our financing arrangements.
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 9, 10 and 11 to the accompanying unaudited condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), maintains disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to provide
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reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended November 30, 2021. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of November 30, 2021, the end of the period covered by this quarterly report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In connection with the evaluation described above, we identified no change in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during our fiscal quarter ended November 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 below.
EPA Regulatory Matter
In our quarterly report on Form 10-Q for our first quarter of fiscal 2022, we disclosed that we were in discussions with 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 Health & Home 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, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we worked with the EPA towards an expedient resolution. In July 2021, the EPA approved modest changes to our labeling claims on packaging of existing water filtration products, which we implemented, and subsequently began shipping in limited quantities during the second quarter of fiscal 2022. The shipping volume for these products has continued to increase and, in September 2021, we returned to a more normalized level of shipping activity. In August 2021, the EPA approved changes to our air filtration packaging and we implemented a repackaging plan. We began shipping limited quantities of the impacted products at the end of August 2021 and returned to a more normalized level of shipping activity in November 2021. We have also resolved the majority of the packaging compliance concerns on the limited subset of humidifier products and do not expect them to have a material impact on our consolidated financial results. Our consolidated and Health & Home segment’s net sales revenue, gross profit and operating income for the nine months ended November 30, 2021, have been materially and adversely impacted by the stop shipment actions and the time needed to execute repackaging plans after changes were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of repackaging our existing inventory of affected products. If we are not able to execute our repackaging plans on schedule to meet demand, our net sales revenue, gross
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profit and operating income could continue to be materially and adversely impacted. At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
See Note 8 to our condensed consolidated financial statements, Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “EPA Compliance Costs” and Part II, Item 1A., “Risk Factors” in this Form 10-Q for additional information.
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 annual report on Form 10-K for the fiscal year ended February 28, 2021 (“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 except as follows.
Significant changes in or our compliance with regulations, interpretations or product certification requirements could adversely impact our operations.
As a global company, we are subject to U.S. and foreign regulations, including environmental, health and safety laws, and industry-specific product certifications. Many of the products we sell are subject to product safety laws and regulations in various jurisdictions. These laws and regulations specify the maximum allowable levels of certain materials that may be contained in our products, provide statutory prohibitions against misbranded and adulterated products, establish ingredients and manufacturing procedures for certain products, specify product safety testing requirements, and set product identification, labeling and claim requirements. For example, thermometers distributed by our Health & Home segment must comply with various regulations governing the production and distribution of medical devices.
Additionally, some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “EPA”), U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
In our quarterly report on Form 10-Q for our first quarter of fiscal 2022, we disclosed that we were in discussions with 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 Health & Home 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, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we worked with the EPA towards an expedient resolution. In July 2021, the EPA approved modest changes to our labeling claims on packaging of existing water filtration products, which we implemented, and subsequently began shipping in limited quantities during the second quarter of fiscal 2022. The shipping volume for these products has continued to increase and, in September 2021, we returned to a more normalized level of shipping activity. In August 2021, the EPA approved changes to our air filtration packaging and we implemented a repackaging plan. We began shipping limited quantities of the impacted products at the end of August 2021 and returned to a more normalized level of shipping activity in November 2021. We have also resolved the majority of the packaging compliance concerns on the limited subset of humidifier products and do not expect them to have a material impact on our consolidated financial results. Our consolidated and Health & Home segment’s net sales revenue, gross profit and operating income for the nine months ended November 30, 2021, have been materially and
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adversely impacted by the stop shipment actions and the time needed to execute repackaging plans after changes were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of repackaging our existing inventory of affected products. If we are not able to execute our repackaging plans on schedule to meet demand, our net sales revenue, gross profit and operating income could continue to be materially and adversely impacted. The extent to which net sales revenue, gross profit and operating income could be impacted will primarily depend on product demand and the duration of time required to repackage the affected inventory. In addition, our net sales revenue could be materially and adversely impacted by customer returns, an increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers. There can also be no assurance that fines or penalties will not be imposed by the EPA.
During the first quarter of fiscal 2022, we recorded a $13.1 million charge to cost of goods sold to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. During the second and third quarters of fiscal 2022, we incurred additional compliance costs of $3.0 million and $4.9 million, respectively, comprised of incremental warehouse storage costs and legal fees of $2.6 million and $4.6 million, respectively, which were recognized in SG&A, and storage and obsolete packaging charges from vendors of $0.4 million and $0.3 million, respectively, which were recognized in cost of goods sold. In addition, during the second and third quarters of fiscal 2022, we incurred and capitalized into inventory costs to repackage a portion of our existing inventory of the affected products and expect to continue to incur and capitalize such costs as we continue to repackage the remainder of the inventory during the fourth quarter of fiscal 2022. We also expect to incur additional compliance costs, which may include incremental freight, warehouse storage costs, charges from vendors, and legal fees, among other things. Such potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Heath & Home segment's gross profit and operating income. The consequences of the compliance requirements and other matters pertaining to our discussions with the EPA are inherently uncertain. Accordingly, additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. As a result, our business, results of operations and financial condition could be adversely and materially impacted in ways that we are not able to predict today. 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” in this Form 10-Q.
The ongoing compliance efforts with the EPA related to our Health & Home products, as well as significant new regulations, material changes to existing regulations, or greater oversight, enforcement or changes in interpretation of existing regulations, could further delay or interrupt distribution of our products in the U.S. and other countries, result in fines or penalties or cause our costs of compliance to increase. Additionally, we cannot guarantee that our products will receive regulatory approval in all countries. Similarly, some of our Beauty segment’s customers require that our Beauty appliances comply with various safety certifications, including UL certifications. Significant new certification requirements or changes to existing certification requirements could further delay or interrupt distribution of our products, or make them more costly to produce.
We are not able to predict the nature of potential changes to, or enforcement of laws, regulations, product certification requirements, repeals or interpretations. Nor are we able to predict the impact that any of these changes would have on our business in the future. Further, if we were found to be noncompliant with applicable laws and regulations in these or other areas, we could be subject to governmental or regulatory actions, including fines, import detentions, injunctions, product withdrawals or recalls or asset seizures, any of which could have a material adverse effect on our business, results of operations and financial condition.
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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, of which approximately $79.5 million remained. 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 6 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 equity holder can be 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 | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in thousands) (2) | |||||||||||||||||||
| September 1 to September 30, 2021 | 5,557 | $ | 239.19 | 5,557 | $ | 498,671 | |||||||||||||||||
| October 1 to October 31, 2021 | 6,036 | 229.28 | 6,036 | 497,287 | |||||||||||||||||||
| November 1 to November 30, 2021 | 466 | 247.75 | 466 | 497,171 | |||||||||||||||||||
| Total | 12,059 | $ | 234.56 | 12,059 | |||||||||||||||||||
(1)The number of shares includes shares of common stock acquired from employees 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 November 30, 2021, there were no common stock open market purchases.
(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 6 to the accompanying condensed consolidated financial statements.
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| ITEM 6. | EXHIBITS | |||||||||||||||||||||||||
| (a) | Exhibits | |||||||||||||||||||||||||
| 101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended November 30, 2021, 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. | ||||||||||||||||||||||||||
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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: | January 7, 2022 | /s/ Julien R. Mininberg | ||||||
| Julien R. Mininberg | ||||||||
| Chief Executive Officer, Director and Principal Executive Officer | ||||||||
| Date: | January 7, 2022 | /s/ Matthew J. Osberg | ||||||
| Matthew J. Osberg | ||||||||
| Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer | ||||||||
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