UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended February 28 , 2022
OR
Commission file number 001-14669
(Exact name of registrant as specified in its charter)
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| of incorporation or organization) | Identification No.) | |||||||
(Address of principal executive offices)
(Registrant's United States Mailing Address)
(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 | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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.
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common shares held by non-affiliates of the registrant as of August 31, 2021, based upon the closing price of the common shares as reported by The NASDAQ Global Select Market on such date, was approximately $5,726.4 million.
As of April 21, 2022, there were 23,841,808 common shares, $0.10 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
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EXPLANATORY NOTE
In this Annual Report on Form 10-K (the “Annual Report”), which includes the accompanying consolidated financial statements and 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. We refer to our common shares, par value $0.10 per share, as “common stock.” References to “EMEA” refer to the combined geographic markets of Europe, the Middle East and Africa. We use product and service names in this Annual Report for identification purposes only and they may be protected in the United States and other jurisdictions by trademarks, trade names, service marks, and other intellectual property rights of ours and other parties. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks, and logos referenced herein belong to their respective owners. References to “fiscal” in connection with a numeric year number denotes our fiscal year ending on the last day of February, during the year number listed. 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.
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PART I
Item 1. Business
Our Company
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 go to market under a number of brands, some of which are licensed. Our Leadership Brands are brands which have number-one or number-two positions in their respective categories and include the OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools and Drybar brands.
Segment Information
In the fourth quarter of fiscal 2022, we changed the names of two of our segments to align with the growth in certain product offerings and brands within our portfolio. Our previously named “Housewares” segment was changed to “Home & Outdoor,” and our previously named “Health & Home” segment was changed to “Health & Wellness.” There were no changes to the products or brands included within the segments as part of these name changes. The Osprey brand and products were added to the Home & Outdoor segment upon the completion of the acquisition of Osprey Packs, Inc. ("Osprey") discussed further below.
We currently operate in three business segments:
•Home & Outdoor: Provides a broad range of innovative consumer products for home activities such as food preparation, cooking, cleaning, and organization; as well as products for outdoor and on the go activities such as hydration, food storage, backpacks, and travel gear. This segment sells primarily to retailers as well as through our direct-to-consumer channel.
•Health & Wellness: Provides health and wellness products including healthcare devices, thermometers, water and air filtration systems, humidifiers, and fans. Sales for the segment are primarily to retailers and distributors with some direct-to-consumer channel sales.
•Beauty: Provides mass and prestige market beauty appliances including hair styling appliances, grooming tools, decorative hair accessories, and prestige market liquid-based hair and personal care products. This segment sells primarily to retailers, beauty supply wholesalers and through our direct- to- consumer channel.
For more segment and geographic information concerning our net sales revenue, long-lived assets and operating income, refer to Note 18 to the accompanying consolidated financial statements.
Our Strategic Initiatives
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 was 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
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Leadership Brands, with a focus on growing them through consumer-centric innovation, expanding them more aggressively outside 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 continuing to enhance and consolidate our Environmental, Social and Governance (“ESG”) efforts and accelerate programs related to Diversity, Equity, and Inclusion (“DE&I”) to support our Phase II transformation. See further discussion below of our initiatives in these areas.
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 North America Personal Care business to HRB Brands LLC, for $44.7 million in cash and recognized a gain on the sale in selling, general and administrative expense (“SG&A”) totaling $0.5 million. Subsequent to our fiscal 2022 year end, on March 25, 2022, we completed the sale of the Latin America and Caribbean Personal Care businesses to HRB Brands LLC, for $1.8 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 Personal Care business. Accordingly, we continued to classify the identified net assets of the Latin America and Caribbean Personal Care businesses as held for sale in our fiscal 2022 consolidated balance sheet.
Subsequent to our fiscal 2022 year end, on April 22, 2022, we completed the acquisition of Recipe Products Ltd., a producer of innovative prestige hair care products for all types of curly and wavy hair under the Curlsmith brand (“Curlsmith”). The total purchase consideration, net of cash acquired, was $150.0 million in cash, subject to certain customary closing adjustments. The acquisition was funded with cash on hand and borrowings under our existing revolving credit facility.
On December 29, 2021, we completed the acquisition of Osprey, a longtime U.S. leader in technical and everyday packs, for $410.9 million in cash, net of a preliminary closing net working capital adjustment and cash acquired. Osprey is highly respected in the outdoor industry with a product lineup that includes a wide range of backpacks and daypacks for hiking, mountaineering, skiing, climbing, mountain biking, trail running, commuting, and school, as well as rugged adventure travel packs, wheeled luggage, and travel accessories. The acquisition of Osprey complements our outdoor platform, accelerates our international strategy and adds a 9th Leadership Brand to the Company.
On January 23, 2020, we completed the acquisition of Drybar Products LLC (“Drybar Products”), for approximately $255.9 million in cash. Drybar is an innovative, trend-setting prestige hair care and styling brand in the multibillion-dollar beauty industry.
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Our Products
The following table summarizes the types of products we sell by business segment:
| Segment | Product Category | Primary Products | ||||||||||||
| Home & Outdoor | Food Preparation and Storage | Food preparation tools and gadgets, food storage containers and storage and organization products | ||||||||||||
| Coffee and Tea | Coffee makers, grinders, manual pour overs and tea kettles | |||||||||||||
| Cleaning and Bath | Household cleaning products, shower organization and bathroom accessories | |||||||||||||
| Infant and Toddler | Feeding and drinking products, child seating, cleaning tools and nursery accessories | |||||||||||||
| Hot and Cold Beverage Containers and Food Transport and Storage Solutions | Insulated hydration bottles, hydration packs, drinkware, mugs, food containers, lunch containers, insulated totes, soft coolers and accessories | |||||||||||||
| Backpacks and Gear | Technical and outdoor sports packs, hydration packs, travel packs, luggage, daypacks and everyday packs | |||||||||||||
| Health & Wellness | Healthcare | Thermometers, blood pressure monitors, pulse oximeters, nasal aspirators and humidifiers | ||||||||||||
| Wellness | Faucet mount water filtration systems and pitcher-based water filtration systems, air purifiers, heaters, and fans | |||||||||||||
| Beauty | Appliances and Accessories | Mass, professional and prestige market hair appliances, grooming brushes, tools and decorative hair accessories | ||||||||||||
| Personal and Hair Care (1) | Prestige market shampoos, liquid hair styling products, treatments and conditioners | |||||||||||||
(1)During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care business, which included our mass channel liquid, powder and aerosol products. During fiscal 2022, we completed the sale of our North America Personal Care business. We continued to classify the identified net assets of the Latin America and Caribbean Personal Care businesses as held for sale. Subsequent to our fiscal 2022 year end, on March 25, 2022, we completed the sale of the Latin America and Caribbean Personal Care businesses. For additional information see Note 4 to the accompanying consolidated financial statements.
Our Trademarks
We market products under a number of trademarks that we own and sell certain of our products under trademarks licensed from third parties. We believe our principal trademarks, both owned and licensed, have high levels of brand name recognition among retailers and consumers throughout the world. Through our favorable partnerships with our licensors, we believe we have developed stable, enduring relationships that provide access to unique brands that complement our owned and internally developed trademarks.
The Beauty and Health & Wellness segments rely on the continued use of trademarks licensed under various agreements for a substantial portion of their net sales revenue. New product introductions under licensed trademarks require approval from the respective licensors. The licensors must also approve the product packaging. Some of our license agreements require us to pay minimum royalties.
During fiscal 2022, we sold our Pert, Sure and Infusium trademarks in connection with the sale of our North America Personal Care business. Subsequent to our fiscal 2022 year end, on March 25, 2022, we sold our Brut trademark in connection with the sale of our Latin America and Caribbean Personal Care businesses.
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The following table lists our key trademarks by segment:
| Segment | Owned | Licensed | ||||||||||||
| Home & Outdoor | OXO, Good Grips, Hydro Flask, Soft Works, OXO tot, OXO Brew, OXO Strive, OXO Outdoor, Osprey | |||||||||||||
| Health & Wellness | PUR | Honeywell, Braun, Vicks | ||||||||||||
| Beauty | Drybar, Hot Tools | Revlon, Bed Head | ||||||||||||
Patents and Other Intellectual Property
We maintain utility and design patents in the U.S. and several foreign countries. We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage.
Sales and Marketing
We currently market our products in over 95 countries throughout the world. Sales within the U.S. comprised approximately 78% of total net sales revenue in fiscal 2022 and 79% of total net sales revenue in both fiscal 2021 and 2020. Our segments primarily sell their products through mass merchandisers, drugstore chains, warehouse clubs, home improvement stores, grocery stores, specialty stores, beauty supply retailers, e-commerce retailers, wholesalers, and various types of distributors, as well as directly to consumers. We collaborate extensively with our retail customers and, in many instances, produce specific versions of our product lines with exclusive designs and packaging for their stores, which are appropriately priced for their respective customer bases. We market products principally through the use of outside sales representatives and our own internal sales staff, supported by our internal marketing, category management, engineering, creative services, and customer and consumer service staff. These groups work closely together to develop pricing and distribution strategies, to design packaging and to help develop product line extensions and new products.
Research and Development
Our research and development activities focus on new, differentiated and innovative products designed to drive sustained organic growth. We continually invest to strengthen our product design and research and development capabilities, including extensive studies to gain consumer insights. Research and development expenses consist primarily of salary and employee benefit expenses and contracted development and testing efforts associated with development of products.
Manufacturing and Distribution
We contract with unaffiliated manufacturers, primarily in China, Mexico and Vietnam, to manufacture a significant portion of our finished goods for the Home & Outdoor and Health & Wellness segments and our Beauty appliances and accessories product category. The personal and hair care category of the Beauty segment sources most of its products from U.S. manufacturers. Finished goods manufactured by vendors in Asia comprised approximately 88%, 80% and 76% of finished goods purchased for fiscal 2022, 2021 and 2020, respectively.
We occupy owned and leased office and distribution space in various locations to support our operations. These facilities include our U.S. headquarters in El Paso, Texas, and distribution centers in Southaven, Mississippi, and Olive Branch, Mississippi, which are used to support a significant portion of our domestic distribution. We are currently constructing an additional distribution facility in Gallaway, Tennessee that we expect to be operational by the end of fiscal year 2023.
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Customers
Sales to our largest customer, Amazon.com Inc., accounted for approximately 19%, 20% and 18% of our consolidated net sales revenue in fiscal 2022, 2021 and 2020, respectively. Sales to our second largest customer, Walmart, Inc., including its worldwide affiliates, accounted for approximately 11%, 13% and 14% of our consolidated net sales revenue in fiscal 2022, 2021 and 2020, respectively. Sales to our third largest customer, Target Corporation, accounted for approximately 11%, 11% and 9% of our consolidated net sales revenue in fiscal 2022, 2021 and 2020, respectively. No other customers accounted for 10% or more of consolidated net sales revenue during these fiscal years. Sales to our top five customers accounted for approximately 49%, 52% and 50% of our consolidated net sales revenue in fiscal 2022, 2021 and 2020, respectively.
Order Backlog
When placing orders, our individual consumer, retail and wholesale customers usually request that we ship the related products within a short time frame. As such, there usually is no significant backlog of orders in any of our distribution channels.
Seasonality
The following table illustrates the seasonality of our net sales revenue by fiscal quarter as a percentage of annual net sales revenue for the periods presented:
| Fiscal Quarters Ended Last Day of Month | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| May | 24.3 | % | 20.0 | % | 22.0 | % | |||||||||||
| August | 21.4 | % | 25.3 | % | 24.2 | % | |||||||||||
| November | 28.1 | % | 30.4 | % | 27.8 | % | |||||||||||
| February | 26.2 | % | 24.3 | % | 26.0 | % | |||||||||||
Our sales are seasonal due to different calendar events, holidays and seasonal weather patterns. Historically, the third fiscal quarter produces the highest net sales revenue during the fiscal year.
Competitive Conditions
We generally sell our products in markets that are very competitive and mature. Our products compete against similar products of many large and small companies, including well-known global competitors. In many of the markets and industry segments in which we sell our products we compete against other branded products as well as retailers' private-label brands. We believe that we have certain key competitive advantages, such as well recognized brands, engineering expertise and innovation, sourcing and supply chain know-how, and productive co-development relationships with our manufacturers. We support our products with advertising, promotions and other marketing activities, as well as an extensive sales force in order to build awareness and to encourage new consumers to try our brands and products. We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position. We believe these advantages allow us to bring our retailers a differentiated value proposition.
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The following table summarizes our primary competitors by business segment:
| Segment | Competitor | |||||||
| Home & Outdoor | Lifetime Brands, Inc. (KitchenAid), Newell Brands Inc., Simple Human LLC, Yeti Holdings, Inc., Bradshaw Home, Inc., Gregory Mountain Products, Mystery Ranch, CamelBak, The North Face, Deuter | |||||||
| Health & Wellness | Exergen Corporation, Omron Healthcare, Inc., Crane Engineering, Newell Brands, Inc., Lasko Products, LLC, The Clorox Company (Brita), Zero Technologies, LLC, Vornado Air Circulation Systems, Dyson Ltd, Unilever (Blueair), Guardian Technologies LLC. | |||||||
| Beauty | Conair, Spectrum Brands Holdings Inc. (Remington), Coty Inc., Dyson Ltd, L'Oréal S.A. | |||||||
Environmental and Health and Safety Matters
Our operations are subject to national, state, local, and provincial jurisdictions’ environmental, health and safety laws and regulations 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, some of our Beauty segment’s customers require that our Beauty appliances comply with various safety certifications, including UL certifications. Similarly, thermometers distributed by our Health & Wellness segment must comply with various regulations governing the production and distribution of medical devices. Additionally, some product lines within our Health & Wellness 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.
During fiscal 2022, 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 & Wellness segment that are sold in the U.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, we voluntarily
implemented a temporary stop shipment action across this line of products in the U.S. as we worked with
the EPA towards an expedient resolution. The EPA approved modest changes to our labeling claims on packaging of the air and water filtration impacted products, which we implemented, and subsequently resumed shipping during fiscal 2022. Our consolidated and Health & Wellness segment’s net sales revenue, gross profit and operating income during fiscal 2022 was 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 impacted products. Additionally, as a result of continuing dialogue with the EPA, we are executing further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration 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 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 fiscal 2022, we incurred additional compliance costs of $19.3 million, comprised of $14.6 million of incremental warehouse storage costs and legal fees, which were recognized in SG&A, and $4.7 million of storage, obsolete packaging and other charges from vendors, which were recognized in cost of goods sold. These charges are referred to throughout this Annual Report as “EPA compliance costs.” In addition, during fiscal 2022, we incurred and capitalized into
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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 inventory. 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 Health & Wellness 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.
An emerging trend with governmental and non-governmental organizations, consumers, shareholders, retail customers, communities, and other stakeholders is increased focus and expectations on ESG matters. These trends have led to, among other things, increased public and private social accountability reporting requirements relating to labor practices, climate change, human trafficking and other ESG matters and greater demands on our packaging and products. In our product space, some requirements have already been mandated and we believe others may become required in the future. Examples of current requirements include conflict minerals content reporting, customer reporting of foreign fair labor practices in connection with our supply chain vendors, and evaluating the risks of human trafficking and slavery.
We believe that we are in material compliance with these laws, regulations and other reporting requirements. Due to the nature of our operations and the frequently changing nature of compliance and social reporting standards and technology, we cannot predict with any certainty what future material capital or operating expenditures, if any, will be required in order to comply with applicable laws, regulations and other reporting mandates. Further, any failure to achieve our ESG goals or a perception of our failure to act responsibly or to effectively respond to new, or changes in, legal or regulatory requirements relating to ESG concerns could adversely affect our business, financial condition, results of operations and reputation.
ESG Initiatives
We seek to maintain best-in-class level of corporate governance on behalf of our stakeholders, including our associates, customers, consumers, communities, and shareholders. We also recognize the importance of environmental and social factors related to how we operate our business. We are continuing to enhance and consolidate our ESG efforts and accelerate programs related to DE&I to support our Phase II transformation.
The Corporate Governance Committee of our Board of Directors has oversight of ESG-related matters, including climate change risks and opportunities. Our ESG Task Force, which includes associate representatives from our business segments and global shared services, leads the development and implementation of our strategic ESG plan with the goal of aligning our ESG performance with relevant standards, such as the Sustainability Accounting Standards Board (“SASB”) and the Task Force on Climate Finance Disclosures (“TCFD”). In June 2021, we published our first ESG Report, which aligns with relevant standards such as the SASB, the TCFD and the Global Reporting Initiative. Our ESG Report summarizes our ESG strategy and performance, including in the areas of climate change, DE&I and human capital, and environmental and natural capital management. Information in our ESG Report is not part of this Annual Report or any other report we file with, or furnish to, the Securities and Exchange Commission (“SEC”), except as expressly set forth by specific reference in such a filing.
We are working to implement a system to minimize negative impacts of our practices on the environment and continue to work on initiatives to reduce emissions in our supply chain and product use. As part of these efforts and in order to strengthen our support of climate action, we became a signatory of We Mean Business, a coalition of organizations and businesses with a goal of catalyzing business action to accelerate the transition to a zero-carbon economy. With our participation in this coalition, we intend to
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(1) report climate change data and measures to the Carbon Disclosure Project aligned with the guidelines of the TCFD, (2) implement a responsible climate policy, and (3) develop targets which were approved in October 2021 by the Science Based Targets initiative.
We will also continue to advance our DE&I efforts as part of our ESG initiatives to support our focus on attracting and retaining top talent, and to help promote a work environment where everyone has the opportunity to grow to their fullest potential. We believe progress on our ESG initiatives will have a positive impact on our shareholders, consumers, customers, our talented worldwide associates and the communities in which we are proud to live and work.
Human Capital
Overview
We are committed to fostering a positive and engaging culture of inclusion, care, and support where all people throughout our global workforce can thrive. Resources provided to enhance associates' “total well-being” include learning and development opportunities, charitable leave policy, financial advice and stock purchase programs, health and wellness programs, and product discounts. Perks and benefits vary by region and office. We also monitor our culture and associate engagement through a number of methods, including periodic culture surveys.
We have a performance evaluation and feedback program for all of our associates. We encourage career planning at all levels of the Company. We have a formal system for identifying and developing talent and growth for associates within our organization and support the creation of development and succession plans across key positions in the Company. Our senior leadership team develops and recommends to the Board of Directors succession plans for all of our senior management.
We believe our culture, fair pay, benefits, rewards and recognition, healthy-living initiatives, collaborative projects, and open communication between management and staff enables us to attract and retain talented associates.
Our Associates
As of February 28, 2022, we employed approximately 2,146 full-time associates worldwide. We also use temporary, part-time and seasonal associates as needed.
None of our U.S. associates are covered by a collective bargaining agreement. Certain of our associates in Europe and Vietnam are covered by collective arrangements or works counsel in accordance with local practice. We have never experienced a work stoppage, and we believe that we have satisfactory working relations with our associates.
DE&I
We believe that a diverse workforce is essential to innovation, growth, and the well-being of our associates. We celebrate the diversity of our people and value the unique perspectives they bring. We are committed to cultivating an inclusive culture where all of our associates can thrive.
We are advancing short- and long-term initiatives which include: leadership coaching and training to build awareness and sponsorship, recruitment actions to increase diversity of new hires, associate learning programs to develop skills that foster inclusion, business resource groups to further support inclusion, ongoing dialogue sessions with our associates and charitable donations to non-profit organizations whose mission and values align with our culture.
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Communities
We have a 50-plus-year tradition of supporting the communities where we live and work through charitable donations from both the Company and its associates. In addition, we provide our associates two paid community service days to donate their time to organizations that matter most to them. We believe our community engagement and good corporate citizenship will lead to stronger communities and shared success for our Company.
Available Information
We maintain our main Internet site at: http://www.helenoftroy.com. The information contained on this website is not included as a part of, or incorporated by reference into, this Annual Report. We make available on or through our main website’s Investor Relations page under the heading “Financials - SEC Filings” certain reports and amendments to those reports that we file with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements on Schedule 14A, amendments to these reports, and the reports required under Section 16 of the Exchange Act of transactions in our common stock by directors and officers. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Also, on the Investor Relations page, under the heading “Governance,” are our Code of Ethics, Code of Conduct, Corporate Governance Guidelines and the Charters of the Committees of the Board of Directors.
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Item 1A. Risk Factors
Carefully consider the risks described below and all of the other information included in our Annual Report when deciding whether to invest in our securities or otherwise evaluating our business. If any of the risks or other events or circumstances described elsewhere in this Annual Report materialize, our business, operating results or financial condition may suffer. In this case, the trading price of our common stock and the value of your investment might significantly decline. The risks listed below are not the only risks that we face. Additional risks unknown to us or that we currently believe are insignificant may also affect our business.
You should also refer to the explanation of the qualifications and limitations on forward-looking statements under “Information Regarding Forward-Looking Statements,” at the end of Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements made by us are qualified by the risk factors described below.
The following is a summary of some of the principal risk factors which are more fully described below.
Business, Operational and Strategic Risks
•The occurrence of cyber incidents, or failure by us or our third-party service providers to maintain cybersecurity and the integrity of confidential internal or customer data could have a material adverse effect on our operations and profitability.
•A cybersecurity breach, obsolescence or interruptions in the operation of our central global Enterprise Resource Planning systems and other peripheral information systems could have a material adverse effect on our operations and profitability.
•The geographic concentration and peak season capacity of certain of our U.S. distribution facilities increase our risk to disruptions that could affect our ability to deliver products in a timely manner.
•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.
•To compete successfully, we must develop and introduce a continuing stream of innovative new products to meet changing consumer preferences.
•Our operating results are dependent on sales to several large customers; furthermore, our large customers may take actions that adversely affect our gross profit and operating results.
•We are dependent on third-party manufacturers, most of which are located in Asia, and any inability to obtain products from such manufacturers could have a material adverse effect on our business, operating results and financial condition.
•Our ability to deliver products to our customers in a timely manner and to satisfy our customers’ fulfillment standards are subject to several factors, some of which are beyond our control.
•Our operating results may be adversely affected by trade barriers, exchange controls, expropriations, and other risks associated with domestic and foreign operations including uncertainty and business interruptions resulting from political changes and actions in the U.S. and abroad, such as the current conflict between Russia and Ukraine, and volatility in the global credit and financial markets and economy.
•We are subject to risks related to our dependence on the strength of retail economies and may be vulnerable in the event of a prolonged economic downturn.
•We are subject to risks associated with the use of licensed trademarks from or to third parties.
•Our business is subject to weather conditions, the duration and severity of the cold and flu season and other related factors.
•We rely on our Chief Executive Officer and a limited number of other key senior officers to operate our business.
•We may be unsuccessful integrating acquired businesses or disaggregating divested businesses.
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Legal, Regulatory and Tax Risks
•Changes in laws and regulations, including environmental, employment and health and safety and tax laws, and the costs and complexities of compliance with such laws could have a material adverse impact on our business.
•We face risks associated with the increased focus and expectations on climate change and other environmental, social and governance matters.
•Significant changes in or our compliance with regulations, interpretations or product certification requirements could adversely impact our operations.
•We face 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.
•Under current tax law, favorable tax treatment of our non-U.S. income is dependent on our ability to avoid classification as a Controlled Foreign Corporation.
•Legislation enacted in Bermuda and Barbados in response to the European Union’s review of harmful tax competition could adversely affect our operations.
•Our judgments regarding the accounting for tax positions and the resolution of tax disputes may impact our net earnings and cash flow.
•All of our products are manufactured by unaffiliated manufacturers, most of which are located in China, Mexico and Vietnam; we face risks of significant tariffs or other restrictions being placed on imports from China, Mexico or Vietnam or any retaliatory trade measures taken by China, Mexico or Vietnam, adversely impacting our business.
•We face risks associated with product recalls, product liability and other claims against us.
Financial Risks
•If our goodwill, indefinite-lived and definite-lived intangible assets, or other long-lived assets become impaired, we will be required to record impairment charges, which may be significant.
•Increased costs of raw materials, energy and transportation may adversely affect our operating results and cash flow.
•Our liquidity or cost of capital may be materially adversely affected by constraints or changes in the capital and credit markets and limitations under our financing arrangements.
•We face risks associated with foreign currency exchange rate fluctuations.
•Our projections of product demand, sales and net income are highly subjective in nature and our future sales and net income could vary in a material amount from our projections.
You should carefully consider this summary with the more detailed descriptions of risks described below and all of the other information included in our Annual Report when deciding whether to invest in our securities or otherwise evaluating our business.
Business, Operational and Strategic Risks
The occurrence of cyber incidents, or failure by us or our third-party service providers to maintain cybersecurity and the integrity of confidential internal or customer data could have a material adverse effect on our operations and profitability. Such incidents may also result in faulty business decisions, operational inefficiencies, damage to our reputation or our associate and business relationships, and/or subject us to costs, fines, or lawsuits.
Information systems require constant updates to their security policies, networks, software, and hardware systems to reduce the risk of unauthorized access, malicious destruction of data or information theft. We rely on commercially available systems, software, tools, third-party service providers and monitoring to provide security for processing, transmission and storage of confidential information and data. While we have security measures in place, our systems, networks, and third-party service providers have been and
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will continue to be subject to ongoing threats. We and our third-party service providers have experienced and expect to continue to experience actual or attempted cyber-attacks of our information systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition. Our security measures may also be breached in the future as a result of associate error, failure to implement appropriate processes and procedures, advances in computer and software capabilities and encryption technology, new tools and discoveries, malfeasance, third-party action, including cyber-attacks or other international misconduct by computer hackers or otherwise. Additionally, we may have heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. Our workforce is in a state of transition to a combination of remote work and flexible work schedules opening us up for cybersecurity threats and potential breaches as a result of increased employee usage of networks other than company-managed. Furthermore, due to geopolitical tensions related to the current conflict between Russia and Ukraine, the risk of cyber-attacks may be elevated. This could result in one or more third-parties obtaining unauthorized access to our customer or supplier data or our internal data, including personally identifiable information, intellectual property and other confidential business information. Third-parties may also attempt to fraudulently induce associates into disclosing sensitive information such as user names, passwords or other information in order to gain access to customer or supplier data or our internal data, including intellectual property, financial, and other confidential business information. We believe our mitigation measures reduce but cannot eliminate the risk of a cyber incident; however, there can be no assurance that our existing and planned precautions of backup systems, regular data backups, security protocols and other procedures will be adequate to prevent significant damage, system failure or data loss and the same is true for our partners, vendors and other third parties on which we rely. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure or otherwise maintain the confidentiality, security, and integrity of data that we store or otherwise maintain on behalf of third-parties may harm our reputation and our associate, customer and consumer relationships.
If such unauthorized disclosure or access does occur, we may be required to notify our customers, consumers, associates or those persons whose information was improperly used, disclosed or accessed. We may also be subject to claims of breach of contract for such use or disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was improperly used or disclosed. We could also become the subject of regulatory action or litigation from our consumers, customers, associates, suppliers, service providers, and shareholders, which could damage our reputation, require significant expenditures of capital and other resources, and cause us to lose business and revenue. Additionally, an unauthorized disclosure or use of information could cause interruptions in our operations and might require us to spend significant management time and other resources investigating the event and dealing with local and federal law enforcement. Regardless of the merits and ultimate outcome of these matters, we may be required to devote time and expense to their resolution.
In addition, the increase in the number and the scope of data security incidents has increased regulatory and industry focus on security requirements and heightened data security industry practices. New regulation, evolving industry standards, and the interpretation of both, may cause us to incur additional expense in complying with any new data security requirements. As a result, the failure to maintain the integrity of and protect customer or supplier data or our confidential internal data could have a material adverse effect on our business, operating results and financial condition.
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We rely on central global Enterprise Resource Planning (“ERP”) systems and other peripheral information systems. A cybersecurity breach, obsolescence or interruptions in the operation of our computerized systems or other information technologies could have a material adverse effect on our operations and profitability.
Our operations are largely dependent on our ERP system. We continuously make adjustments to improve the effectiveness of the ERP and other peripheral information systems, including the installation of significant new subsystems. Our ERP system is subject to continually evolving cybersecurity and technological risks, including risks associated with cloud data storage. Any failures or disruptions in the ERP and other information systems, including a cybersecurity breach, or any complications resulting from ongoing adjustments to our systems could cause interruption or loss of data in our information or logistical systems that could materially impact our ability to procure products from our factories and suppliers, transport them to our distribution centers, and store and deliver them to our customers on time and in the correct amounts. In addition, natural disasters or other extraordinary events may disrupt our information systems and other infrastructure, and our data recovery processes may not be sufficient to protect against loss.
Certain of our U.S. distribution facilities are geographically concentrated and operate during peak shipping periods at or near capacity. These factors increase our risk that disruptions could occur and significantly affect our ability to deliver products to our customers in a timely manner. Such disruptions could have a material adverse effect on our business.
Most of our U.S. distribution, receiving and storage functions are consolidated into two distribution facilities in northern Mississippi. Approximately 67% of our consolidated gross sales volume shipped from facilities in this region in fiscal 2022. For this reason, any disruption in our distribution process in either of these facilities, even for a few days, could adversely affect our business, operating results and financial condition. As examples, government mandated or suggested isolation protocols relating to a pandemic or other public health crisis, or severe weather events, could limit or disrupt the distribution process at either facility, or even cause the closure of either facility, which could have a material adverse effect on our business, operating results and financial condition.
Additionally, our U.S. distribution operations may incur capacity constraints during peak shipping periods as we continue to grow our sales revenue through a combination of organic growth and acquisitions. These and other factors described above could cause delays in the delivery of our products and increases in shipping and storage costs that could have a material and adverse effect on our business, operating results and financial condition.
We expect the continuing public health crisis resulting from the outbreak of novel coronavirus disease (commonly referred to as “COVID-19”) to continue to adversely impact certain parts of our business, which has had and could continue to have a material impact on our operating results and financial condition. We must 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.
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. COVID-19 has spread throughout the U.S. and the world. We expect COVID-19 to continue to adversely impact certain parts of our business, which could be material. COVID-19 is impacting consumer shopping patterns and demand for goods in certain product categories.
COVID-19 is also impacting our third-party manufacturers, most of which are located in Asia, principally China. As a result, COVID-19 has disrupted certain parts of our supply chain, which in certain cases, limited our ability to fulfill demand and may limit our ability to fulfill demand in the future. Additionally, surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have
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strained the global freight network, which is resulting in higher costs, less capacity, 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. During fiscal 2022, we were adversely impacted by COVID-19 related global supply chain disruptions and cost increases. Similar effects could arise in the future. 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. These factors may impact our ability to fulfill some orders on a timely basis.
Demand for raw materials, components and semiconductor chips impacted by the supply chain challenges described above has 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 for labor along with COVID-19 related government stimulus payments 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.
The extent of the future impact of COVID-19 on our business and financial results will depend largely on future developments, including the duration of the continued surges in the spread of COVID-19 within the U.S. and globally, the effectiveness of any vaccines for COVID-19, the impact on capital and financial markets and the related impact on consumer confidence and spending. These future developments are outside of our control, are highly uncertain and cannot be predicted and may further increase the difficulty of planning for operations. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Our business, financial condition and results, cash flows and liquidity, and results of operations could be materially and adversely affected by any such future developments. Additionally, the extent of COVID-19’s impact on the demand for certain of our product lines in the future will depend on 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 continuously evolving landscape.
The impacts and potential future impact of COVID-19 described above, failure of third parties on which we rely and significant adverse changes in the political environment in which we manufacture, sell or distribute our products, all could adversely impact our business if a future public health crisis, pandemic or epidemic were to occur.
To compete successfully, we must develop and introduce a continuing stream of innovative new products to meet changing consumer preferences.
Our long-term success in the competitive retail environment depends on our ability to develop and commercialize a continuing stream of innovative new products that meet changing consumer preferences and take advantage of opportunities sooner than our competition. We face the risk that our competitors will introduce innovative new products that compete with our products. There are numerous uncertainties inherent in successfully developing and commercializing new products on a continuing basis and new product launches may not deliver expected growth in sales or operating income. If we are unable to develop and introduce a continuing stream of competitive new products, it may have an adverse effect on our business, operating results and financial condition.
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Large customers may take actions that adversely affect our gross profit and operating results.
With the continuing trend towards retail trade consolidation, we are increasingly dependent upon key customers whose bargaining strength is substantial and growing. We may be negatively affected by changes in the policies of our customers, such as actions to respond to a public health crisis, on-hand inventory reductions, limitations on access to shelf space, use of private label brands, price and term demands, and other conditions, which could negatively impact our business, operating results and financial condition.
Certain of our customers source and sell products under their own private label brands that compete with our products. Additionally, as large traditional retail and online customers grow even larger and become more sophisticated, they may continue to demand lower pricing, special packaging, shorter lead times for the delivery of products, smaller more frequent shipments, or impose other requirements on product suppliers. These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship. If we do not effectively respond to these demands, these customers could decrease their purchases from us. A reduction in the demand for our products by these customers and the costs of complying with their business demands could have a material adverse effect on our business, operating results and financial condition.
Our operating results are dependent on sales to several large customers and the loss of, or substantial decline in, sales to a top customer could have a material adverse effect on our revenues and profitability.
A few customers account for a substantial percentage of our net sales revenue. Our financial condition and operating results could suffer if we lost all or a portion of the sales to any one of these customers. In particular, sales to our two largest customers accounted for approximately 30% of our consolidated net sales revenue in fiscal 2022. While only three customers individually accounted for 10% or more of our consolidated net sales revenue in fiscal 2022, sales to our top five customers in aggregate accounted for approximately 49% of fiscal 2022 consolidated net sales revenue. We expect that a small group of customers will continue to account for a significant portion of our net sales revenue. Although we have long-standing relationships with our major customers, we generally do not have written agreements that require these customers to buy from us or to purchase a minimum amount of our products. A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and operating results. Some of our customers creditworthiness may be vulnerable to the impact of COVID-19 or a prolonged economic downturn. We regularly monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate. Despite these efforts, a deterioration in the credit worthiness or bankruptcy filing of a key customer could have a material adverse effect on our business, operating results and financial condition.
We are dependent on third-party manufacturers, most of which are located in Asia, and any inability to obtain products from such manufacturers could have a material adverse effect on our business, operating results and financial condition.
All of our products are manufactured by unaffiliated companies, most of which are in Asia, principally in China. For fiscal 2022, finished goods manufactured in Asia comprised approximately 88% of total finished goods purchased. This concentration exposes us to risks associated with doing business globally, including among others: global public health crises (such as pandemics and epidemics); changing international political relations and conflicts; labor availability and cost; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations and policies; changes in customs duties, additional tariffs and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; an extended and complex transportation cycle; the impact of changing economic conditions; and the availability and cost of raw materials and merchandise. In recent years, increasing labor costs, import tariffs, regional labor dislocations driven by new government policies, local
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inflation, changes in ocean cargo carrier capacity and costs, the impact of energy prices on transportation, and fluctuations in the Chinese Renminbi against the U.S. Dollar have resulted in variability in our cost of goods sold. In the past, certain Chinese suppliers have closed operations due to economic conditions that pressured their profitability. Although we have multiple sourcing partners for certain products, occasionally we may be unable to source certain items on a timely basis due to changes occurring with our suppliers. We believe that we could source similar products outside of China and are moving towards a more diversified supplier base through continuously exploring the expansion of sourcing alternatives in other countries. However, the relocation of any production capacity could require substantial time and costs. The political, legal and cultural environment in Asia is rapidly evolving, and any change that impairs our ability to obtain products from manufacturers in that region, or to obtain products at marketable rates, could have a material adverse effect on our business, operating results and financial condition.
COVID-19 has also disrupted our ability to receive manufactured products from Asia and has disrupted our suppliers located elsewhere who rely on products from Asia. If we continue to experience supply disruptions as a result of the global public health crisis, we may not be able to develop short-term sourcing alternatives. Any disruption to our supply chain, even for a relatively short period of time, could cause a loss of revenue, which could adversely affect our operating results. Additionally, the impact of COVID-19, as well as other factors, has continued to strain the global supply chain network resulting in higher inbound freight costs and surges in prices for raw materials, components and semiconductor chips, which has adversely impacted our operating costs. If such trends continue, we may experience further cost increases which could have a material adverse effect on our business, operating results and financial condition.
With most of our manufacturers located in Asia, our production lead times are relatively long. Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand accurately, we may encounter difficulties in filling customer orders on a timely basis or in liquidating excess inventories. We may also find that customers are canceling orders or returning products. Any of these results could have a material adverse effect on our business, operating results and financial condition.
Our ability to deliver products to our customers in a timely manner and to satisfy our customers’ fulfillment standards are subject to several factors, some of which are beyond our control.
Retailers place great emphasis on timely delivery of our products for specific selling seasons, especially during our third fiscal quarter, and on the fulfillment of consumer demand throughout the year. We cannot control all of the various factors that might affect product delivery to retailers. Vendor production delays, difficulties encountered in shipping from overseas, customs clearance delays, and operational issues with any of the third-party logistics providers we use in certain countries are on-going risks of our business. We also rely upon third-party carriers for our product shipments from our distribution centers to customers. In certain circumstances, we rely on the shipping arrangements our suppliers have made in the case of products shipped directly to retailers from the suppliers. Accordingly, we are subject to risks, including labor disputes, inclement weather, public health crises (such as pandemics and epidemics), natural disasters, possible acts of terrorism, port and canal backlogs and blockages, availability of shipping containers, and increased security restrictions associated with the carriers’ ability to provide delivery services to meet our shipping needs. These risks have been exacerbated by surges in demand and shifts in shopping patterns related to COVID-19, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times for our products. 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. Further, our delivery process must often accommodate special vendor requirements to use specific carriers and delivery schedules. Failure to deliver products to our retailers in a timely and effective manner could damage our reputation and brands and result in the loss
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of customers or reduced orders, which could have a material adverse effect on our business, operating results and financial condition.
Our operating results may be adversely affected by trade barriers, exchange controls, expropriations, and other risks associated with domestic and foreign operations.
The economies of foreign countries important to our operations, including countries in Asia, EMEA and Latin America, could suffer slower economic growth or economic, social and/or political instability or hyperinflation in the future. Our international operations in countries in Asia, EMEA and Latin America, including manufacturing and sourcing operations (and the international operations of our customers), are subject to inherent risks which could adversely affect us. Additionally, there may be uncertainty and business interruptions resulting from political changes and actions in the U.S. and abroad, such as the current conflict between Russia and Ukraine, ongoing terrorist activity, and other global events. The global credit and financial markets have recently experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, or other geopolitical events. Sanctions imposed by the US and other countries in response to such conflicts, including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures by affected countries and others could exacerbate market and economic instability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur.
Furthermore, the exit of the U.K. from European Union (the “EU”) membership (commonly referred to as “Brexit”) could cause disruptions to, and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and associates, which could have an adverse effect on our business, financial results and operations. Recent effects of Brexit include changes in customs regulations, shortages of truck drivers in the U.K., and administrative burdens placed on transportation companies, which have lead to challenges and delays in moving inventory across U.K./EU borders, and higher importation, freight and distribution costs. If such trends continue, we may experience further cost increases. These factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.
The domestic and foreign risks of these changes include, among other things:
•protectionist policies restricting or impairing the manufacturing, sales or import and export of our products;
•new restrictions on access to markets;
•lack of required infrastructure;
•inflation (including hyperinflation) or recession;
•changes in, and the burdens and costs of compliance with, a variety of U.S. and foreign laws and regulations, including environmental laws, occupational health and safety laws, tax laws, and accounting standards;
•social, political or economic instability;
•acts of war and terrorism;
•natural disasters and public health crises, such as pandemics and epidemics (including COVID-19);
•reduced protection of intellectual property rights in some countries;
•increases in duties and taxation;
•restrictions on transfer of funds or exchange of currencies;
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•currency devaluations;
•expropriation of assets; and
•other adverse changes in policies, including monetary, tax or lending policies, encouraging foreign investment or foreign trade by our host countries.
Should any of these events occur, our ability to sell or export our products or repatriate profits could be impaired, we could experience a loss of sales and profitability from our domestic or international operations, and/or we could experience a substantial impairment or loss of assets, any of which could materially and adversely affect our business, operating results and financial condition.
We are subject to risks related to our dependence on the strength of retail economies and may be vulnerable in the event of a prolonged economic downturn, including a future downturn from the effects of COVID-19 or other public health crises.
Our business depends on the strength of the retail economies in various parts of the world, primarily in North America and to a lesser extent EMEA, Asia and Latin America. These retail economies are affected for the most part by factors such as consumer demand and the condition of the retail industry, which, in turn, are affected by general economic conditions and specific events such as natural disasters, public health crises (such as pandemics and epidemics), terrorist attacks and political unrest. Consumer spending in any geographic region is generally affected by a number of factors, including local economic conditions, government actions, inflation, interest rates, energy costs, unemployment rates, gasoline prices, and consumer confidence, all of which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. Measures imposed, or that may be imposed, by national, state and local authorities in response to COVID-19 may have impacts of uncertain severity and duration on domestic and foreign economies. The effectiveness of economic stabilization efforts, including government payments and loans to affected citizens and industries, is uncertain. Any sustained economic downturn in the U.S. or any of the other countries in which we conduct significant business, may cause significant readjustments in both the volume and mix of our product sales, which could materially and adversely affect our business, operating results and financial condition.
We rely on licensed trademarks from third parties and license certain trademarks to third parties in exchange for royalty income, the loss of which could have a material adverse effect on our revenues and profitability.
A substantial portion of our sales revenue comes from selling products under licensed trademarks, particularly in the Beauty and Health & Wellness segments. As a result, we are dependent upon the continued use of these trademarks. Additionally, we license certain owned trademarks to third parties in exchange for royalty income. It is possible that certain actions taken by us, our licensors, licensees, or other third parties might diminish greatly the value of any of our licensed trademarks. Some of our licensors and licensees also have the ability to terminate their license agreements with us at their option subject to each parties’ right to continue the license for a limited period of time following notice of termination. If we, or our licensees, were unable to sell products under these licensed trademarks, or one or more of our license agreements were terminated or the value of the trademarks were diminished, the effect on our business, operating results and financial condition could be both negative and material.
Our business is subject to weather conditions, the duration and severity of the cold and flu season and other related factors, which can cause our operating results to vary from quarter to quarter and year to year.
Sales in our Health & Wellness segment are influenced by weather conditions. Sales volumes for thermometers, humidifiers and heating appliances are higher during, and subject to the severity of, the cold weather months, while sales of fans are higher during, and subject to weather conditions in, spring
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and summer months. Weather conditions can also more broadly impact sales across the organization. Additionally, natural disasters (such as wildfires, hurricanes and ice storms), public health crises (such as pandemics and epidemics), or unusually severe winter weather may result in temporary unanticipated fluctuations in retail traffic and consumer demand, may impact our ability to staff our distribution facilities or could otherwise impede timely transport and delivery of products to and from our distribution facilities. Sales in our Health & Wellness segment are also impacted by cough, cold and flu seasonal trends, including the duration and severity of the cold and flu season. These factors could have a material adverse effect on our business, operating results and financial condition.
We rely on our Chief Executive Officer and a limited number of other key senior officers to operate our business. The loss of any of these individuals could have a material adverse effect on our business.
The loss of our Chief Executive Officer or any of our key senior officers could have a material adverse effect on our business, operating results and financial condition, particularly if we are unable to hire and integrate suitable replacements on a timely basis. Further, as we continue to grow our business, we will continue to adjust our senior management team. If we are unable to attract or retain the right individuals for the team, it could hinder our ability to grow our business and could disrupt our operations or otherwise have a material adverse effect on our business.
Expectations regarding recent acquisitions, 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, may adversely affect the price of our common stock.
We continue to look for opportunities to make strategic business and/or brand acquisitions. Additionally, we frequently evaluate our portfolio of business products and may consider divestitures or exits of businesses that we no longer believe to be an appropriate strategic fit. Our financial results could be impacted in the event that changes in the cash flows or other market-based assumptions or conditions cause the value of acquired assets to fall below book value, or we are not able to deliver the expected benefits or synergies associated with acquisition transactions, which could also have an impact on associated goodwill and intangible assets. Any acquisition or divestiture, if not favorably received by consumers, shareholders, analysts, and others in the investment community, could have a material adverse effect on the price of our common stock.
In addition, any acquisition involves numerous risks, including:
•difficulties in the assimilation of the operations, technologies, products, and personnel associated with the acquisition;
•challenges in integrating distribution channels;
•diversion of management's attention from other business concerns;
•difficulties in transitioning and preserving customer, contractor, supplier, and other important third-party relationships;
•challenges realizing anticipated cost savings, synergies and other benefits;
•risks associated with subsequent losses or operating asset write-offs, contingent liabilities and impairment of related acquired intangible assets;
•risks of entering markets in which we have no or limited experience; and
•potential loss of key employees associated with the acquisition.
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Legal, Regulatory and Tax Risks
Changes in laws and regulations, including environmental, employment and health and safety and tax laws, and the costs and complexities of compliance with such laws could have a material adverse impact on our business.
The impact of future legislation in the U.S. or abroad, including such things as employment and health insurance laws, environmental and climate change related legislation, tax legislation, regulations or treaties is always uncertain. Global, federal and local legislative agendas from time to time contain numerous proposals dealing with environmental policy, energy policy, taxes, financial regulation, transportation policy and infrastructure policy, among others that, if enacted into law, could increase our costs of doing business. Changes in government administrations in the U.S. or abroad, increase the uncertainty of future changes in legislation, enhanced regulations, and greater oversight, or more stringent interpretations, of existing policies by regulatory agencies. Changes in such laws, regulations or oversight could cause us to incur material capital or operating expenditures in the future to comply with applicable laws and regulations, increase our effective income tax rate, delay or interrupt distribution of our products, or make them more costly to produce, all of which could have a material adverse impact on our business.
As additional tax or financial regulatory guidance is issued by the applicable authorities and accounting treatment is clarified, we perform additional analysis on the application of the law and we refine our estimates. Our final analysis may be different from provisional amounts, which could materially affect our tax obligations, effective tax rate and operating results in the period completed.
Increased focus and expectations on climate change and other ESG matters could have a material adverse effect on our business, financial condition and results of operations and damage our reputation.
Increased focus and expectations on ESG are emerging trends with governmental and non-governmental organizations, consumers, shareholders, retail customers, communities, and other stakeholders. These trends have led to, among other things, increased public and private social accountability reporting requirements relating to labor practices, climate change, human trafficking and other ESG matters and greater demands on our packaging and products. The increased focus on ESG matters may also lead to new or more regulations and customer, shareholder and consumer demands that could require us to incur additional costs or make changes to our operations to comply with new regulations or address these demands. We expect that these trends will continue. If we are unable to adequately respond to, or we are not perceived as adequately responding to, existing or new requirements or demands, customers and consumers may choose to purchase products from another company or a competitor. Increased requirements and costs to comply with these requirements, such as climate change regulations and international accords may also cause disruptions in or higher costs associated with manufacturing or distributing our products. Any failure to achieve our ESG goals or a perception of our failure to act responsibly or to effectively respond to new, or changes in, legal or regulatory requirements relating to ESG matters could adversely affect our business, financial condition, results of operations and reputation.
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
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identification, labeling and claim requirements. For example, thermometers distributed by our Health & Wellness segment must comply with various regulations governing the production and distribution of medical devices.
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. 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.
Additionally, some product lines within our Health & Wellness 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. As discussed elsewhere in this Annual Report, during fiscal 2022, 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 & Wellness segment that are sold in the U.S. As a result, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. as we worked to execute repackaging plans after modest changes to our labeling claims on packaging of the air and water filtration impacted products were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of repackaging some of our existing inventory of impacted products. Additionally, as a result of continuing dialogue with the EPA, we are executing further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration products. We expect to incur additional compliance costs, which could materially and adversely impact our gross profit and operating income. 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. While we do not anticipate material fines or penalties by the EPA, there can be no assurances that such fines or penalties will not be imposed against us. 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 Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “EPA Compliance Costs” in this Annual Report.
Global legal developments regarding privacy and data security could result in changes to our business practices, penalties, increased cost of operations, or otherwise harm our business.
As a global company, we are subject to global privacy and data security laws, regulations, and codes of conduct that apply to our various business units. These laws and regulations may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. Government regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use,
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store, share and transmit personal data. This increased scrutiny may result in new interpretations of existing laws, thereby further impacting our business.
New and emerging global and local laws on privacy, data and related technologies, as well as industry self-regulatory codes, are creating new compliance obligations and expanding the scope of potential liability, either jointly or severally with our customers and suppliers. While we have invested in readiness to comply with applicable requirements, these new and emerging laws, regulations and codes may affect our ability to reach current and prospective consumers, to respond to consumer requests under the laws (such as individual rights of access, correction, and deletion of their personal information), and to implement our business models effectively. The costs of compliance or failure to comply with such laws, regulations, codes of conduct and expectations could have a material adverse impact on our financial condition and results of operations.
Under current tax law, favorable tax treatment of our non-U.S. income is dependent on our ability to avoid classification as a Controlled Foreign Corporation. Changes in the composition of our stock ownership could have an impact on our classification. If our classification were to change, it could have a material adverse effect on the largest U.S. shareholders and, in turn, on our business.
A non-U.S. corporation, such as ours, will constitute a “controlled foreign corporation” or “CFC” for U.S. federal income tax purposes if its largest U.S. shareholders together own more than 50 percent of the stock outstanding. A U.S. shareholder is defined as any U.S. person who owns directly, indirectly, or constructively: (1) 10 percent or more of the total combined voting power of all classes of stock, or (2) 10 percent or more of the total value of shares of all classes of stock. If the IRS or a court determined that we were a CFC at any time during the tax year, then each of our U.S. shareholders as defined above would be required to include in gross income for U.S. federal income tax purposes its pro rata share of our “subpart F income” (and the subpart F income of any of our subsidiaries determined to be a CFC) for the period during which we (and our non-U.S. subsidiaries) were deemed a CFC. In addition, any gain on the sale of our shares realized by such a shareholder may be treated as ordinary income to the extent of the shareholder’s proportionate share of our and our CFC subsidiaries’ undistributed earnings and profits accumulated during the shareholder’s holding period of the shares while we were deemed to be a CFC.
Legislation enacted in Bermuda and Barbados in response to the European Union’s review of harmful tax competition could adversely affect our operations.
Our jurisdiction of organization is Bermuda and one of our subsidiaries is organized in Barbados, two of the countries identified in the EU Economic and Financial Affairs Council (“ECOFIN”) report issued in December 2017 listing non-cooperative tax jurisdictions. In response to the ECOFIN report, “economic substance” legislation was enacted in Bermuda and Barbados and ECOFIN subsequently declared that both countries “cooperate with the EU” and are considered to have “implemented all commitments.”
The economic substance legislation in each of Bermuda and Barbados requires certain entities engaged in “relevant activities” in that country to maintain a substantial economic presence in the country, and to satisfy economic substance requirements. The list of “relevant activities” in the respective statutes includes carrying on as a business any one or more of several enumerated activities, such as headquarters, shipping, distribution and service center, intellectual property and holding entities. Any entity that is required to satisfy economic substance requirements must file a declaration with the Bermuda Registrar of Companies and the Ministry of International Business and Industry in Barbados, as applicable. Failure to comply with the economic substance requirements could result in automatic disclosure of relevant information to competent authorities in the EU (and perhaps elsewhere). Other sanctions include financial penalties, restriction or regulation of business activities and/or being struck off as a registered entity in Bermuda or Barbados.
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Although the local authorities have released some implementing guidelines, the impact of the foregoing legislation and developments is unclear, including how the requirements will be measured and whether additional or revised requirements may be enacted by Bermuda or Barbados. We are evaluating the guidelines and will be implementing changes as needed to comply with the legislation. However, we cannot predict the effect of Bermuda’s or Barbados’s current or future economic substance requirements on our business, which may impact the manner and jurisdictions in which we operate, and which could adversely affect our business, financial condition or results of operations.
Our judgments regarding the accounting for tax positions and the resolution of tax disputes may impact our net earnings and cash flow.
Significant judgment is required to determine our effective tax rate and evaluate our tax positions. We provide for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria prescribed by applicable accounting standards. Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact our effective tax rate and financial results. Additionally, we are subject to audits in the various taxing jurisdictions in which we conduct business. In cases where audits are conducted and issues are raised, a number of years may elapse before such issues are finally resolved. Unfavorable resolution of any tax matter could increase the effective tax rate, which could have an adverse effect on our operating results and cash flow. For additional information regarding our taxes, see Note 19 to the accompanying consolidated financial statements.
If significant tariffs or other restrictions are placed on imports from China, Mexico or Vietnam or any retaliatory trade measures are taken by China, Mexico or Vietnam, our business and results of operations could be materially and adversely affected.
All of our products are manufactured by unaffiliated manufacturers, most of which are located in China, Mexico, Vietnam and the U.S. This concentration exposes us to risks associated with doing business globally, including changes in tariffs. Any alteration of trade agreements and terms between China, Mexico, Vietnam and the U.S., including limiting trade with China, Mexico and Vietnam, imposing additional tariffs on imports from China, Mexico or Vietnam and potentially imposing other restrictions on imports from China, Mexico or Vietnam to the U.S. may result in further or higher tariffs, or retaliatory trade measures by China, Mexico or Vietnam, all of which could have a material adverse effect on our business and operating results.
Our business involves the potential for product recalls, product liability and other claims against us, which could materially and adversely affect our business, operating results and financial condition.
We are, from time to time, involved in various claims, litigation matters and regulatory proceedings that arise in the ordinary course of our business and that could have a material adverse effect on us. These matters may include personal injury and other tort claims, deceptive trade practice disputes, intellectual property disputes, product recalls, contract disputes, warranty disputes, employment and tax matters and other proceedings and litigation, including class actions. It is not possible to predict the outcome of pending or future litigation. As with any litigation, it is possible that some of the actions could be decided unfavorably, resulting in significant liability and, regardless of the ultimate outcome, can be costly to defend. Our results and our business could also be negatively impacted if one of our brands suffers substantial damage to its reputation due to a significant product recall or other product-related litigation and if we are unable to effectively manage real or perceived concerns about the safety, quality, or efficacy of our products.
We also face exposure to product liability and other claims in the event that one of our products is alleged to have resulted in property damage, bodily injury or other adverse effects. Although we maintain liability
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insurance in amounts that we believe are reasonable, that insurance is, in most cases, subject to large self-insured retentions for which we are responsible. We cannot provide assurance that we will be able to maintain such insurance on acceptable terms, if at all in the future, or that product liability or other claims will not exceed the amount of insurance coverage, or that all such matters would be covered by our insurance. As a result, these types of claims could have a material adverse effect on our business, operating results and financial condition.
Financial Risks
If our goodwill, indefinite-lived and definite-lived intangible assets, or other long-lived assets become impaired, we will be required to record impairment charges, which may be significant.
A significant portion of our non-current assets consists of goodwill and intangible assets recorded as a result of past acquisitions. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We review intangible assets with definite lives and long-lived assets held and used for impairment if a triggering event occurs during the reporting period. We evaluate long-lived assets held for sale quarterly to determine if fair value less cost to sell has changed during the reporting period. We record impairment charges to the extent the carrying values of these assets are not recoverable in accordance with the applicable accounting standards.
Considerable management judgment is necessary in reaching a conclusion regarding the reasonableness of fair value estimates, evaluating the most likely impact of a range of possible external conditions, considering the resulting operating changes and their impact on estimated future cash flows, determining the appropriate discount factors to use, and selecting and weighting appropriate comparable market level inputs. The recoverability of these non-current assets is dependent upon achievement of our projections and the continued execution of key initiatives related to revenue growth and profitability. The rates used in our projections are management’s estimate of the most likely results over time, given a wide range of potential outcomes. The assumptions and estimates used in our impairment testing involve significant elements of subjective judgment and analysis by our management. While we believe that the assumptions we use are reasonable at the time made, changes in business conditions or other unanticipated events and circumstances may occur that cause actual results to differ materially from projected results and this could potentially require future adjustments to our asset valuations.
Events and changes in circumstances that may indicate there is impairment and which may indicate interim impairment testing is necessary include, but are not limited to: strategic decisions to exit a business or dispose of an asset made in response to changes in economic, political and competitive conditions; the impact of the economic environment on our customer base and on broad market conditions that drive valuation considerations by market participants; our internal expectations with regard to future revenue growth and the assumptions we make when performing our impairment reviews; a significant decrease in the market price of our assets; a significant adverse change in the extent or manner in which our assets are used; a significant adverse change in legal factors or the business climate that could affect our assets; an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset; and significant changes in the cash flows associated with an asset. As a result of such circumstances, we may be required to record a significant charge to net income in our financial statements during the period in which any impairment of our goodwill, indefinite-lived and definite-lived intangible assets or other long-lived assets is determined. As a result of such circumstances and the current public health crisis, we may be required to revise certain accounting estimates and judgments such as those related to the valuation of goodwill, indefinite-lived and definite-lived intangible assets and other long-lived assets, which could result in material impairment charges. Any such impairment charges could have a material adverse effect on our results of operations.
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Increased costs of raw materials, energy and transportation may adversely affect our operating results and cash flow.
Significant increases in the costs and availability of raw materials, energy and transportation may negatively affect our operating results. Our suppliers purchase significant amounts of metals and plastics to manufacture our products. In addition, they also purchase significant amounts of electricity to supply the energy required in their production processes. Global political instabilities and tensions and many other factors may drive up fuel prices resulting in higher transportation prices and product costs. We are heavily dependent on inbound sea, rail and truck freight. Disruptions in the global supply chain and freight networks, including shortages of qualified drivers, has, and may continue to limit inbound and outbound shipment capacity and increase our cost of goods sold and certain operating expenses.
The cost of raw materials, energy and transportation, in the aggregate, represents a significant portion of our cost of goods sold and certain operating expenses, which we may not be able to pass on to our customers. Our operating results could be adversely affected by future increases in these costs. Additionally, the loss or disruption of essential manufacturing and supply elements such as raw materials or other finished product components, restricted transportation or increased freight costs, reduced workforce, or other manufacturing and distribution disruption could adversely impact our ability to meet our customers’ needs.
Our liquidity or cost of capital may be materially adversely affected by constraints or changes in the capital and credit markets and limitations under our financing arrangements.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations, or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash, credit facilities, and other debt arrangements. If our sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the reaction by banks and financial institutions to a public health crisis (such as pandemics and epidemics), the regulatory environment for banks and other financial institutions, the availability of credit and our reputation with potential lenders. Further, disruptions in national and international credit markets could result in limitations on credit availability, tighter lending standards, higher interest rates on consumer and business loans, and higher fees associated with obtaining and maintaining credit availability. Disruptions may also materially limit consumer credit availability and restrict credit availability to us and our customer base. In addition, in the event of disruptions in the financial markets, current or future lenders may become unwilling or unable to continue to advance funds under any agreements in place, increase their commitments under existing credit arrangements or enter into new financing arrangements. These factors could materially adversely affect our liquidity, costs of borrowing and our ability to pursue business opportunities or grow our business, and threaten our ability to meet our obligations as they become due. In addition, covenants in our debt agreements could restrict or delay our ability to respond to business opportunities, or in the event of a failure to comply with such covenants, could result in an event of default, which if not cured or waived, could have a material adverse effect on us. As of April 20, 2022, the remaining amount available for borrowings under our Credit Agreement was $192.8 million. We may also assume or incur additional debt, including secured debt, in the future in connection with, or to fund, future acquisitions or for other operating needs.
In addition, the London Interbank Offered Rate (“LIBOR”), the interest rate benchmark used as a reference rate on our variable rate debt and related interest rate swaps, began being phased out at the beginning of calendar year 2022, with the one-month LIBOR, which we utilize as a reference rate, scheduled to cease immediately after June 30, 2023. A reference rate based on the Secured Overnight Financing Rate (“SOFR”), and other alternative benchmark rates, are replacing LIBOR. We intend to amend our variable rate debt agreements and related interest rate swaps to replace LIBOR with an
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agreed upon replacement index, such as Bloomberg’s Short-Term Bank Yield Index (“BSBY”) or similar index, prior to the one-month LIBOR ceasing, which could result in higher interest rates and adversely affect our interest expense. Additionally, it remains uncertain whether the BSBY or another alternative replacement rate will be agreed upon by the lenders as the replacement for the one-month LIBOR under our variable rate debt agreements and related interest rate swaps. For additional information, refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report.
Our operating results may be adversely affected by foreign currency exchange rate fluctuations.
The U.S. Dollar is the functional currency for the Company and all of its subsidiaries. Changes in the relation of other foreign currencies to the U.S. Dollar will affect our sales and profitability and can result in exchange losses because we have operations and assets located outside the U.S. We transact a portion of our international business in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. Accordingly, foreign operations will continue to expose us to foreign currency exchange rate fluctuations, which may result in the recognition of foreign exchange losses upon remeasurement to U.S. Dollars. Additionally, we purchase a substantial amount of our products from Chinese manufacturers in U.S Dollars, who source a significant portion of their labor and raw materials in Chinese Renminbi. The Chinese Renminbi has fluctuated against the U.S. Dollar in recent years. During fiscal 2022, the average exchange rate of the Chinese Renminbi strengthened against the U.S. dollar by approximately 5% compared to the average rate during fiscal 2021. Chinese Renminbi currency fluctuations have the potential to add volatility to our product costs over time.
Where operating conditions permit, we seek to reduce foreign currency risk by purchasing most of our inventory with U.S. Dollars and by converting cash balances denominated in foreign currencies to U.S. Dollars. We use derivative financial instruments including forward contracts and cross-currency debt swaps to mitigate certain foreign currency exchange rate risk inherent in our transactions denominated in foreign currencies. It is not practical for us to mitigate all our exposures, nor are we able to accurately project the possible effect of foreign currency remeasurement on our operating results or future net income due to our constantly changing exposure to various foreign currencies, difficulty in predicting fluctuations in foreign currency exchange rates relative to the U.S. Dollar and the significant number of currencies involved.
The impact of future foreign currency exchange rate fluctuations on our results of operations cannot be accurately predicted. Accordingly, there can be no assurance that foreign currency exchange rates:
•will be stable in the future;
•can be mitigated with currency hedging or other risk management strategies; or
•will not have a material adverse effect on our business, operating results and financial condition.
Our projections of product demand, sales and net income are highly subjective in nature and our future sales and net income could vary in a material amount from our projections.
From time to time, we may provide financial projections to our shareholders, lenders, investment community, and other stakeholders of our future sales and net income. Since we do not require long-term purchase commitments from our major customers and the customer order and ship process is very short, it is difficult for us to accurately predict the demand for many of our products, or the amount and timing of our future sales, related net income and cash flows.
Our projections are based on management’s best estimate of sales using historical sales data and other relevant information available at the time. These projections are highly subjective since sales to our customers can fluctuate substantially based on the demand of their retail consumers and related ordering
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patterns, as well as other risks described in this Annual Report. Additionally, changes in consumer demand, retailer inventory management strategies, transportation lead times, supplier capacity, and raw material availability could make our inventory management and sales forecasting more difficult. Due to these factors, our future sales and net income could vary materially from our projections.
We are dependent on discretionary spending, which is affected by, among other things, economic and political conditions, consumer confidence, interest, inflation and tax rates, and financial and housing markets, which are all outside of our control. Furthermore, the future extent of COVID-19 on our business and financial results will depend largely on the duration of the continued surges in spread of COVID-19 within the U.S. and globally, the effectiveness of any COVID-19 vaccines, the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. Consequently, these and other potential impacts we are not currently aware of could also cause future sales and net income to vary materially from our projections.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of February 28, 2022, we own, lease or otherwise utilize through third-party management service agreements various properties worldwide for sales, procurement, research and development, administrative and distribution facilities. Our U.S. headquarters are located in El Paso, Texas, and we have two main distribution facilities in Southaven and Olive Branch, Mississippi, which service all of our segments. We are currently constructing an additional distribution facility in Gallaway, Tennessee that we expect to be operational by the end of fiscal year 2023 and will service our Home & Outdoor segment. We believe our facilities are adequate to conduct our business.
Item 3. 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.
Water Filtration Patent Litigation
On December 23, 2021, Brita LP filed a complaint against Kaz USA, Inc. and Helen of Troy Limited in the United States District Court for the Western District of Texas (the “Patent Litigation”), alleging patent infringement by the Company relating to its PUR gravity-fed water filtration systems. In the Patent Litigation, Brita LP seeks monetary damages and injunctive relief relating to the alleged infringement. Brita LP simultaneously filed a complaint with the United States International Trade Commission (“ITC”) against Kaz USA, Inc., Helen of Troy Limited and five other companies that sell water filtration systems (the “ITC Action”). The complaint in the ITC Action also alleges patent infringement by the Company with respect to its PUR gravity-fed water filtration systems. In the ITC Action, Brita LP requested the ITC to initiate an unfair import investigation relating to the filtration systems. It seeks injunctive relief to prevent entry of PUR products (and certain other products) into the U.S. and removal of existing inventory that is already in the U.S. On January 25, 2022, the ITC instituted the investigation requested by the ITC Action. The Patent Litigation has been stayed pending resolution of the ITC Action. We intend to vigorously pursue our claims and defenses in these proceedings. However, we cannot predict the outcome of these proceedings, the amount or range of any potential loss, or when the proceedings will be resolved. Litigation is inherently unpredictable, and the resolution or disposition of these proceedings could, if
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adversely determined, have a material and adverse impact on our financial position and results of operations.
EPA Regulatory Matter
During fiscal 2022, 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 & Wellness segment that are sold in the U.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, we voluntarily
implemented a temporary stop shipment action across this line of products in the U.S. as we worked with
the EPA towards an expedient resolution. The EPA approved modest changes to our labeling claims on packaging of the air and water filtration impacted products, which we implemented, and subsequently resumed shipping during fiscal 2022. Our consolidated and Health & Wellness segment’s net sales revenue, gross profit and operating income during fiscal 2022 was 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 impacted products. Additionally, as a result of continuing dialogue with the EPA, we are executing further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration 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.
See Note 13 to the accompanying consolidated financial statements for further discussion.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is listed on the NASDAQ Global Select Market under symbol: HELE.
Approximate Number of Equity Security Holders of Record
Our common stock is our only class of equity security outstanding at February 28, 2022. As of April 21, 2022, there were 119 holders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders whose shares are held of record by banks, brokers and other financial institutions.
Cash Dividends
Our current policy is to retain earnings to provide funds for the operation and expansion of our business, common stock repurchases and for potential acquisitions. We have not paid any cash dividends on our common stock since inception. Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations, and other factors deemed relevant by our Board of Directors.
Issuer Purchases of Equity Securities
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 11 to the accompanying consolidated financial statements for additional information.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option or other share-based award holders are settled by having the holder tender back to us a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares.
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Share repurchase activity during the three-month period ended February 28, 2022, was as follows:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in thousands) (2) | ||||||||||||||||||||||
| December 1 through December 31, 2021 | 21 | $ | 246.27 | 21 | $ | 497,166 | ||||||||||||||||||||
| January 1 through January 31, 2022 | 338,720 | 221.24 | 338,720 | 422,227 | ||||||||||||||||||||||
| February 1 through February 28, 2022 | 1,170 | 204.80 | 1,170 | 421,988 | ||||||||||||||||||||||
| Total | 339,911 | $ | 221.19 | 339,911 | ||||||||||||||||||||||
(1)The number of shares includes shares of common stock acquired from associates who tendered shares to: (i) satisfy the tax withholding on equity awards as part of our long-term incentive plans or (ii) satisfy the exercise price on stock option exercises. For the three-month period ended February 28, 2022, 152 shares were acquired from associates at an average price per share of $215.68.
(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 11 to the accompanying consolidated financial statements.
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Performance Graph
The graph below compares the cumulative total return of our Company to the NASDAQ Composite Index and a Peer Group Index, assuming $100 was invested on February 28, 2017. The Peer Group Index is the Dow Jones - U.S. Personal Products, Broad Market Cap, Yearly, and Total Return Index. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of the possible future performance of our common stock.
The Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 under the Exchange Act. In addition, it shall not be deemed incorporated by reference by any statement that incorporates this Annual Report by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate this information by reference.
Item 6. Reserved
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Item 7. 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 the other sections of this Annual Report, including Item 1., “Business” and Item 8., “Financial Statements and Supplementary Data.” 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 Item 1A.,“Risk Factors,” and in the section entitled “Information Regarding Forward-Looking Statements,” following this MD&A, and in Item 7A., “Quantitative and Qualitative Disclosures About Market Risk.” 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, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, 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 asset impairment charges, 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 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 50.
We also refer to a number of other key financial measures, some of which are non-GAAP. Management primarily uses these measures to evaluate historical performance on a comparable basis, predict future performance and benchmark our performance against our competitors. Management also uses certain of these financial measures to calculate and monitor our compliance with the covenants in our Credit Agreement and determine amounts available for borrowings. We believe these measures provide management and investors with important information that is useful in understanding our business results, trends and the covenants in our Credit Agreement. The following represents our key financial measures:
•Accounts receivable turnover: Twelve-month trailing net sales revenue divided by the average of the current and prior four fiscal quarters’ ending accounts receivable balances. This result is divided by 365 days to express turnover in terms of average days outstanding.
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•Core business sales: Net sales revenue associated with strategic business that we expect to be an ongoing part of our operations.
•Current ratio: Current assets divided by current liabilities at the end of a reporting period, expressed as a ratio.
•EBITDA: Earnings before interest, taxes, depreciation and amortization expense.
•Ending debt to ending equity ratio: Total interest bearing short- and long-term debt divided by stockholders’ equity at the end of a reporting period, expressed as a ratio.
•Gross profit margin: Gross profit divided by the related net sales revenue expressed as a percentage.
•Inventory turnover: Trailing twelve month cost of goods sold divided by the average of the current and prior four fiscal quarters’ ending inventory balances to express turnover in terms of the number of times per year.
•Leadership Brand sales revenue, net: Net sales revenue from brands which have number-one and number-two positions in their respective categories and include OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools and Drybar.
•Leverage ratio: Total current and long-term debt plus outstanding letters of credit, divided by EBITDA plus non-cash charges and certain allowed addbacks, less certain non-cash income, plus the pro forma effect of acquisitions and certain pro forma run-rate cost savings for acquisitions and dispositions, as defined in our Credit Agreement.
•Non-Core business sales: Net sales revenue associated with business or net assets (including net assets held for sale) that we expect to divest within a year of its designation as Non-Core.
•Online channel net sales: Direct to consumer online net sales, net sales to retail customers fulfilling end-consumer online orders and net sales to pure-play online retailers.
•Operating margin: Operating income for the Company or a business segment divided by the related net sales revenue for the Company or a business segment.
•Organic business sales: 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.
•Return on average equity: Trailing twelve month net income divided by the average of the current and prior four fiscal quarters’ ending stockholders’ equity.
•SG&A ratio: Total selling, general and administrative expense (“SG&A”) divided by net sales revenue.
•Working capital: Current assets less current liabilities.
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Overview
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 Home & Outdoor, Health & Wellness and Beauty. In the fourth quarter of fiscal 2022, we changed the names of two of our segments to align with the growth in certain product offerings and brands within our portfolio. Our previously named “Housewares” segment was changed to “Home & Outdoor,” and our previously named “Health & Home” segment was changed to “Health & Wellness.” There were no changes to the products or brands included within our reportable segments as part of these name changes. The Osprey brand and products were added to the Home & Outdoor segment upon the completion of the acquisition of Osprey discussed further below.
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 was 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 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 continuing to enhance and consolidate our ESG efforts and accelerate programs related to DE&I to support our Phase II transformation.
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 Personal Care business. On June 7, 2021, we completed the sale of our North America Personal Care business to HRB Brands LLC, for $44.7 million in cash and recognized a gain on the sale in SG&A totaling $0.5 million. Subsequent to our fiscal 2022 year end, on March 25, 2022, we completed the sale of the Latin America and Caribbean Personal Care businesses to HRB Brands LLC, for $1.8 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 Personal Care business. Accordingly, we continued to classify the identified net assets of the Latin America and Caribbean Personal Care businesses as held for sale in our fiscal 2022 consolidated balance sheet. See Note 4 to the accompanying consolidated financial statements for additional information.
Subsequent to our fiscal 2022 year end, on April 22, 2022, we completed the acquisition of Recipe Products Ltd., a producer of innovative prestige hair care products for all types of curly and wavy hair under the Curlsmith brand (“Curlsmith”). The total purchase consideration, net of cash acquired, was $150.0 million in cash, subject to certain customary closing adjustments. The acquisition was funded with cash on hand and borrowings from our existing revolving credit facility.
On December 29, 2021, we completed the acquisition of Osprey, a longtime U.S. leader in technical and everyday packs, for $410.9 million in cash, net of a preliminary closing net working capital adjustment and cash acquired. Osprey is highly respected in the outdoor industry with a product lineup that includes a wide range of backpacks and daypacks for hiking, mountaineering, skiing, climbing, mountain biking,
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trail running, commuting, and school, as well as rugged adventure travel packs, wheeled luggage, and travel accessories.
On December 22, 2020, we entered into an amended and extended Trademark License Agreement with Revlon to license Revlon’s trademark for hair care appliances and tools (the “Revlon License”). The Revlon License grants us an exclusive, global, fully paid-up license to use the licensed trademark to manufacture, sell and distribute licensed merchandise in accordance with the terms of the agreement. The Revlon License has an initial term of 40 years, which will automatically renew at the end of the initial term for three consecutive additional 20-year periods unless we give notice of non-renewal. The Revlon License amends and restates the existing Revlon trademark licensing agreements entirely, and eliminates ongoing royalties we have historically paid and recognized as expense within SG&A in accordance with such agreements. In exchange for this exclusive global license, we paid a one-time, up-front license fee of $72.5 million, which was recorded as an intangible asset at cost and is being amortized on a straight-line basis over a useful life of 40 years, representing the initial term. As a result of the Revlon License, we are no longer obligated to pay royalties to Revlon, and thus have not recognized royalty expense after December 22, 2020, the effective date of the Revlon License.
On January 23, 2020, we completed the acquisition of Drybar Products, for approximately $255.9 million in cash. Drybar is an innovative, trend-setting prestige hair care and styling brand in the multibillion-dollar beauty industry.
In fiscal 2018, 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. During fiscal 2022, we incurred $0.4 million of pre-tax restructuring costs related to Project Refuel. During the fourth quarter of fiscal 2022, we completed the plan, which resulted in total restructuring charges of $9.6 million and total annualized profit improvements of approximately $12.5 million over the duration of the plan. See Note 12 to the accompanying consolidated financial statements for additional information.
Subsequent to our fiscal 2022 year end, on March 30, 2022, a third-party facility that we utilize for inventory storage incurred severe damage from a weather-related incident. The inventory stored at this facility primarily relates to our Health & Wellness and Beauty segments. While the inventory is insured, some seasonal inventory and inventory designated for specific customer promotions is currently not accessible, and as a result, may unfavorably impact our net sales revenue in the first half of fiscal 2023. We are working with local officials and our insurance provider to understand the extent of the damage, however the building must be assessed and made structurally sound before we will have access to the inventory and be able to fully assess damages. The potential financial impact of this weather-related incident remains ongoing and could have a material adverse effect on our operating results and financial condition.
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. COVID-19 has spread throughout the U.S. and the world. COVID-19 is impacting consumer shopping patterns and demand for goods in certain product categories. Additionally, COVID-19 has disrupted certain parts of our supply chain, which in certain cases, limited our ability to fulfill demand and may limit our ability to fulfill demand in the future. 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.
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During fiscal 2021, the COVID-19 related impact on our business included the effect of temporary closures of certain customer stores or limited hours of operation and materially lower store traffic which shifted consumer shopping preferences from brick and mortar to more online purchases. In addition, we saw high demand for healthcare products as well as cooking, storage and related product lines as consumers spent more time at home. We also experienced disruptions to our supply chain due to shifting consumer purchasing patterns, limited capacity of shipping containers, and COVID-19 related work stoppages in the global supply chain. During the first quarter of fiscal 2021, we implemented a number of temporary precautionary cost reduction measures, many of which we reversed during the second quarter of fiscal 2021, including restoration of all wages, salaries and director compensation to pre-COVID-19 levels. In addition, during the third quarter of fiscal 2021, we reinstituted merit increases, promotions and new associate hiring. In the third and fourth quarters of fiscal 2021, we continued to increase the amount of our investments including marketing, new product development and capital expenditures to continue progressing our Phase II transformation plan and longer-term opportunities to further grow our business.
During fiscal 2022, we were adversely impacted by COVID-19 related global supply chain disruptions and cost increases. We also saw recovery of our product lines and brands that were unfavorably impacted in fiscal 2021 as a result of the pandemic. Additionally, as customers have been able to return to more brick and mortar shopping, our mix of online sales has been negatively impacted compared to fiscal 2021.
Impacts could arise in the future as this situation continues to evolve, and additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. 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 continued surges in the spread of COVID-19, our continued ability to source and distribute our products, the impact of COVID-19 on capital and financial markets, and the related impact on consumer confidence and spending, all of which are uncertain and difficult to predict considering the continuously evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
For additional information on our related material risks, see Item 1A., “Risk Factors.”
Global Supply Chain and Related 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. The disruptions in the global supply chain and freight networks are also resulting in shortages of qualified drivers, which has, and may continue to limit inbound and outbound shipment capacity and increase our costs of goods sold and certain operating expenses. 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 has 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 for labor along with COVID-19 related government stimulus payments 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 have, and may further, increase our costs and negatively impact our ability to attract and retain qualified associates. Global supply chain disruptions and related inflationary cost trends have adversely impacted our business, financial condition, cash flows
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and results of operations. Continuation of current trends, or more pronounced adverse impacts may arise which could have further negative impacts to our business, results of operations and financial condition.
EPA Compliance Costs
Some product lines within our Health & Wellness segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the EPA, U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
During fiscal 2022, 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 & Wellness segment that are sold in the U.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, we voluntarily implemented a temporary stop shipment action on the impacted products as we worked with the EPA towards an expedient resolution. The EPA approved modest changes to our labeling claims on packaging of the air and water filtration impacted products, which we implemented, and subsequently resumed shipping during fiscal 2022. Our fiscal 2022 consolidated, and Health & Wellness segment’s, net sales revenue, gross profit, SG&A, and operating income was 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 impacted products. Additionally, as a result of continuing dialogue with the EPA, we are executing further repackaging and relabeling plans on certain additional humidifier products and certain additional air filtration 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. 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 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 fiscal 2022, we incurred additional compliance costs of $19.3 million, comprised of $14.6 million of incremental warehouse storage costs and legal fees, which were recognized in SG&A, and $4.7 million of storage, obsolete packaging and other charges from vendors, which were recognized in cost of goods sold. These charges are referred to throughout this Annual Report as “EPA compliance costs.” In addition, during 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 inventory. 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 Health & Wellness 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.
See Note 13 to the accompanying consolidated financial statements for additional information and Item 1A., “Risk Factors” in this Annual Report for additional information on our related material risks.
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Potential Impact of Tariffs
Since 2019, the Office of the U.S. Trade Representative (‘‘USTR’’) has imposed, and in certain cases subsequently reduced or suspended, 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 imports from China to the U.S. may result in further 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.
Potential Impact of Brexit
The transitional exit of the U.K. from E.U. membership (commonly referred to as “Brexit”) could cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and associates, which could have an adverse effect on our business, financial results and operations. The U.K. and the E.U. signed an EU-UK Trade and Cooperation Agreement (the “TCA”), which became provisionally applicable on January 1, 2021 and was formally approved by the European Parliament on May 1, 2021. The ultimate effects of Brexit will depend, in part, on how the terms of the TCA take effect in practice and on any other agreements the U.K. may make with the EU. Recent effects include changes in customs regulations, shortages of truck drivers in the U.K., and administrative burdens placed on transportation companies, which have lead to challenges and delays in moving inventory across U.K./EU borders, and higher importation, freight and distribution costs. If such trends continue, we may experience further cost increases. The TCA and any future trade negotiations could potentially disrupt the markets we serve and the tax jurisdictions in which we operate, adversely change tax benefits or liabilities in these or other jurisdictions, and cause us to lose customers, suppliers, and associates. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.
Potential Impact of LIBOR Transition
LIBOR, which is the interest rate benchmark used as a reference rate on our variable rate debt and related interest rate swaps, began being phased out at the beginning of calendar year 2022, with the one-month LIBOR, which we utilize as a reference rate, scheduled to cease immediately after June 30, 2023. A reference rate based on the SOFR, and other alternative benchmark rates, are replacing LIBOR. We intend to amend our variable rate debt agreements and related interest rate swaps, to replace LIBOR with an agreed upon replacement index, such as Bloomberg’s Short-Term Bank Yield Index (“BSBY”) or similar index, prior to the one-month LIBOR ceasing, which could result in higher interest rates and adversely affect our interest expense. For additional information, refer to Item 1A., “Risk Factors” and Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report.
Potential Impact of Macroeconomic Trends
Since March 2020, interest rates have remained at historically low levels, primarily due to impacts to the U.S economy caused by COVID-19. More recently, higher consumer demand, lower interest rates, global supply chain disruption, and other factors have contributed to rapidly accelerating economic inflation. To offset the impacts of inflation, the Federal Open Market Committee ("FOMC") has been, and intends to continue, raising interest rates throughout the remainder of 2022 and possibly into 2023. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates may have a material adverse impact to us as a higher cost of capital could significantly increase our interest expense on outstanding long-term debt. High inflation and interest rates also have the potential
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to negatively impact consumer spending, which may adversely impact our business, financial condition, cash flows and results of operations.
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.
Changes in foreign currency exchange rates had a favorable impact on consolidated U.S. Dollar reported net sales revenue of approximately $6.8 million, or 0.3% for fiscal 2022 and an unfavorable impact of approximately $0.4 million, or less than 0.1% for fiscal 2021 and $7.0 million, or 0.4% for fiscal 2020.
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 78% of our consolidated net sales revenue in fiscal 2022 was from U.S. shipments compared to 79% of consolidated net sales revenue in both fiscal 2021 and 2020.
Our concentration of sales reflects the evolution of consumer shopping preferences to online or multichannel shopping experiences. For fiscal 2022, 2021 and 2020, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 24%, 26% and 24%, respectively, of our total consolidated net sales revenue and decreased approximately 1.3% in fiscal 2022 and grew approximately 32% and 34% in fiscal 2021 and 2020, respectively, over the prior fiscal year periods.
With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Wellness segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. The 2021-2022 cough/cold/flu season was below historical averages, but higher than the 2020-2021 season, which 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. The 2019-2020 cough/cold/flu season was in line with historical averages for such season.
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Results of Operations
This section provides an analysis of our results of operations for fiscal year 2022 as compared to fiscal year 2021 including descriptions of material changes. Refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2021 Annual Report on Form 10-K, filed with the SEC on April 29, 2021, for an analysis of the fiscal year 2021 results of operations as compared to fiscal year 2020, which such section is hereby incorporated by reference. Additionally, as previously noted, in the fourth quarter of fiscal 2022, we changed the names of two of our segments to align with the growth in certain product offerings and brands within our portfolio. Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our 2021 Annual Report on Form 10-K references the previously named “Housewares” segment which has been changed to “Home & Outdoor,” and our previously named “Health & Home” segment which has been changed to “Health & Wellness.” There were no changes to the products or brands included within our reportable segments as part of these name changes.
The following table provides selected operating data, in U.S. Dollars, as a percentage of net sales revenue, and as a year-over-year percentage change.
| Fiscal Years Ended Last Day of February, | % of Sales Revenue, net | % Change | |||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 (1)(2) | 2021 (2) | 2020 (2) | 2022 | 2021 | 2020 | 22/21 | 21/20 | |||||||||||||||||||||||||||||||||||||||
| Sales revenue by segment, net | |||||||||||||||||||||||||||||||||||||||||||||||
| Home & Outdoor | $ | 865,844 | $ | 727,354 | $ | 640,965 | 38.9 | % | 34.7 | % | 37.5 | % | 19.0 | % | 13.5 | % | |||||||||||||||||||||||||||||||
| Health & Wellness | 777,080 | 890,191 | 685,397 | 35.0 | % | 42.4 | % | 40.1 | % | (12.7) | % | 29.9 | % | ||||||||||||||||||||||||||||||||||
| Beauty | 580,431 | 481,254 | 381,070 | 26.1 | % | 22.9 | % | 22.3 | % | 20.6 | % | 26.3 | % | ||||||||||||||||||||||||||||||||||
| Total sales revenue, net | 2,223,355 | 2,098,799 | 1,707,432 | 100.0 | % | 100.0 | % | 100.0 | % | 5.9 | % | 22.9 | % | ||||||||||||||||||||||||||||||||||
| Cost of goods sold | 1,270,168 | 1,171,497 | 972,966 | 57.1 | % | 55.8 | % | 57.0 | % | 8.4 | % | 20.4 | % | ||||||||||||||||||||||||||||||||||
| Gross profit | 953,187 | 927,302 | 734,466 | 42.9 | % | 44.2 | % | 43.0 | % | 2.8 | % | 26.3 | % | ||||||||||||||||||||||||||||||||||
| SG&A | 680,257 | 637,012 | 511,902 | 30.6 | % | 30.4 | % | 30.0 | % | 6.8 | % | 24.4 | % | ||||||||||||||||||||||||||||||||||
| Asset impairment charges | — | 8,452 | 41,000 | — | % | 0.4 | % | 2.4 | % | * | (79.4) | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 380 | 350 | 3,313 | — | % | — | % | 0.2 | % | 8.6 | % | (89.4) | % | ||||||||||||||||||||||||||||||||||
| Operating income | 272,550 | 281,488 | 178,251 | 12.3 | % | 13.4 | % | 10.4 | % | (3.2) | % | 57.9 | % | ||||||||||||||||||||||||||||||||||
| Non-operating income, net | 260 | 559 | 394 | — | % | — | % | — | % | (53.5) | % | 41.9 | % | ||||||||||||||||||||||||||||||||||
| Interest expense | 12,844 | 12,617 | 12,705 | 0.6 | % | 0.6 | % | 0.7 | % | 1.8 | % | (0.7) | % | ||||||||||||||||||||||||||||||||||
| Income before income tax | 259,966 | 269,430 | 165,940 | 11.7 | % | 12.8 | % | 9.7 | % | (3.5) | % | 62.4 | % | ||||||||||||||||||||||||||||||||||
| Income tax expense | 36,202 | 15,484 | 13,607 | 1.6 | % | 0.7 | % | 0.8 | % | * | 13.8 | % | |||||||||||||||||||||||||||||||||||
| Net income | $ | 223,764 | $ | 253,946 | $ | 152,333 | 10.1 | % | 12.1 | % | 8.9 | % | (11.9) | % | 66.7 | % | |||||||||||||||||||||||||||||||
(1)Fiscal 2022 includes approximately nine weeks of operating results from Osprey, acquired on December 29, 2021. For additional information see Note 7 to the accompanying consolidated financial statements.
(2)Fiscal 2020 includes approximately five weeks of operating results from Drybar Products, acquired on January 23, 2020, and fiscal 2022 and 2021 include a full year of operating results. For additional information see Note 7 to the accompanying consolidated financial statements
* Calculation is not meaningful.
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Fiscal 2022 Financial Results
•Consolidated net sales revenue increased 5.9%, or $124.6 million, to $2,223.4 million compared to $2,098.8 million for the same period last year.
•Consolidated operating income decreased 3.2%, or $8.9 million, to $272.6 million, compared to $281.5 million for the same period last year. Consolidated operating margin decreased 1.1 percentage points to 12.3%, compared to 13.4% for the same period last year. Consolidated operating income for fiscal 2022 includes pre-tax restructuring charges of $0.4 million related to Project Refuel, pre-tax acquisition-related expenses of $2.4 million, and pre-tax EPA compliance costs of $32.4 million. Consolidated operating income for fiscal 2021 included pre-tax asset impairment charges of $8.5 million and pre-tax restructuring charges of $0.4 million related to Project Refuel.
•Consolidated adjusted operating income increased 6.2%, or $20.7 million, to $355.1 million, compared to $334.4 million for the same period last year. Consolidated adjusted operating margin increased 0.1 percentage points to 16.0% of consolidated net sales revenue, compared to 15.9% for the same period last year.
•Net income decreased 11.9%, or $30.2 million, to $223.8 million, compared to $253.9 million for the same period last year. Diluted EPS decreased 9.0% to $9.17, compared to $10.08 for the same period last year.
•Adjusted income increased 2.8% to $301.8 million, compared to $293.7 million for the same period last year. Adjusted diluted EPS increased 6.1% to $12.36, compared to $11.65 for the same period last year.
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Fiscal 2021 Financial Results
•Consolidated net sales revenue increased 22.9%, or $391.4 million, to $2,098.8 million in fiscal 2021, compared to $1,707.4 million in fiscal 2020.
•Consolidated operating income increased 57.9%, or $103.2 million, to $281.5 million in fiscal 2021, compared to $178.3 million in fiscal 2020. Consolidated operating margin increased 3.0 percentage points to 13.4% in fiscal 2021, compared to 10.4% in fiscal 2020. Consolidated operating income for fiscal 2021 included pre-tax asset impairment charges of $8.5 million and pre-tax restructuring charges of $0.4 million related to Project Refuel. Consolidated operating income for fiscal 2020 included pre-tax asset impairment charges of $41.0 million, pre-tax restructuring charges of $3.3 million related to Project Refuel, and pre-tax acquisition-related expenses of $2.5 million.
•Consolidated adjusted operating income increased 24.2%, or $65.1 million, to $334.4 million in fiscal 2021, compared to $269.3 million in fiscal 2020. Consolidated adjusted operating margin increased 0.1 percentage point to 15.9% of consolidated net sales revenue in fiscal 2021, compared to 15.8% in fiscal 2020.
•Net income increased 66.7%, or $101.6 million, to $253.9 million in fiscal 2021, compared to $152.3 million in fiscal 2020. Diluted EPS increased 67.4% to $10.08 in fiscal 2021, compared to $6.02 in fiscal 2020.
•Adjusted income increased 24.7% to $293.7 million in fiscal 2021, compared to $235.6 million in fiscal 2020. Adjusted diluted EPS increased 25.3% to $11.65 in fiscal 2021, compared to $9.30 in fiscal 2020.
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Consolidated and Segment Net Sales Revenue
The following tables summarize the impact that Organic business, foreign currency, and acquisitions had on our net sales revenue by segment:
| Fiscal Year Ended Last Day of February, | |||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 727,354 | $ | 890,191 | $ | 481,254 | $ | 2,098,799 | |||||||||||||||
| Organic business | 113,495 | (116,690) | 96,550 | 93,355 | |||||||||||||||||||
| Impact of foreign currency | 622 | 3,579 | 2,627 | 6,828 | |||||||||||||||||||
| Acquisition (1) | 24,373 | — | — | 24,373 | |||||||||||||||||||
| Change in sales revenue, net | 138,490 | (113,111) | 99,177 | 124,556 | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 865,844 | $ | 777,080 | $ | 580,431 | $ | 2,223,355 | |||||||||||||||
| Total net sales revenue growth (decline) | 19.0 | % | (12.7) | % | 20.6 | % | 5.9 | % | |||||||||||||||
| Organic business | 15.6 | % | (13.1) | % | 20.1 | % | 4.4 | % | |||||||||||||||
| Impact of foreign currency | 0.1 | % | 0.4 | % | 0.5 | % | 0.3 | % | |||||||||||||||
| Acquisition | 3.4 | % | — | % | — | % | 1.2 | % | |||||||||||||||
| Fiscal Year Ended Last Day of February, | |||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty | Total | |||||||||||||||||||
Fiscal 2020 sales revenue, net | $ | 640,965 | $ | 685,397 | $ | 381,070 | $ | 1,707,432 | |||||||||||||||
| Organic business | 85,916 | 202,786 | 57,110 | 345,812 | |||||||||||||||||||
| Impact of foreign currency | 473 | 2,008 | (2,926) | (445) | |||||||||||||||||||
| Acquisition (2) | — | — | 46,000 | 46,000 | |||||||||||||||||||
| Change in sales revenue, net | 86,389 | 204,794 | 100,184 | 391,367 | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 727,354 | $ | 890,191 | $ | 481,254 | $ | 2,098,799 | |||||||||||||||
| Total net sales revenue growth (decline) | 13.5 | % | 29.9 | % | 26.3 | % | 22.9 | % | |||||||||||||||
| Organic business | 13.4 | % | 29.6 | % | 15.0 | % | 20.3 | % | |||||||||||||||
| Impact of foreign currency | 0.1 | % | 0.3 | % | (0.8) | % | — | % | |||||||||||||||
| Acquisition | — | % | — | % | 12.1 | % | 2.7 | % | |||||||||||||||
(1)On December 29, 2021, we completed the acquisition of Osprey. Osprey sales are reported in Acquisition in fiscal 2022 and consist of approximately nine weeks of operating results. For additional information see Note 7 to the accompanying consolidated financial statements.
(2)On January 23, 2020, we completed the acquisition of Drybar Products. Drybar Products sales prior to the first annual anniversary of the acquisition are reported in Acquisition in fiscal 2021 and consist of approximately 47 weeks of incremental operating results. For additional information see Note 7 to the accompanying consolidated financial statements.
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
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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. Subsequent to our fiscal 2022 year end, on March 25, 2022, we completed the sale of the Latin America and Caribbean Personal Care businesses.
The following tables summarize the impact that Core business and Non-Core (Personal Care) business had on our net sales revenue by segment:
| Fiscal Year Ended Last Day of February, | |||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty | Total | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 727,354 | $ | 890,191 | $ | 481,254 | $ | 2,098,799 | |||||||||||||||
| Core business | 138,490 | (113,111) | 143,407 | 168,786 | |||||||||||||||||||
| Non-Core business (Personal Care) | — | — | (44,230) | (44,230) | |||||||||||||||||||
| Change in sales revenue, net | 138,490 | (113,111) | 99,177 | 124,556 | |||||||||||||||||||
Fiscal 2022 sales revenue, net | $ | 865,844 | $ | 777,080 | $ | 580,431 | $ | 2,223,355 | |||||||||||||||
| Total net sales revenue growth (decline) | 19.0 | % | (12.7) | % | 20.6 | % | 5.9 | % | |||||||||||||||
| Core business | 19.0 | % | (12.7) | % | 29.8 | % | 8.0 | % | |||||||||||||||
| Non-Core business (Personal Care) | — | % | — | % | (9.2) | % | (2.1) | % | |||||||||||||||
| Fiscal Year Ended Last Day of February, | |||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty | Total | |||||||||||||||||||
Fiscal 2020 sales revenue, net | $ | 640,965 | $ | 685,397 | $ | 381,070 | $ | 1,707,432 | |||||||||||||||
| Core business | 86,389 | 204,794 | 114,176 | 405,359 | |||||||||||||||||||
| Non-Core business (Personal Care) | — | — | (13,992) | (13,992) | |||||||||||||||||||
| Change in sales revenue, net | 86,389 | 204,794 | 100,184 | 391,367 | |||||||||||||||||||
Fiscal 2021 sales revenue, net | $ | 727,354 | $ | 890,191 | $ | 481,254 | $ | 2,098,799 | |||||||||||||||
| Total net sales revenue growth (decline) | 13.5 | % | 29.9 | % | 26.3 | % | 22.9 | % | |||||||||||||||
| Core business | 13.5 | % | 29.9 | % | 30.0 | % | 23.7 | % | |||||||||||||||
| Non-Core business (Personal Care) | — | % | — | % | (3.7) | % | (0.8) | % | |||||||||||||||
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Leadership Brand and Other Net Sales Revenue
The following table summarizes our Leadership Brand and other net sales revenue:
| Fiscal Years Ended Last Day of February, | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2020 | 22/21 | 21/20 | 22/21 | 21/20 | ||||||||||||||||||||||||||||||||||
| Leadership Brand sales revenue, net (1)(2) | $ | 1,810,249 | $ | 1,706,545 | $ | 1,360,059 | $ | 103,704 | $ | 346,486 | 6.1 | % | 25.5 | % | |||||||||||||||||||||||||||
| All other sales revenue, net | 413,106 | 392,254 | 347,373 | 20,852 | 44,881 | 5.3 | % | 12.9 | % | ||||||||||||||||||||||||||||||||
| Total sales revenue, net | $ | 2,223,355 | $ | 2,098,799 | $ | 1,707,432 | $ | 124,556 | $ | 391,367 | 5.9 | % | 22.9 | % | |||||||||||||||||||||||||||
(1)Fiscal 2022 includes approximately nine weeks of operating results from Osprey, acquired on December 29, 2021. For additional information see Note 7 to the accompanying consolidated financial statements.
(2)Fiscal 2022 and 2021 include a full year of operating results from Drybar Products, acquired on January 23, 2020, compared to approximately five weeks of operating results in fiscal 2020. For additional information see Note 7 to the accompanying consolidated financial statements.
Consolidated Net Sales Revenue
Comparison of Fiscal 2022 to 2021
Consolidated net sales revenue increased $124.6 million, or 5.9%, to $2,223.4 million, compared to $2,098.8 million. Growth was driven by an increase from Organic business of $93.4 million, or 4.4%, primarily due to:
•higher brick and mortar and online channel sales in our Beauty and Home & Outdoor segments primarily reflecting strong consumer demand and the favorable comparative impact of COVID-19 related store closures, reduced store traffic and a soft back-to-school season in the prior year;
•higher sales in the club and closeout channels;
•growth in consolidated international sales; and
•the impact of customer price increases related to rising freight and product costs.
These factors were partially offset by:
•a decrease in sales in our Health & Wellness 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; 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.
The Osprey acquisition also contributed $24.4 million, or 1.2%, to consolidated net sales revenue growth. Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $6.8 million, or 0.3%.
Net sales revenue from our Leadership Brands was $1,810.2 million, compared to $1,706.5 million, representing growth of 6.1%.
Segment Net Sales Revenue
Home & Outdoor
Comparison of Fiscal 2022 to 2021
Net sales revenue increased $138.5 million, or 19.0%, to $865.8 million, compared to $727.4 million. Growth was driven by an increase from Organic business of $113.5 million, or 15.6%, primarily due to:
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•higher brick and mortar and online channel sales driven by strong consumer demand and the favorable comparative impact of COVID-19 related store closures, reduced store traffic and a soft back-to-school season in the prior year;
•higher sales in the club and closeout channels;
•growth in international sales; and
•the impact of customer price increases related to rising freight and product costs.
Net sales revenue growth also benefited from approximately nine weeks of net sales revenue of $24.4 million, or 3.4%, from the Osprey acquisition. Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $0.6 million, or 0.1%.
Health & Wellness
Comparison of Fiscal 2022 to 2021
Net sales revenue decreased $113.1 million, or 12.7%, to $777.1 million, compared to $890.2 million. The decrease was primarily driven by a decrease from Organic business of $116.7 million, or 13.1%, 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; 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.
These factors were partially offset by an increase in sales of fans as some customers accelerated seasonal orders, and the impact of customer price increases related to rising freight and product costs.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $3.6 million, or 0.4%.
Beauty
Comparison of Fiscal 2022 to 2021
Net sales revenue increased $99.2 million, or 20.6%, to $580.4 million, compared to $481.3 million. The increase was driven by an increase from Organic business of $96.6 million, or 20.1%, primarily due to:
•higher brick and mortar and online channel sales driven by strong consumer demand and the favorable comparative impact of COVID-19 related store closures and reduced store traffic in the prior year;
•new product introductions;
•expanded distribution primarily in the club channel;
•increased closeout channel sales; and
•higher international sales.
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 also favorably impacted by net foreign currency fluctuations of approximately $2.6 million, or 0.5%.
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Consolidated Gross Profit Margin
Comparison of Fiscal 2022 to 2021
Consolidated gross profit margin decreased 1.3 percentage points to 42.9%, compared to 44.2%. The decrease in consolidated gross profit margin was primarily due to:
•the net dilutive impact of inflationary costs and related customer price increases;
•EPA compliance costs recognized in cost of goods sold in the Health & Wellness segment of $17.8 million; and
•a less favorable channel mix within the Home & Outdoor segment.
These factors were partially offset by a more favorable product mix within the Beauty and Home & Outdoor segments and a favorable mix of more Beauty and Home & Outdoor sales within our consolidated net sales revenue.
Consolidated SG&A
Comparison of Fiscal 2022 to 2021
Consolidated SG&A ratio increased 0.2 percentage points to 30.6%, compared to 30.4%. The increase in the consolidated SG&A ratio was primarily due to:
•the comparative impact of higher personnel expense due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19;
•EPA compliance costs of $14.6 million in the Health & Wellness segment as a result of the EPA packaging compliance matter and related stop shipment actions;
•higher share-based compensation expense; and
•increased distribution expense.
These factors were partially offset by:
•a decrease in marketing expense;
•lower royalty expense;
•reduced amortization expense; and
•the favorable leverage impact of net sales growth.
Asset Impairment Charges
Fiscal 2022
We did not record any asset impairment charges.
Fiscal 2021
As a result of our quarterly impairment evaluation of long-lived assets held for sale, we recorded an asset impairment charge of $8.5 million ($7.4 million after tax) to reduce the goodwill of our Personal Care business during the fourth quarter of fiscal 2021.
Restructuring Charges
Fiscal 2022
We incurred $0.4 million of pre-tax restructuring costs related to employee severance and termination benefits under Project Refuel. During fiscal 2022, we made total cash restructuring payments of $0.5 million.
Fiscal 2021
We incurred $0.4 million of pre-tax restructuring costs related to employee severance and termination benefits and contract termination costs under Project Refuel. During fiscal 2021, we made total cash restructuring payments of $1.1 million and had a remaining liability of $0.1 million as of February 28, 2021.
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Operating Income, Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment
In order to provide a better understanding of the impact of certain items on our operating income, the tables that follow report the comparative pre-tax impact of asset impairment charges, 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 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Fiscal Year Ended February 28, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Home & Outdoor (1) | Health & Wellness | Beauty (2) | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 134,925 | 15.6 | % | $ | 39,217 | 5.0 | % | $ | 98,408 | 17.0 | % | $ | 272,550 | 12.3 | % | |||||||||||||||||||||||||||||||
| Acquisition-related expenses | 2,424 | 0.3 | % | — | — | % | — | — | % | 2,424 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| EPA compliance costs | — | — | % | 32,354 | 4.2 | % | — | — | % | 32,354 | 1.5 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 369 | — | % | — | — | % | 11 | — | % | 380 | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 137,718 | 15.9 | % | 71,571 | 9.2 | % | 98,419 | 17.0 | % | 307,708 | 13.8 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,891 | 0.3 | % | 2,284 | 0.3 | % | 7,589 | 1.3 | % | 12,764 | 0.6 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 13,812 | 1.6 | % | 12,001 | 1.5 | % | 8,805 | 1.5 | % | 34,618 | 1.6 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 154,421 | 17.8 | % | $ | 85,856 | 11.0 | % | $ | 114,813 | 19.8 | % | $ | 355,090 | 16.0 | % | |||||||||||||||||||||||||||||||
| Fiscal Year Ended February 28, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty (2) | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income, as reported (GAAP) | $ | 122,487 | 16.8 | % | $ | 94,103 | 10.6 | % | $ | 64,898 | 13.5 | % | $ | 281,488 | 13.4 | % | |||||||||||||||||||||||||||||||
| Asset impairment charges | — | — | % | — | — | % | 8,452 | 1.8 | % | 8,452 | 0.4 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 249 | — | % | (6) | — | % | 107 | — | % | 350 | — | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 122,736 | 16.9 | % | 94,097 | 10.6 | % | 73,457 | 15.3 | % | 290,290 | 13.8 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,055 | 0.3 | % | 8,611 | 1.0 | % | 6,977 | 1.4 | % | 17,643 | 0.8 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 10,278 | 1.4 | % | 9,191 | 1.0 | % | 6,949 | 1.4 | % | 26,418 | 1.3 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 135,069 | 18.6 | % | $ | 111,899 | 12.6 | % | $ | 87,383 | 18.2 | % | $ | 334,351 | 15.9 | % | |||||||||||||||||||||||||||||||
| Fiscal Year Ended February 29, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Home & Outdoor | Health & Wellness | Beauty (2) | Total | |||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss), as reported (GAAP) | $ | 123,135 | 19.2 | % | $ | 68,166 | 9.9 | % | $ | (13,050) | (3.4) | % | $ | 178,251 | 10.4 | % | |||||||||||||||||||||||||||||||
| Acquisition-related expenses | — | — | % | — | — | % | 2,546 | 0.7 | % | 2,546 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| Asset impairment charges | — | — | % | — | — | % | 41,000 | 10.8 | % | 41,000 | 2.4 | % | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 1,351 | 0.2 | % | 93 | — | % | 1,869 | 0.5 | % | 3,313 | 0.2 | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 124,486 | 19.4 | % | 68,259 | 10.0 | % | 32,365 | 8.5 | % | 225,110 | 13.2 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,055 | 0.3 | % | 10,539 | 1.5 | % | 8,677 | 2.3 | % | 21,271 | 1.2 | % | |||||||||||||||||||||||||||||||||||
| Non-cash share-based compensation | 7,218 | 1.1 | % | 9,717 | 1.4 | % | 5,994 | 1.6 | % | 22,929 | 1.3 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating income (non-GAAP) | $ | 133,759 | 20.9 | % | $ | 88,515 | 12.9 | % | $ | 47,036 | 12.3 | % | $ | 269,310 | 15.8 | % | |||||||||||||||||||||||||||||||
(1)Fiscal 2022 includes approximately nine weeks of operating results from Osprey, acquired on December 29, 2021. For additional information see Note 7 to the accompanying consolidated financial statements.
(2)Fiscal 2022 and 2021 include a full year of operating results from Drybar Products, acquired on January 23, 2020, compared to approximately five weeks of operating results in fiscal 2020. For additional information see Note 7 to the accompanying consolidated financial statements.
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Consolidated Operating Income
Comparison of Fiscal 2022 to 2021
Consolidated operating income was $272.6 million, or 12.3% of net sales revenue, compared to $281.5 million, or 13.4% of net sales revenue. Fiscal 2022 includes pre-tax acquisition-related expenses of $2.4 million, pre-tax EPA compliance costs of $32.4 million, and pre-tax restructuring charges of $0.4 million, compared to pre-tax asset impairment charges of $8.5 million and pre-tax restructuring charges of $0.4 million in fiscal 2021. The effect of these items unfavorably impacted the year-over-year comparison of consolidated operating margin by a combined 1.2 percentage points. The remaining 0.1 percentage point increase in consolidated operating margin was primarily driven by:
•a favorable product mix within the Beauty and Home & Outdoor segment and a favorable mix of more Beauty and Home & Outdoor sales within our consolidated net sales revenue;
•a decrease in marketing expense;
•lower royalty expense; and
•reduced amortization expense.
These factors were partially offset by:
•the net dilutive impact of inflationary costs and related customer price increases;
•the comparative impact of higher personnel expense due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19;
•higher share-based compensation expense;
•increased distribution expense; and
•a less favorable channel mix within the Home & Outdoor segment.
Consolidated adjusted operating income increased 6.2% to $355.1 million, or 16.0% of net sales revenue, compared to $334.4 million, or 15.9% of net sales revenue.
Home & Outdoor
Comparison of Fiscal 2022 to 2021
Operating income was $134.9 million, or 15.6% of segment net sales revenue, compared to $122.5 million, or 16.8% of segment net sales revenue. The 1.2 percentage point decrease in segment operating margin was primarily due to:
•a less favorable channel mix;
•an increase in marketing expense;
•higher acquisition-related expense in connection with the Osprey transaction;
•the net dilutive impact of inflationary costs and related customer price increases; and
•higher share-based compensation expense.
These factors were partially offset by favorable operating leverage and a more favorable product mix.
Adjusted operating income increased 14.3% to $154.4 million, or 17.8% of segment net sales revenue, compared to $135.1 million, or 18.6% of segment net sales revenue.
Health & Wellness
Comparison of Fiscal 2022 to 2021
Operating income was $39.2 million, or 5.0% of segment net sales revenue, compared to $94.1 million, or 10.6% of segment net sales revenue. The 5.6 percentage point decrease in segment operating margin is primarily due to:
•unfavorable operating leverage;
•EPA compliance costs of $32.4 million;
•the net dilutive impact of inflationary costs and related customer price increases;
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•higher personnel expense;
•increased inventory obsolescence expense;
•increased distribution expense; and
•higher share-based compensation expense.
These factors were partially offset by:
•a decrease in marketing expense;
•lower inbound air freight expense;
•the favorable comparative impact of tariff exclusion refunds received in fiscal 2022;
•lower royalty expense;
•reduced amortization expense; and
•decreased annual incentive compensation expense.
Adjusted operating income decreased 23.3% to $85.9 million, or 11.0% of segment net sales revenue, compared to $111.9 million, or 12.6% of segment net sales revenue.
Beauty
Comparison of Fiscal 2022 to 2021
Operating income was $98.4 million, or 17.0% of segment net sales revenue, compared to $64.9 million, or 13.5% of segment net sales revenue. Operating income in fiscal 2021 included $8.5 million of pre-tax asset impairment charges. The effect of this item favorably impacted the year-over-year comparison of segment operating margin by 1.8 percentage points. The remaining 1.7 percentage point increase in segment operating margin was primarily due to:
•favorable operating leverage;
•a more favorable product mix;
•lower inventory obsolescence expense;
•a decrease in outbound freight costs; and
•reduced royalty expense as a result of the amended Revlon trademark license.
These factors were partially offset by:
•