Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 31, 2010

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ..... to .....

 

Commission file number: 001-14669

 

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda

 

74-2692550

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Clarenden House

Church Street

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

 

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address)

 

(Zip Code)

 

(915) 225-8000

(Registrant’s telephone number, including area code)

 

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 x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).         Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer   x        

 

 

 

Non-accelerated filer   o (Do not check if a smaller reporting company)

 

Smaller reporting company   o        

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 4, 2010

Common Shares, $0.10 par value, per share

 

30,635,477 shares

 

 

 



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

INDEX – FORM 10-Q

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets (unaudited)

 

 

 

 

as of August 31, 2010 and February 28, 2010

3

 

 

 

 

 

 

 

Consolidated Condensed Statements of Income (unaudited)

 

 

 

 

for the Three- and Six-Months Ended

 

 

 

 

August 31, 2010 and August 31, 2009

4

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows (unaudited)

 

 

 

 

for the Six Months Ended

 

 

 

 

August 31, 2010 and August 31, 2009

5

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements (unaudited)

6

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

 

 

 

 

and Results of Operations

22

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

 

 

 

Item 1A.

Risk Factors

41

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

 

 

 

Item 6.

Exhibits

41

 

 

 

 

 

 

Signatures

42

 

2


 


Table of Contents

 

PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (unaudited)

(in thousands, except shares and par value)

 

 

August 31,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Asset, current:

 

 

 

 

 

Cash and cash equivalents

 

$

49,069

 

$

110,208

 

Derivative assets, current

 

1,071

 

795

 

Receivables - principally trade, less allowances of $3,723 and $3,346

 

122,313

 

109,722

 

Inventory, net

 

167,500

 

124,021

 

Prepaid expenses

 

4,577

 

2,485

 

Income taxes receivable

 

-    

 

597

 

Deferred tax assets, net

 

12,093

 

11,526

 

Total assets, current

 

356,623

 

359,354

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $61,607 and $58,464

 

80,233

 

82,113

 

Goodwill

 

201,542

 

185,937

 

Other intangible assets, net of accumulated amortization of $30,698 and $33,449

 

220,356

 

177,124

 

Other assets, net of accumulated amortization of $3,940 and $3,825

 

30,949

 

30,205

 

Total assets

 

$

889,703

 

$

834,733

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

Accounts payable, principally trade

 

$

48,227

 

$

35,005

 

Accrued expenses and other current liabilities

 

67,621

 

67,289

 

Income taxes payable

 

145

 

-    

 

Long-term debt, current maturities

 

53,000

 

3,000

 

Total liabilities, current

 

168,993

 

105,294

 

 

 

 

 

 

 

Deferred compensation liability

 

3,473

 

3,758

 

Other liabilities, noncurrent

 

739

 

75

 

Deferred tax liabilities, net

 

1,006

 

1,202

 

Long-term debt, excluding current maturities

 

78,000

 

131,000

 

Liability for uncertain tax positions

 

1,829

 

2,562

 

Derivative liabilities, noncurrent

 

8,272

 

7,070

 

Total liabilities

 

262,312

 

250,961

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued

 

-    

 

-    

 

Common stock, $0.10 par. Authorized 50,000,000 shares; 30,623,427 and 30,571,813 shares issued and outstanding

 

3,062

 

3,057

 

Additional paid in capital

 

124,351

 

120,761

 

Accumulated other comprehensive loss

 

(8,890

)

(8,574

)

Retained earnings

 

508,868

 

468,528

 

Total stockholders’ equity

 

627,391

 

583,772

 

Total liabilities and stockholders’ equity

 

$

889,703

 

$

834,733

 

 

See accompanying notes to consolidated condensed financial statements.

 

3



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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (unaudited)

(in thousands, except per share data)

 

 

Three Months Ended August 31,

 

 

Six Months Ended August 31,

 

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

$

174,823

 

$

162,193

 

 

 

$

334,976

 

$

306,066

 

Cost of goods sold

 

 

94,547

 

93,299

 

 

 

182,273

 

178,663

 

Gross profit

 

 

80,276

 

68,894

 

 

 

152,703

 

127,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

 

52,621

 

48,250

 

 

 

101,815

 

87,572

 

Operating income before impairment

 

 

27,655

 

20,644

 

 

 

50,888

 

39,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

-    

 

900

 

 

 

501

 

900

 

Operating income

 

 

27,655

 

19,744

 

 

 

50,387

 

38,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

 

164

 

361

 

 

 

334

 

803

 

Interest expense

 

 

(2,136

)

(2,587

)

 

 

(4,296

)

(6,047

)

Income before income taxes

 

 

25,683

 

17,518

 

 

 

46,425

 

33,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

3,485

 

1,858

 

 

 

5,174

 

1,298

 

Deferred

 

 

(1,275

)

(251

)

 

 

(609

)

1,969

 

Net income

 

 

$

23,473

 

$

15,911

 

 

 

$

41,860

 

$

30,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.77

 

$

0.53

 

 

 

$

1.37

 

$

1.01

 

Diluted

 

 

$

0.75

 

$

0.51

 

 

 

$

1.34

 

$

0.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,642

 

30,098

 

 

 

30,637

 

29,989

 

Diluted

 

 

31,230

 

30,920

 

 

 

31,292

 

30,749

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (unaudited)

(in thousands)

 

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net cash provided by operating activities:

 

 

 

 

 

Net income

 

$

41,860

 

$

30,420

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

8,306

 

7,933

 

Provision for doubtful receivables

 

(49

)

344

 

Share-based compensation

 

1,145

 

831

 

Intangible asset impairment charges

 

501

 

900

 

Loss on the sale of property and equipment

 

49

 

33

 

Realized and unrealized gain on investments

 

-    

 

(421

)

Deferred income taxes and tax credits

 

(661

)

1,934

 

Changes in operating assets and liabilities, net of effects of acquisition of businesses:

 

 

 

 

 

Receivables

 

(3,953

)

(13,111

)

Inventories

 

(38,592

)

15,784

 

Prepaid expenses

 

(1,700

)

(978

)

Other assets

 

(1,061

)

(298

)

Accounts payable

 

7,954

 

393

 

Accrued expenses and other current liabilities

 

(2,192

)

6,548

 

Accrued income taxes

 

172

 

397

 

Net cash provided by operating activities

 

11,779

 

50,709

 

 

 

 

 

 

 

Net cash used in investing activities:

 

 

 

 

 

Capital, license, trademark, and other intangible expenditures

 

(1,999

)

(1,581

)

Proceeds from the sale of property and equipment

 

63

 

44

 

Proceeds from sale of investments

 

200

 

1,074

 

Payments to acquire businesses

 

(69,000

)

(60,000

)

Net cash used in investing activities

 

(70,736

)

(60,463

)

 

 

 

 

 

 

Net cash used in financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(3,000

)

(78,000

)

Proceeds from exercise of stock options, employee stock purchases and excess tax benefits

 

2,617

 

866

 

Payment of tax obligations resulting from cashless option exercise

 

-    

 

(2,712

)

Payments for repurchases of common stock

 

(1,799

)

(419

)

Net cash used in financing activities

 

(2,182

)

(80,265

)

Net decrease in cash and cash equivalents

 

(61,139

)

(90,019

)

Cash and cash equivalents, beginning balance

 

110,208

 

102,675

 

Cash and cash equivalents, ending balance

 

$

49,069

 

$

12,656

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

4,208

 

$

6,570

 

Income taxes paid, net of refunds

 

$

4,943

 

$

1,005

 

Value of common stock received as exercise price of options

 

$

-

 

$

11,992

 

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

August 31, 2010

 

Note 1 - Basis of Presentation

 

In our opinion, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of August 31, 2010 and February 28, 2010, and the results of our consolidated operations for the three- and six-month periods ended August 31, 2010 and 2009. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2010, and our other reports on file with the Securities and Exchange Commission (“SEC”).  In some cases, we have provided additional information for prior periods in the accompanying notes to consolidated condensed financial statements to conform to the current period’s presentation.  In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, 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 the Company’s common shares, par value $0.10 per share, as “common stock.”

 

Product and service names mentioned in this Form 10-Q are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions.  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 companies.

 

Note 2 – New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies that are adopted by the Company as of the specified effective date.  Unless otherwise discussed, the Company’s management believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.

 

Note 3 – Litigation

 

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.

 

Note 4 – Earnings per Share

 

Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period plus the effect of dilutive securities.   Our dilutive securities consist entirely of outstanding options for common stock that were “in-the-money,” meaning that the exercise price of the options was less than the average market price of our common stock during the period reported.  “Out-of-the-money” options are outstanding options to purchase common stock that were excluded from the computation of earnings per share because the exercise price of the options was greater than the average market price of our common stock during the period reported.  Thus, their effect would be antidilutive.

 

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Table of Contents

 

The effect of dilutive securities was approximately 588,000 and 654,500 shares of common stock for the three- and six-month periods ended August 31, 2010, respectively, and 821,700 and 760,700 shares of common stock for the three- and six-month periods ended August 31, 2009, respectively.   Options for common stock that were antidilutive totaled approximately 852,300 and 666,900 for the three- and six-month periods ended August 31, 2010, respectively, and 1,609,400 and 1,680,400 for the three- and six-month periods ended August 31, 2009, respectively.

 

Note 5 – Comprehensive Income

 

The components of comprehensive income, net of tax, for the periods covered by this report are as follows:

 

COMPONENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 Three Months Ended August 31,

 

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,473

 

$

15,911

 

 

 

$

41,860

 

$

30,420

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges - interest rate swaps, net of tax (1)

 

(1,141

)

393

 

 

 

(742

)

1,183

 

Cash flow hedges - foreign currency, net of tax (2)

 

(443

)

(153

)

 

 

429

 

(867

)

Unrealized gain (loss) - auction rate securities, net of tax (3)

 

(158

)

824

 

 

 

(2

)

370

 

Comprehensive income, net of tax

 

$

21,731

 

$

16,975

 

 

 

$

41,545

 

$

31,106

 

 

The components of accumulated other comprehensive loss, net of tax, for the periods covered by our consolidated condensed balance sheets are as follows:

 

 

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

(in thousands)

 

 

August 31,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Unrealized holding losses on cash flow hedges - interest rate swaps, net of tax (1)

 

$

(8,676

)

$

(7,934

)

Unrealized holding gains on cash flow hedges - foreign currency, net of tax (2)

 

1,021

 

592

 

Temporary impairment loss on auction rate securities, net of tax (3)

 

(1,235

)

(1,232

)

Total accumulated other comprehensive loss

 

$

(8,890

)

$

(8,574

)

 

(1)

 

The change in unrealized loss on interest rate swap cash flow hedges is recorded net of tax expense (benefits) of ($0.59) and ($0.38) million for the three- and six-month periods ended August 31, 2010, respectively, and $0.20 and $0.61 million for the three- and six-month periods ended August 31, 2009, respectively. The unrealized holding loss on interest rate swap cash flow hedges included in accumulated other comprehensive loss includes net deferred tax benefits of $4.47 and $4.09 million at August 31, 2010 and February 28, 2010, respectively.

 

 

 

(2)

 

The change in unrealized gain (loss) on foreign currency cash flow and ordinary hedges is recorded net of tax expense (benefits) of ($0.18) and $0.23 million for the three- and six-month periods ended August 31, 2010, respectively, and ($0.06) and ($0.37) million for the three- and six-month periods ended August 31, 2009, respectively. The unrealized holding gain on foreign currency cash flow hedges included in accumulated other comprehensive loss, includes net deferred tax expense of $0.47 and $0.24 million at August 31, 2010 and February 28, 2010, respectively.

 

 

 

(3)

 

The change in temporary impairment loss on auction rate securities is recorded net of tax expense (benefits) of ($0.08) and $0.00 million for the three- and six-month periods ended August 31, 2010, respectively, and $0.42 and $0.19 million for the three- and six-month periods ended August 31, 2009, respectively. The temporary impairment loss on auction rate securities included in accumulated other comprehensive loss, includes net deferred tax benefits of $0.64 million at August 31, 2010 and February 28, 2010.

 

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Table of Contents

 

Note 6 – Segment Information

 

In the tables that follow, we present two segments: Personal Care and Housewares.  Our Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, shavers, mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid and aerosol hair styling products, men’s fragrances, men’s and women’s antiperspirants and deodorants, liquid and bar soaps, shampoos, hair treatments, foot powder, body powder and skin care products.  Our Housewares segment reports the operations of the OXO family of brands whose products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, food storage containers, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, rechargeable lighting products and baby-toddler products.  We use third-party manufacturers to produce our goods.  Both our Personal Care and Housewares segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores and specialty stores.  In addition, the Personal Care segment sells through beauty supply retailers and wholesalers.

 

The following tables contain segment information for the periods covered by our consolidated condensed statements of income:

 

THREE MONTHS ENDED AUGUST 31, 2010 AND 2009

 

(in thousands)

 

 

Personal

 

 

August 31, 2010

Care

Housewares

Total

 

 

 

 

Net sales

$          119,119

$               55,704

$          174,823

Operating income before impairment

14,743

12,912

27,655

Asset impairment charges

-     

-     

-    

Operating income

14,743

12,912

27,655

Capital, license, trademark and other intangible expenditures

625

588

1,213

Depreciation and amortization

2,641

1,582

4,223

 

 

 

 

 

Personal

 

 

August 31, 2009

Care

Housewares

Total

 

 

 

 

Sales revenue, net

$          111,627

$                50,566

$          162,193

Operating income before impairment

9,319

11,325

20,644

Asset impairment charges

900

-    

900

Operating income

8,419

11,325

19,744

Capital, license, trademark and other intangible expenditures

163

767

930

Depreciation and amortization

2,695

1,360

4,055

 

SIX MONTHS ENDED AUGUST 31, 2010 AND 2009

 

(in thousands)

 

 

Personal

 

 

August 31, 2010

Care

Housewares

Total

 

 

 

 

Net sales

$          231,347

$             103,629

$          334,976

Operating income before impairment

28,326

22,562

50,888

Asset impairment charges

501

-    

501

Operating income

27,825

22,562

50,387

Capital, license, trademark and other intangible expenditures

921

1,078

1,999

Depreciation and amortization

5,230

3,076

8,306

 

 

 

 

 

Personal

 

 

August 31, 2009

Care

Housewares

Total

 

 

 

 

Sales revenue, net

$          212,812

$               93,254

$          306,066

Operating income before impairment

19,912

19,919

39,831

Asset impairment charges

900

-    

900

Operating income

19,012

19,919

38,931

Capital, license, trademark and other intangible expenditures

282

1,299

1,581

Depreciation and amortization

5,198

2,735

7,933

 

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Table of Contents

 

We compute operating income for each segment based on net sales revenue, less cost of goods sold, selling, general and administrative expense (“SG&A”), and any impairment charges associated with the segment. The SG&A used to compute each segment’s operating income includes SG&A directly associated with the segment, plus overhead expenses that are allocable to the segment.  We do not allocate nonoperating income (expense), interest expense, or income taxes to operating segments.  The following tables contain identifiable assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:

 

IDENTIFIABLE ASSETS AT AUGUST 31, 2010 AND FEBRUARY 28, 2010

 

(in thousands)

 

 

 

Personal

 

 

 

 

 

 

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

August 31, 2010

 

$

518,224

 

$

371,479

 

$

889,703

 

February 28, 2010

 

483,106

 

351,627

 

834,733

 

 

Note 7 – Property and Equipment

 

A summary of property and equipment is as follows:

 

PROPERTY AND EQUIPMENT

 

(in thousands)

 

 

 

Estimated

 

 

 

 

 

 

 

Useful Lives

 

August 31,

 

February 28,

 

 

 

(Years)

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Land

 

-  

 

$

9,073

 

$

9,073

 

Building and improvements

 

10 - 40

 

65,056

 

65,117

 

Computer and other equipment

 

3 - 10

 

45,914

 

46,088

 

Tools, dies and molds

 

1 - 3

 

11,248

 

9,573

 

Transportation equipment

 

3 - 5

 

153

 

240

 

Furniture and fixtures

 

5 - 15

 

8,566

 

8,532

 

Construction in process

 

-  

 

1,830

 

1,954

 

Information system under development

 

-  

 

-     

 

-     

 

Property and equipment, gross

 

 

 

141,840

 

140,577

 

Less accumulated depreciation

 

 

 

(61,607

)

(58,464

)

Property and equipment, net

 

 

 

$

80,233

 

$

82,113

 

 

Depreciation expense was $2.04 and $4.10 million for the three- and six- month periods ended August 31, 2010, respectively, and $2.48 and $4.94 million for the three- and six- month periods ended August 31, 2009, respectively.

 

We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2019.  Certain leases contain escalation clauses and renewal or purchase options.  Rent expense related to our operating leases was $0.45 and $1.02 million for the three- and six- month periods ended August 31, 2010, respectively, and $0.58 and $1.15 million for the three- and six- month periods ended August 31, 2009, respectively.

 

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Note 8 – Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal 2011 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2011.  As a result of its testing, the Company recorded a non-cash impairment charge of $0.50 million ($0.49 million after tax).  The charge was related to an indefinite-lived trademark in our Personal Care segment that was written down to its fair value, determined on the basis of future discounted cash flows using the relief from royalty method.

 

Annual Impairment Testing in the First Quarter of Fiscal 2010 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2010.  As a result of its testing, the Company concluded no further impairments had occurred since the fourth quarter of fiscal 2009, when interim testing was performed and a total non-cash impairment charge of $99.51 million ($99.06 million after tax) was recorded.

 

A summary of the carrying amounts and associated accumulated amortization for all intangible assets by operating segment is as follows:

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

 

August 31, 2010

 

February 28, 2010

 

 

 

Gross

 

Cumulative

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Description / Life

 

Amount

 

Impairments

 

Amortization

 

Value

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

81,901

 

$

(46,490

)

$

-

 

$

35,411

 

$

66,296

 

$

(46,490

)

$

-

 

$

19,806

 

Trademarks - indefinite

 

76,203

 

-

 

-

 

76,203

 

53,054

 

-

 

-

 

53,054

 

Trademarks - finite

 

338

 

-

 

(248

)

90

 

338

 

-

 

(245

)

93

 

Licenses - indefinite

 

10,300

 

-

 

-

 

10,300

 

10,300

 

-

 

-

 

10,300

 

Licenses - finite

 

19,564

 

-

 

(15,164

)

4,400

 

24,196

 

-

 

(19,495

)

4,701

 

Other intangibles - finite

 

49,401

 

-

 

(6,068

)

43,333

 

26,286

 

-

 

(4,049

)

22,237

 

Total Personal Care

 

237,707

 

(46,490

)

(21,480

)

169,737

 

180,470

 

(46,490

)

(23,789

)

110,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

166,131

 

-

 

-

 

166,131

 

166,131

 

-

 

-

 

166,131

 

Trademarks - indefinite

 

75,554

 

-

 

-

 

75,554

 

75,554

 

-

 

-

 

75,554

 

Other intangibles - finite

 

19,694

 

-

 

(9,218

)

10,476

 

20,845

 

-

 

(9,660

)

11,185

 

Total Housewares

 

261,379

 

-

 

(9,218

)

252,161

 

262,530

 

-

 

(9,660

)

252,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

499,086

 

$

(46,490

)

$

(30,698

)

$

421,898

 

$

443,000

 

$

(46,490

)

$

(33,449

)

$

363,061

 

 

Intangible asset activity for the six month period ended August 31, 2010 was as follows:

 

·     Personal Care segment: During the three month period ended May 31, 2010, we recorded $63.13 million of intangible assets, net of certain acquisition adjustments, in connection with our acquisition of the Pert Plus and Sure products business (as discussed further in Note 9), and a non-cash impairment charge of $0.50 million against the carrying value of an indefinite-lived trademark.  During the three- and six-month periods ended August 31, 2010, we recorded $0.02 and 0.24 million, respectively in acquisition adjustment reductions related to the Pert Plus and Sure products business.  In addition, during the three month period ended August 31, 2010, we recorded adjustments to remove certain fully amortized license agreements and other intangibles with a gross carrying value of $5.39 million.

 

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Table of Contents

 

·     Housewares segment:  During the three- and six- month periods ended August 31, 2010, we recorded adjustments to remove certain fully amortized patents having a gross carrying value of $0.10 and $0.86 million, respectively.  During the three month period ended August 31, 2010, we recorded adjustments to remove certain fully amortized other intangibles with a gross carrying value of $0.59 million.  We also recorded new patent development costs of $0.12 and $0.30 million for the three- and six- month periods ended August 31, 2010, respectively.

 

The following table summarizes the amortization expense attributable to intangible assets for the three- and six- month periods ended August 31, 2010 and 2009, respectively, as well as our estimated amortization expense for the fiscal years ending the last day of each February 2011 through 2016.

 

AMORTIZATION OF INTANGIBLE ASSETS

(in thousands)

 

Aggregate Amortization Expense

 

 

 

For the three months ended

 

 

 

 

 

 

 

August 31, 2010

 

$

 2,118

 

August 31, 2009

 

$

 1,515

 

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the six months ended

 

 

 

 

 

 

 

August 31, 2010

 

$

 4,089

 

August 31, 2009

 

$

 2,785

 

 

 

 

 

Estimated Amortization Expense

 

 

 

For the fiscal years ended

 

 

 

 

 

 

 

February 2011

 

$

 8,144

 

February 2012

 

$

 8,053

 

February 2013

 

$

 8,020

 

February 2014

 

$

 7,555

 

February 2015

 

$

 7,479

 

February 2016

 

$

 7,295

 

 

NOTE 9 - Acquisitions

 

Pert Plus and Sure Acquisition - On March 31, 2010, we completed the acquisition of certain assets and liabilities of the Pert Plus hair care and Sure anti-perspirant and deodorant businesses from Innovative Brands, LLC for a net cash purchase price of $69.00 million, which we paid with cash on hand.  Net assets acquired consist principally of accounts receivable, finished goods inventories, prepaid expenses, goodwill, patents, trademarks, tradenames, product design specifications, production know-how, certain fixed assets, distribution rights and customer lists, less certain product related operating accruals and other current liabilities.  We will market Pert Plus and Sure products primarily into retail trade channels.

 

We have accounted for the acquisition as the purchase of a business and have recorded the excess purchase price as goodwill. All of the goodwill is held in jurisdictions that do not allow deductions for tax purposes. We have completed our analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and will amortize the customer list and patent rights over expected average lives of approximately 8.2 and 7.5 years, respectively.  For the customer list, we used our historical attrition rates to assign an expected life.  For patent rights, we used the underlying non-renewable term of a royalty free license we acquired for the use of patented formulas in certain Pert Plus and Sure products. The trademarks acquired are considered to have indefinite lives that are not subject to amortization.  The goodwill arising from the Pert Plus and Sure acquisition consists largely of the distribution network, marketing synergies and economies of scale expected to occur from the addition of the new product line.

 

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Table of Contents

 

The following schedule presents the acquisition date fair value of the net assets of Pert Plus and Sure:

 

PERT AND SURE - NET ASSETS ACQUIRED ON MARCH 31, 2010

(in thousands)

 

Receivables

 

$

8,589

 

Inventory

 

4,887

 

Prepaid expenses

 

392

 

Tools, dies and molds

 

730

 

Goodwill

 

15,845

 

Trademarks

 

23,650

 

Patent rights

 

2,600

 

Customer list

 

21,275

 

Total assets acquired

 

77,968

 

Less: Accounts payable and other current liabilities assumed or recorded at acquisition

 

(8,968

)

Net assets acquired

 

$

69,000

 

 

The fair values of the intangible assets acquired were estimated by applying income and market approaches. These fair value measurements were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements as defined under U.S. generally accepted accounting principles (“GAAP”). Key assumptions included various discount rates based upon a 15.8 percent weighted average cost of capital, royalty rates of 5 percent used in the determination of trademark values and customer attrition rates of 11.5 percent per year used in the determination of customer list values.

 

The impact of the Pert Plus and Sure acquisition on the Company’s consolidated condensed statements of income from the acquisition date through the three- and six-month periods ended August 31, 2010 was as follows:

 

PERT PLUS AND SURE - IMPACT ON CONSOLIDATED CONDENSED STATEMENT OF INCOME

March 31, 2010 (Acquisition Date) through August 31, 2010

(in thousands, except per share data)

 

 

 

Periods Ended August 31, 2010

 

 

 

Three Months

 

Six Months

 

 

 

 

 

 

 

Sales revenue, net

 

$

19,958

 

$

30,829

 

Net income

 

3,936

 

6,035

 

 

 

 

 

 

 

Earning per share impact

 

 

 

 

 

Basic

 

$

0.13

 

$

0.20

 

Diluted

 

$

0.13

 

$

0.19

 

 

The following supplemental pro forma information presents the Company’s financial results as if the Pert Plus and Sure acquisition had occurred as of the beginning of each of the fiscal periods presented.  This supplemental pro forma information has been prepared for comparative purposes and would not necessarily indicate what may have occurred if the acquisition had been completed on March 1, 2010 or 2009, and this information is not intended to be indicative of future results.

 

PERT PLUS AND SURE - PRO FORMA IMPACT ON CONSOLIDATED CONDENSED STATEMENTS OF INCOME

As if the Acquisition Had Been Completed at the Beginning of Each Period

(in thousands, except per share data)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

174,823

 

$

180,610

 

$

340,607

 

$

343,339

 

Net income

 

23,473

 

20,012

 

42,957

 

38,225

 

 

 

 

 

 

 

 

 

 

 

Earning per share impact

 

 

 

 

 

 

 

 

 

Basic

 

$

0.77

 

$

0.66

 

$

1.40

 

$

1.27

 

Diluted

 

$

0.75

 

$

0.65

 

$

1.37

 

$

1.24

 

 

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Table of Contents

 

Infusium 23 Acquisition - On March 31, 2009, we completed the acquisition of certain assets, trademarks, customer lists, distribution rights, patents, goodwill and formulas for Infusium 23 (“Infusium”) hair care products from The Procter & Gamble Company for a cash purchase price of $60 million, which we paid with cash on hand.  We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. All of this goodwill is held in jurisdictions that do not allow deductions for tax purposes. We completed our analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and will amortize the customer list and patent rights over expected lives of 9.0 and 7.5 years, respectively.  For the customer list, we used our historical attrition rates to assign an expected life.  For patent rights, we used the underlying non-renewable term of a royalty free license we acquired for the use of patented formulas in certain Infusium products. The trademarks acquired are considered to have indefinite lives that are not subject to amortization.  The goodwill arising from the Infusium acquisition consists largely of the distribution network, marketing synergies and economies of scale expected to occur from the addition of the new product line. The following schedule presents the acquisition date fair value of the net assets of Infusium:

 

INFUSIUM 23 - BRAND ASSETS ACQUIRED ON MARCH 31, 2009

 

(in thousands)

 

 

 

 

 

 

 

Goodwill

 

$

19,700

 

Trademarks

 

18,700

 

Patent rights

 

600

 

Customer list

 

21,000

 

Total assets acquired

 

$

60,000

 

 

Note 10 – Short Term Debt

 

We have a Revolving Line of Credit Agreement (the “RCA”) with Bank of America, N.A. that provides for a total revolving commitment of up to $50 million, subject to certain limitations as discussed below. The commitment under the RCA terminates on December 15, 2013.  Borrowings under the RCA accrue interest at a “Base Rate” plus a margin of 0.25 to 0.75 percent based on the “Leverage Ratio” at the time of borrowing.  The base rate is equal to the highest of the Federal Funds Rate plus 0.50 percent, Bank of America’s prime rate, or the one month LIBOR rate plus 1 percent.  Alternatively, upon our timely election, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 1.25 percent to 1.75 percent based upon the “Leverage Ratio” (as defined in the RCA) at the time of the borrowing. We incur loan commitment fees at a current rate of 0.20 percent per annum on the unused balance of the RCA and letter of credit fees at a current rate of 1.25 percent per annum on the face value of any letter of credit. Outstanding letters of credit reduce the borrowing availability dollar for dollar.  As of August 31, 2010, there were no revolving loans and $0.20 million of open letters of credit outstanding against this facility.

 

The RCA contains certain covenants and formulas that limit our outstanding indebtedness from all sources (less unrestricted cash on hand in excess of $15 million) to no more than 3.0 times the latest twelve months’ trailing EBITDA. As of August 31, 2010, our loan covenants effectively limited our ability to incur more than $296.41 million of additional debt from all sources, including draws on our RCA.  The RCA is guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited and certain subsidiaries.  Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions, and limit our ability to repurchase shares of our common stock.  As of August 31, 2010, we were in compliance with the terms of the RCA and our other debt agreements.

 

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Table of Contents

 

Note 11 – Accrued Expenses and Current Liabilities

 

A summary of accrued expenses and other current liabilities is as follows:

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

(in thousands)

 

 

 

 

 

 

 

August 31,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Accrued defectives, discounts and allowances

 

$

21,548

 

$

20,758

 

Accrued compensation

 

11,267

 

17,888

 

Accrued advertising

 

11,283

 

6,862

 

Accrued interest

 

1,359

 

1,339

 

Accrued royalties

 

3,768

 

3,612

 

Accrued professional fees

 

839

 

730

 

Accrued benefits and payroll taxes

 

1,536

 

1,170

 

Accrued freight

 

2,675

 

1,398

 

Accrued property, sales and other taxes

 

2,429

 

879

 

Derivative liabilities, current

 

4,874

 

4,951

 

Other

 

6,043

 

7,702

 

Total accrued expenses and other current liabilities

 

$

67,621

 

$

67,289

 

 

Note 12 – Income Taxes

 

United States Income Taxes - In April 2010, the IRS concluded its audit of the Company’s 2007 and 2008 tax returns.  No adjustments were made to either year’s tax returns.

 

Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes.  We must assess the likelihood that we will be able to recover our deferred tax assets.  If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

 

In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our income not being subject to taxation in the U.S.  If such income were subject to U.S. federal income taxes, our effective income tax rate would increase materially. Future actions by taxing authorities may result in tax liabilities that are significantly higher than the reserves established, which could have a material adverse effect on our consolidated results of operations or cash flows.  Additionally, the U.S. government is currently considering several alternative proposed changes in the tax law that, if enacted, could increase our overall effective tax rate.

 

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Table of Contents

 

Note 13 – Long-Term Debt

 

A summary of long-term debt is as follows:

 

LONG-TERM DEBT

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

Interest

 

Interest

 

 

 

August 31

 

February 28,

 

 

 

Borrowed

 

Rates

 

Matures

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

$15 million unsecured Senior Note payable at a fixed interest rate of 7.24%. Interest payable quarterly. Annual principal payments of $3 million began in July 2008.

 

07/97

 

7.24%

 

07/12

 

$

6,000

 

$

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million unsecured floating interest rate 7 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 85 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)

 

06/04

 

5.89%

 

06/11

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million unsecured floating interest rate 10 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 90 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)

 

06/04

 

6.01%

 

06/14

 

75,000

 

75,000

 

Total long-term debt

 

 

 

 

 

 

 

131,000

 

134,000

 

Less current maturities of long-term debt

 

 

 

 

 

 

 

(53,000

)

(3,000

)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

$

78,000

 

$

131,000

 

 

(1)       Floating interest rates have been hedged with interest rate swaps to effectively fix interest rates.  Additional information regarding these swaps is provided in Note 15.

 

All of our long-term debt is unconditionally guaranteed by the parent company, Helen of Troy Limited and/or certain subsidiaries on a joint and several basis.  Our debt agreements require the maintenance of certain debt/EBITDA and interest coverage ratios, specify minimum consolidated net worth levels and contain other customary covenants. As of August 31, 2010, our debt agreements effectively limited our ability to incur more than $296.41 million of additional debt from all sources, including draws on our RCA.  Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions, and limit our ability to repurchase our common stock.  As of August 31, 2010, we were in compliance with the terms of these agreements.

 

The following table contains a summary of the components of our interest expense for the periods covered by our consolidated condensed statements of income:

 

INTEREST EXPENSE

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Interest and commitment fees

 

$

601

 

$

950

 

$

1,169

 

$

2,316

 

Deferred finance costs

 

57

 

61

 

114

 

212

 

Interest rate swap settlements, net

 

1,477

 

1,576

 

3,012

 

3,519

 

Total interest expense

 

$

2,136

 

$

2,587

 

$

4,296

 

$

6,047

 

 

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Table of Contents

 

Note 14 – Fair Value

 

The following tables present the fair value hierarchy of our financial assets and liabilities carried at fair value or measured for disclosure purposes on a recurring basis as of August 31, 2010 and February 28, 2010:

 

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets

 

Observable

 

Unobservable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Inputs

 

Description

 

August 31, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

25,864

 

$

25,864

 

$

-

 

$

-

 

Commercial paper

 

14,810

 

14,810

 

-

 

-

 

Trading securities

 

-

 

-

 

-

 

-

 

Auction rate securities

 

20,330

 

-

 

-

 

20,330

 

Foreign currency contracts

 

1,420

 

-

 

1,420

 

-

 

Total assets

 

$

62,424

 

$

40,674

 

$

1,420

 

$

20,330

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

6,475

 

$

-

 

$

6,475

 

$

-

 

Long-term debt - floating rate (1)

 

125,000

 

-

 

125,000

 

-

 

Interest rate swaps

 

13,146

 

-

 

13,146

 

-

 

Total liabilities

 

$

144,621

 

$

-

 

$

144,621

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets

 

Observable

 

Unobservable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Inputs

 

Description

 

February 28, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

14,099

 

$

14,099

 

$

-

 

$

-

 

Commercial paper

 

88,822

 

88,822

 

-

 

-

 

Auction rate securities

 

20,534

 

-

 

-

 

20,534

 

Foreign currency contracts

 

795

 

-

 

795

 

-

 

Total assets

 

$

124,250

 

$

102,921

 

$

795

 

$

20,534

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

9,600

 

$

-

 

$

9,600

 

$

-

 

Long-term debt - floating rate (1)

 

125,000

 

-

 

125,000

 

-

 

Interest rate swaps

 

12,021

 

-

 

12,021

 

-

 

Total liabilities

 

$

146,621

 

$

-

 

$

146,621

 

$

-

 

 

(1)  Debt values are reported at their estimated fair values in this table, but are recorded in the accompanying consolidated condensed balance sheets at the undiscounted value of remaining principal payments due.

 

Money market accounts and commercial paper are included in cash and cash equivalents in the accompanying consolidated condensed balance sheets and are classified as Level 1 assets.

 

We classify our auction rate securities (“ARS”)  as Level 3 assets because we determine their estimated fair values with discounted cash flow models using the methodology and assumptions described in Note 10 to the consolidated financial statements contained in our latest annual report on Form 10-K.

 

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of debt requires the use of a discount rate based upon current market rates of interest for debt with comparable

 

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remaining terms.  Such comparable rates are considered significant other observable market inputs. The fair market value of the fixed rate debt at August 31, 2010 was computed using a discounted cash flow analysis and discount rate of 2.03 percent.  All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

 

We use derivatives for hedging purposes and our derivatives are primarily foreign currency contracts and interest rate swaps. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair value hierarchy.

 

The Company’s other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 assets. These assets are measured at fair value on a nonrecurring basis as part of the Company’s impairment assessments and as circumstances require.

 

The table below presents a reconciliation of our ARS measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three- and six- month periods ended August 31, 2010:

 

FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS (Level 3)

 

(in thousands)

 

 

Periods Ended August 31, 2010

 

 

 

 

Three Months

 

Six Months

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

20,669

 

$

20,534

 

 

Total gains (losses):

 

 

 

 

 

 

Included in other comprehensive income - unrealized

 

(239

)

(4

)

 

Sales at par

 

(100

)

(200

)

 

Balance at end of period

 

$

20,330

 

$

20,330

 

 

 

 

 

 

 

 

 

Cumulative unrealized losses relating to assets still held at the reporting date, net of taxes

 

 

 

$

(1,234

)

 

 

In connection with our annual impairment testing during the fiscal quarter ended May 31, 2010, we recorded a non-cash impairment charge of $0.50 million against the carrying value of indefinite-lived trademark in our Personal Care segment, which we classify as a nonrecurring Level 3 asset.  The indefinite lived trademark was written down to its fair value of $5.60 million, determined on the basis of future discounted cash flows using the relief from royalty method.

 

Note 15 – Financial Instruments and Risk Management

 

Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the three- and six- month periods ended August 31, 2010, approximately 11 and 12 percent, respectively, of our net sales revenue were in foreign currencies. During the three- and six- month periods ended August 31, 2009, approximately 15 percent of our net sales revenue were in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Chilean Pesos, Peruvian Soles and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses are recognized in SG&A. For the three- and six- month periods ended August 31, 2010, we recorded net foreign

 

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exchange gains (losses), including the impact of currency hedges, of $0.63 and $0.09 million, respectively, in SG&A and ($0.01) and $0.14 million, respectively, in income tax expense.  For the three- and six-month periods ended August 31, 2009, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of $0.66 and $3.29 million, respectively, in SG&A and ($0.01) and $0.11 million, respectively, in income tax expense.

 

We have historically hedged against certain foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

 

Venezuela has recently experienced currency instability driven by a highly inflationary economy, government restrictions on cash transfers out of the country and a recent devaluation.  Our method of foreign currency translation has always required us to remeasure foreign monetary assets at the current exchange rates with all exchange gains or losses recognized in our income statement.  The exchange rate we use to remeasure Venezuelan activity is currently the official exchange rate of 4.30 Bolivares Fuertes to $1.  At August 31, 2010, the Company included in its consolidated condensed balance sheet $2.96 million in total assets and $2.72 million in net assets from its Venezuelan operations.  Net assets are primarily working capital.  It is unclear to us whether the current restrictions on transfers of cash out of Venezuela is other than temporary; however, we believe it appropriate to classify these assets and liabilities as current items in our consolidated condensed balance sheets since they support current operations within the country.

 

Interest Rate Risk – Interest on our long-term debt outstanding as of August 31, 2010 is both floating and fixed. Fixed rates are in place on $6 million of Senior Notes at 7.24 percent and floating rates are in place on $125 million of Senior Notes, which reset as described in Note 13, and have been effectively converted to fixed rate debt using interest rate swaps, as described below.

 

We manage our floating rate debt using interest rate swaps (the “swaps”). As of August 31, 2010, we had two swaps that converted an aggregate notional principal of $125 million from floating interest rate payments under our 7 and 10 year Senior Notes to fixed interest rate payments at 5.89 and 6.01 percent, respectively. In the swap transactions, we maintain two contracts to pay fixed rates of interest on an aggregate notional principal amount of $125 million at rates of 5.04 and 5.11 percent on our 7 and 10 year Senior Notes, respectively, while simultaneously receiving floating rate interest payments set at 0.53 percent as of August 31, 2010 on the same notional amounts. The fixed rate side of the swap will not change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap fully offset the change in any period of the underlying debt’s floating rate payments. These swaps are used to reduce the Company’s risk of increased interest costs; however, when interest rates drop significantly below the swap rates, we lose the benefit that our floating rate debt would provide, if not managed with swaps. The swaps are considered highly effective.

 

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Table of Contents

 

The following tables summarize the fair values of our various derivative instruments at August 31, 2010 and February 28, 2010:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS IN THE CONSOLIDATED BALANCE SHEETS

(in thousands)

August 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Final

 

 

 

Derivative

 

Derivative

 

and Other

 

Derivative

 

 

 

 

 

Settlement

 

Notional

 

Assets,

 

Assets,

 

Current

 

Liabilities,

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Current

 

Noncurrent

 

Liabilities

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2011

 

£

6,700

 

$

561

 

$

-    

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2011

 

$

12,000

 

 

228

 

 

348

 

 

-

 

 

-

 

Currency contracts - sell Euros

 

Cash flow

 

2/2011

 

3,000

 

 

283

 

 

-    

 

 

-

 

 

-

 

Subtotal

 

 

 

 

 

 

 

1,072

 

348

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,874

 

8,272

 

Total fair value

 

 

 

 

 

 

 

$

1,072

 

$

348

 

$

4,874

 

$

8,272

 

 

February 28, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Final

 

 

 

Derivative

 

Derivative

 

and Other

 

Derivative

 

 

 

 

 

Settlement

 

Notional

 

Assets,

 

Assets,

 

Current

 

Liabilities,

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Current

 

Noncurrent

 

Liabilities

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2011

 

£

5,000

 

$

651

 

$

-

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2010

 

$

6,000

 

144

 

-

 

-

 

-

 

Subtotal

 

 

 

 

 

 

 

795

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,951

 

7,070

 

Total fair value

 

 

 

 

 

 

 

$

795

 

$

-    

 

$

4,951

 

$

7,070

 

 

The pre-tax effect of derivative instruments for the three- and six-month periods ended August 31, 2010 and 2009 is as follows:

 

PRE TAX EFFECT OF DERIVATIVE INSTRUMENTS

(in thousands)

 

 

Three Months Ended August 31,

 

 

Gain \ (Loss)

 

Gain \ (Loss) Reclassified

 

 

 

 

 

Recognized in OCI

 

from Accumulated Other

 

Gain \ (Loss) Recognized

 

 

 

(effective portion)

 

Comprehensive Loss into Income

 

as Income (1)

 

 

 

2010

 

2009

 

Location

 

2010

 

2009

 

Location

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - ordinary and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cash flow hedges

 

$      (480

)

$      (202

)

SG&A

 

$        98

 

$           -

 

SG&A

 

$       39

 

$         8

 

Interest rate swaps - cash flow hedges

 

(3,207

)

(981

)

Interest expense

 

(1,477

)

(1,576

)

 

 

-   

 

-   

 

Total

 

$   (3,687

)

$   (1,183

)

 

 

$  (1,379

)

$  (1,576

)

 

 

$       39

 

$         8

 

 

 

 

Six Months Ended August 31,

 

 

Gain \ (Loss)

 

Gain \ (Loss) Reclassified

 

 

 

 

 

Recognized in OCI

 

from Accumulated Other

 

Gain \ (Loss) Recognized

 

 

 

(effective portion)

 

Comprehensive Loss into Income

 

as Income (1)

 

 

 

2010

 

2009

 

Location

 

2010

 

2009

 

Location

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - ordinary and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cash flow hedges

 

$      774

 

$      (774

)

SG&A

 

$      150

 

$      418

 

SG&A

 

$      (35

)

$       46

 

Interest rate swaps - cash flow hedges

 

(4,137

)

(1,726

)

Interest expense

 

(3,012

)

(3,519

)

 

 

-   

 

-   

 

Total

 

$  (3,363

)

$   (2,500

)

 

 

$  (2,862

)

$  (3,101

)

 

 

$      (35

)

$       46

 

 

(1)  The amounts shown represent the ineffective portion of the change in fair value of a cash flow hedge.

 

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Table of Contents

 

Counterparty Credit Risk - Financial instruments, including foreign currency contracts and interest rate swaps, expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk through only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote.

 

Risks Inherent in Cash, Cash Equivalents and Investment Holdings – Our cash, cash equivalents and investments are subject to interest rate risk, credit risk and liquidity risk. Cash consists of both interest bearing and non-interest bearing disbursement or short-term investment accounts. Cash equivalents consist of commercial paper and money market investment accounts. Long-term investments consist of AAA rated ARS. The following table summarizes our cash, cash equivalents and long-term investments we held at August 31, 2010 and February 28, 2010:

 

CASH, CASH EQUIVALENTS AND LONG-TERM INVESTMENTS

(in thousands)

 

 

August 31, 2010

 

February 28, 2010

 

 

 

Carrying

 

Range of

 

Carrying

 

Range of

 

 

 

Amount

 

Interest Rates

 

Amount

 

Interest Rates

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash, interest and non-interest-bearing accounts - unrestricted

 

$

7,662

 

0.00 to 1.65%

 

$

6,234

 

0.00 to 2.00%

 

Cash, interest and non-interest-bearing accounts - restricted

 

733

 

0.00 to 1.50%

 

1,053

 

0.00 to 2.50%

 

Commercial paper

 

14,810

 

0.12 to 0.13%

 

88,822

 

0.03 to 0.18%

 

Money market accounts

 

25,864

 

0.11 to 3.37%

 

14,099

 

0.01 to 3.98%

 

Total cash and cash equivalents

 

$

49,069

 

 

 

$

110,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments - auction rate securities

 

$

20,330

 

0.00 to 2.766%

 

$

20,534

 

1.73 to 8.44%

 

 

Our cash balances at August 31, 2010 and February 28, 2010 include restricted cash of $0.73 and $1.05 million, respectively, denominated in Venezuelan Bolivares Fuertes, shown above under the heading “Cash, interest and non-interest-bearing accounts – restricted.” The balances arise from our operations within the Venezuelan market.  The Venezuelan government enforces restrictions on transfers of cash out of the country and controls exchange rates.  We have made formal applications to repatriate this cash at an official exchange rate currently pertinent to us, which is 4.30 Bolivares Fuertes to $1; however, the Company has not yet received approval of these applications.  Until we are able to officially repatriate cash from Venezuela, we intend to use these cash balances in-country to continue to fund operations.  We do not otherwise rely on these restricted funds as a source of liquidity.

 

Most of our cash equivalents and investments are in commercial paper, money market accounts and ARS with frequent rate resets; therefore, we believe there is no material interest rate risk. In addition, our commercial paper and ARS are from issuers with high credit ratings; therefore, we believe the commercial paper and ARS do not present a significant credit risk.

 

We hold investments in ARS collateralized by student loans (with underlying maturities from 18 to 35 years). Substantially all of the collateral is guaranteed by the U.S. government under the Federal Family Education Loan Program. Liquidity for these securities was normally dependent on an auction process that reset the applicable interest rate at pre-determined intervals, ranging from 7 to 35 days. Beginning in February 2008, the auctions for the ARS held by us and others were unsuccessful, requiring us to hold them beyond their typical auction reset dates. Auctions fail when there is insufficient demand. However, this does not represent a default by the issuer of the security. Upon an auction’s failure, the interest rates reset based on a formula contained in the security. The securities will continue to accrue interest and be auctioned until one of the following occurs: the auction succeeds; the issuer calls the securities; or the securities mature. ARS are currently classified as non-current assets held for sale under the heading “Other assets” in our consolidated balance sheets.

 

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Table of Contents

 

At August 31, 2010 and February 28, 2009, we had cumulative pre-tax unrealized losses on our ARS of $1.87 million, which are reflected in accumulated other comprehensive loss in our accompanying consolidated condensed balance sheets, net of related tax effects of $0.64 million.  The recording of these unrealized losses is not a result of the quality of the underlying collateral, but rather a markdown reflecting a lack of liquidity and other market conditions. For the three- and six-month periods ended August 31, 2010, we liquidated $0.10 and $0.20 million, respectively, of ARS at par.  For the three- and six-month periods ended August 31, 2009, we liquidated $0.10 million of ARS at par.

 

Note 16 – Repurchase of Helen of Troy Common Stock

 

Under the latest program approved by our Board of Directors, as of August 31, 2010, we are authorized to purchase up to 1,200,650 shares of common stock in the open market or through private transactions. During the fiscal quarter ended August 31, 2010, we repurchased and retired 80,000 shares of common stock at a total purchase price of $1.80 million, for a $22.49 per share average price. During the fiscal quarter ended May 31, 2010, we did not repurchase any common stock.  During the fiscal quarter ended May 31, 2009, our chief executive officer tendered 762,519 shares of common stock having a market value of $14.60 million as payment for the exercise price and related federal tax obligations arising from the exercise of options. We accounted for this activity as a purchase and retirement of the shares at a price of $19.15 per share.

 

Note 17 – Share-Based Compensation Plans

 

We have options outstanding under two expired and two active share-based compensation plans. The Company recorded share-based compensation expense in SG&A for the three- and six-month periods ended August 31, 2010 and 2009, respectively, as follows:

 

SHARE BASED PAYMENT EXPENSE

(in thousands, except per share data)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$                  409

 

$

445

 

$                 816

 

$

562

 

Restricted stock grants

 

258

 

176

 

258

 

176

 

Employee stock purchase plan

 

71

 

93

 

71

 

93

 

Share-based payment expense

 

738

 

714

 

1,145

 

831

 

Less income tax benefits

 

(25

)

(28

)

(50

)

(35

)

Share-based payment expense, net of income tax benefits

 

$                  713

 

$

686

 

$              1,095

 

$

796

 

 

 

 

 

 

 

 

 

 

 

Earnings per share impact of share based payment expense:

 

 

 

 

 

 

 

 

 

Basic

 

$                 0.02

 

$

0.02

 

$                0.04

 

$

0.03

 

Diluted

 

$                 0.02

 

$

0.02

 

$                0.03

 

$

0.03

 

 

A summary of option activity as of August 31, 2010, and changes during the six months then ended is as follows:

 

SUMMARY OF STOCK OPTION ACTIVITY

(in thousands, except contractual term and per share data)

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Exercise

 

Grant Date

 

Remaining

 

Aggregate

 

 

 

 

 

Price

 

Fair Value

 

Contract Term

 

Intrinsic

 

 

 

Options

 

(per share)

 

(per share)

 

(in years)

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at February 28, 2010

 

2,899

 

$

18.13

 

$

6.57

 

4.06

 

$

18,742

 

Granted

 

7

 

23.70

 

 

 

 

 

 

 

Exercised

 

(109

)

(21.06

)

 

 

 

 

596

 

Forfeited / expired

 

(32

)

(21.46

)

 

 

 

 

 

 

Outstanding at August 31, 2010

 

2,765

 

$

17.99

 

$

6.53

 

3.58

 

$

13,928

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at August 31, 2010

 

2,217

 

$

17.16

 

$

6.07

 

2.87

 

$

12,993

 

 

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Table of Contents

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk”, “Information Regarding Forward Looking Statements”, and “Risk Factors” in the Company’s most recent annual report on Form 10-K and its other filings with the Securities and Exchange Commission (the “SEC”).  This discussion should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1 of this quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2010.

 

OVERVIEW OF THREE- AND SIX- MONTHS ENDED AUGUST 31, 2010 RESULTS:

 

Our second fiscal quarter’s net sales traditionally average approximately 25 percent of the year’s total on a historical basis. Our second fiscal quarter is normally characterized by stable sales between June and the first half of July with increasing sales in the second half of July through August as we build towards a peak shipping season in the third quarter.  Overall retail sales during the quarter generally showed modest year-over-year growth domestically and globally; however, certain business categories, particularly retail personal care appliances, are down on a year-over-year basis.   We believe retailers are tentative in their expectations for a significant rebound in their business for the third and fourth calendar quarters of 2010, and indicators of consumer sentiment are giving mixed signals.  While there was an increase in domestic consumer spending during the month of August, most of this spending was driven by highly promotional items and tax-free shopping holidays in a number of states.  We believe that overall, consumers are focusing on purchasing essentials and holding off on purchases of more discretionary types of merchandise. Accordingly, we continue to remain cautious regarding our outlook for many of our product categories.

 

On March 31, 2010, we completed the acquisition of certain assets and liabilities of the Pert Plus hair care and Sure anti-perspirant and deodorant businesses from Innovative Brands, LLC for a net cash purchase price of $69.00 million, which we paid with cash on hand.  In the second fiscal quarter, we substantially completed the integration of this acquisition into our operations.  The acquisition is a significant addition to the Company’s grooming, skin care and hair care solutions product portfolio, but has required minimal additional staffing and infrastructure. We will market Pert Plus and Sure products primarily into mass retail and drug channels.  Net sales revenue for the three- and six-months ended August 31, 2010 includes three and five months, respectively of Pert Plus and Sure activity totaling $19.96 and $30.83 million in net sales, respectively.

 

Consolidated net sales revenue for the three- and six-month periods ended August 31, 2010 increased 7.8 and 9.4 percent to $174.83 and $334.98 million, respectively, compared to $162.19 and $306.07 million, respectively, for the same periods last year.  Net sales revenue in our Personal Care segment was up 6.7 and 8.7 percent, respectively for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  Growth in the segment was primarily due to our acquisition of the Pert Plus and Sure business, which provided three and five months of additional net sales revenue, respectively, for the three- and six month periods ended August 31, 2010.  In addition, the six month period ended August 31, 2010 includes an extra month of net sales revenue from the Infusium acquisition when compared with the same period last year (which only included five months of revenue due to Infusium being acquired on March 31, 2009).  Sales of appliances and accessories declined when compared to the same periods last year, which is in line with overall industry performance for the category.  We continue to expect that sales revenue performance in our Personal Care segment’s product lines will be heavily dependent on improvements in employment, housing markets and consumers’ personal finances.   Net sales revenue in our Housewares segment was up 10.2 and 11.1 percent, respectively, for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  The month ending August 31, 2010 was OXO’s highest net sales revenue month in its history.  While our

 

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Housewares segment has expanded distribution somewhat, new product introductions across the segment’s existing retail base continue to be the primary driver of growth.

 

In addition to our net sales revenue performance discussed above, highlights of the three- and six-month periods ended August 31, 2010 include the following:

 

·                  Consolidated gross profit margin as a percentage of net sales revenue for the fiscal quarter ended August 31, 2010 increased 3.4 percentage points to 45.9 percent compared to 42.5 percent for the same period last year.  Consolidated gross profit margin as a percentage of net sales for the six month period ended August 31, 2010 increased 4.0 percentage points to 45.6 percent compared to 41.6 percent for the same period last year.

 

·                  Selling, general and administrative expenses (“SG&A”) as a percentage of net sales increased 0.4 percentage points to 30.1 percent for the three months ended August 31, 2010 compared to 29.7 percent for the same period last year.  SG&A expense as a percentage of net sales for the six months ended August 31, 2010 increased 1.8 percentage points to 30.4 percent compared to 28.6 percent for the same period last year.

 

·                  For the three- and six- month periods ended August 31, 2010, operating income before impairment as a percentage of net sales revenue increased 3.1 and 2.2 percentage points to $27.66 and $50.89 million compared to $20.64 and $39.83 million, respectively, for the same periods last year.  For the three- and six-month periods ended August 31, 2010, the dollar increases represent a year-over-year improvement of 34.0 and 27.8 percent, respectively.

 

·                  For the three- and six-month periods ended August 31, 2010, our net income was $23.47 and $41.86 million, respectively, compared to $15.91 and $30.42 million, respectively, for the same periods last year.  For the three- and six-month periods ended August 31, 2010, our diluted earnings per share was $0.75 and $1.34 compared to $0.51 and $0.99, respectively, for the same periods last year.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Comparison of three- and six-month periods ended August 31, 2010 to the same periods ended August 31, 2009

 

The following table sets forth, for the periods indicated, our selected operating data, in U.S. Dollars, as a year-over-year percentage change, and as a percentage of net sales revenue.

 

SELECTED OPERATING DATA

(dollars in thousands)

 

Quarter Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

$ Change

 

% Change

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care Segment

 

$

119,119

 

$

111,627

 

$

7,492

 

6.7%

 

68.1%

 

68.8%

Housewares Segment

 

55,704

 

50,566

 

5,138

 

10.2%

 

31.9%

 

31.2%

Total sales revenue, net

 

174,823

 

162,193

 

12,630

 

7.8%

 

100.0%

 

100.0%

Cost of goods sold

 

94,547

 

93,299

 

1,248

 

1.3%

 

54.1%

 

57.5%

Gross profit

 

80,276

 

68,894

 

11,382

 

16.5%

 

45.9%

 

42.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

52,621

 

48,250

 

4,371

 

9.1%

 

30.1%

 

29.7%

Operating income before impairment

 

27,655

 

20,644

 

7,011

 

34.0%

 

15.8%

 

12.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-    

 

900

 

(900

)

-100.0%

 

0.0%

 

0.6%

Operating income

 

27,655

 

19,744

 

7,911

 

40.1%

 

15.8%

 

12.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

164

 

361

 

(197

)

-54.6%

 

0.1%

 

0.2%

Interest expense

 

(2,136

)

(2,587

)

451

 

-17.4%

 

-1.2%

 

-1.6%

Total other income (expense)

 

(1,972

)

(2,226

)

254

 

-11.4%

 

-1.1%

 

-1.4%

Income before income taxes

 

25,683

 

17,518

 

8,165

 

46.6%

 

14.7%

 

10.8%

Income tax expense

 

2,210

 

1,607

 

603

 

37.5%

 

1.3%

 

1.0%

Net income

 

$

23,473

 

$

15,911

 

$

7,562

 

47.5%

 

13.4%

 

9.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

$ Change

 

% Change

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care Segment

 

$

231,347

 

$

212,812

 

$

18,535

 

8.7%

 

69.1%

 

69.5%

Housewares Segment

 

103,629

 

93,254

 

10,375

 

11.1%

 

30.9%

 

30.5%

Total sales revenue, net

 

334,976

 

306,066

 

28,910

 

9.4%

 

100.0%

 

100.0%

Cost of goods sold

 

182,273

 

178,663

 

3,610

 

2.0%

 

54.4%

 

58.4%

Gross profit

 

152,703

 

127,403

 

25,300

 

19.9%

 

45.6%

 

41.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

101,815

 

87,572

 

14,243

 

16.3%

 

30.4%

 

28.6%

Operating income before impairment

 

50,888

 

39,831

 

11,057

 

27.8%

 

15.2%

 

13.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

501

 

900

 

(399

)

-44.3%

 

0.1%

 

0.3%

Operating income

 

50,387

 

38,931

 

11,456

 

29.4%

 

15.0%

 

12.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

334

 

803

 

(469

)

-58.4%

 

0.1%

 

0.3%

Interest expense

 

(4,296

)

(6,047

)

1,751

 

-29.0%

 

-1.3%

 

-2.0%

Total other income (expense)

 

(3,962

)

(5,244

)

1,282

 

-24.4%

 

-1.2%

 

-1.7%

Income before income taxes

 

46,425

 

33,687

 

12,738

 

37.8%

 

13.9%

 

11.0%

Income tax expense

 

4,565

 

3,267

 

1,298

 

39.7%

 

1.4%

 

1.1%

Net income

 

$

41,860

 

$

30,420

 

$

11,440

 

37.6%

 

12.5%

 

9.9%

 

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Table of Contents

 

Consolidated net sales revenue:

 

Consolidated net sales revenue for the three- and six-month periods ended August 31, 2010 increased 7.8 and 9.4 percent to $174.83 and $334.98 million, respectively, compared to $162.19 and $306.07 million, respectively, for the same periods last year.  Net sales revenue in our Personal Care segment was up 6.7 and 8.7 percent, respectively for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  Net sales revenue in our Housewares segment was up 10.2 and 11.1 percent, respectively, for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  The month ending August 31, 2010 was OXO’s highest net sales revenue month in its history.

 

Impact of acquisitions on net sales revenue:

 

Net sales revenue from acquisitions contributed 12.3 and 10.8 percentage points, respectively, to our net sales revenue growth for the three- and six-month periods ended August 31, 2010.  Net sales revenue from acquisitions for the three- and six-month period ended August 31, 2010 included one month of net sales revenue totaling $2.37 million from our Infusium line of shampoos, conditioners and leave-in hair treatments acquired on March 31, 2009, and two and five months revenue totaling $19.96 and $30.83 million, respectively, for our Pert Plus hair care and Sure anti-perspirant and deodorant product lines acquired on March 31, 2010.  Our core business (business owned and operated over the same fiscal periods last year) had total dollar net sales revenue declines of $7.33 and $4.28 million, respectively, for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  This equates to a 4.5 and 1.4 percentage point decline in net sales revenue, for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year.  Net sales revenue growth in our Housewares segment’s core business was more than offset by declines in our Personal Care segment’s core business.  The following table sets forth the impact acquisitions had on our net sales revenue:

 

IMPACT OF ACQUISITION ON NET SALES REVENUE

(in thousands)

 

Quarter Ended August 31,

 

 

2010

 

2009

 

 

 

 

 

 

Prior year’s sales revenue, net

 

$

162,193

 

$

153,543

 

 

 

 

 

 

 

Components of net sales revenue change

 

 

 

 

 

Core business

 

(7,328

)

(4,066

)

Acquisitions (non-core business net sales revenue)

 

19,958

 

12,716

 

Change in sales revenue, net

 

12,630

 

8,650

 

Sales revenue, net

 

$

174,823

 

$

162,193

 

Total net sales revenue growth

 

7.8%

 

5.6%

 

Core business

 

-4.5%

 

-2.6%

 

Acquisitions

 

12.3%

 

8.3%

 

 

 

Six Months Ended August 31,

 

 

2010

 

2009

 

 

 

 

 

 

Prior year’s sales revenue, net

 

$

306,066  

 

$

298,546  

 

 

 

 

 

 

 

Components of net sales revenue change

 

 

 

 

 

Core business

 

(4,284)

 

(13,069)

 

Acquisitions (non-core business net sales revenue)

 

33,194  

 

20,589  

 

Change in sales revenue, net

 

28,910  

 

7,520  

 

Sales revenue, net

 

$

334,976  

 

$

306,066  

 

Total net sales revenue growth

 

9.4%

 

2.5%

 

Core business

 

-1.4%

 

-4.4%

 

Acquisitions

 

10.8%

 

6.9%

 

 

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Table of Contents

 

Impact of foreign currencies on net sales revenue:

 

During the three- and six-month periods ended August 31, 2010, we transacted approximately 11 and 12 percent, respectively, of our net sales revenues in foreign currencies.   During the three- and six-month periods ended August 31, 2009, we transacted approximately 15 percent of our net sales revenues in foreign currencies.  These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Chilean Pesos, Peruvian Soles, and Venezuelan Bolivares Fuertes.  For the three- and six-month periods ended August 31, 2010, the impact of net foreign currency exchange rates decreased our international net sales revenue by approximately $1.37 and $0.97 million.  The impact of these fluctuations primarily affected the Personal Care segment’s appliance category.

 

Segment net sales revenue:

 

We operate our business under two segments: Personal Care and Housewares.  Our Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, shavers, mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid and aerosol hair styling products, men’s fragrances, men’s and women’s antiperspirants and deodorants, liquid and bar soaps, shampoos, hair treatments, foot powder, body powder and skin care products.  Our Housewares segment reports the operations of the OXO family of brands whose products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, food storage containers, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, rechargeable lighting products and baby-toddler products.  The following table sets forth, for the periods indicated our net sales revenue and the impact of volume and price mix changes for each segment:

 

SALES REVENUE, NET BY SEGMENT

(dollars in thousands)

 

Quarter Ended August 31,

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

Volume

 

Price

 

Net

 

 

 

Volume

 

Price

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

119,119

 

$

111,627

 

 

 

$

9,911

 

$

(2,419)

 

$

7,492

 

 

 

8.9%

 

-2.2%

 

6.7%

Housewares

 

55,704

 

50,566

 

 

 

5,121

 

17  

 

5,138

 

 

 

10.1%

 

0.0%

 

10.2%

Total sales revenue, net

 

$

174,823

 

$

162,193

 

 

 

$

15,032

 

$

(2,402)

 

$

12,630

 

 

 

9.3%

 

-1.5%

 

7.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

Volume

 

Price

 

Net

 

 

 

Volume

 

Price

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

231,347

 

$

212,812

 

 

 

$

23,727

 

$

(5,192)

 

$

18,535

 

 

 

11.1%

 

-2.4%

 

8.7%

Housewares

 

103,629

 

93,254

 

 

 

11,165

 

(790)

 

10,375

 

 

 

12.0%

 

-0.8%

 

11.1%

Total sales revenue, net

 

$

334,976

 

$

306,066

 

 

 

$

34,892

 

$

(5,982)

 

$

28,910

 

 

 

11.4%

 

-2.0%

 

9.4%

 

Personal Care Segment Segment net sales revenue for the three months ended August 31, 2010 increased $7.49 million, or 6.7 percent, to $119.12 million compared with $111.63 million for the same period last year.  Segment net sales revenue for the six months ended August 31, 2010 increased $18.54 million, or 8.7 percent, to $231.35 million compared with $212.81 million for the same period last year.  Net sales revenue increases were attributed primarily to the grooming, skin care and hair care solutions category, which sell at lower per unit prices than appliances overall.  Year-over-year growth in the second quarter was due primarily to an additional three months of net sales revenue from our recent acquisition of the Pert Plus and Sure business, acquired on March 31, 2010.  Sales of appliances and accessories declined when compared to the same period last year, which is in line with overall industry performance for the category.  Hair care appliance net sales revenue continues to be negatively impacted by cautious consumer spending, which includes an overall shift by consumers to spending on lower price point personal care items.  We continue to expect that net sales revenue performance in our Personal Care segment will be heavily dependent on improvements in employment, housing markets and consumers’ personal finances.

 

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Table of Contents

 

Housewares Segment Segment net sales revenue for the three months ended August 31, 2010 increased $5.14 million, or 10.2 percent, to $55.70 million compared with $50.57 million for the same period last year.  Segment net sales revenue for the six months ended August 31, 2010 increased $10.38 million, or 11.1 percent, to $103.63 million compared with $93.25 million for the same period last year. The month ending August 31, 2010 was OXO’s highest net sales revenue month in its history. While our Housewares segment has modestly expanded its distribution, new product introductions across the segment’s existing retail base continues to be the primary driver of growth.  Additional new product introductions, namely our OXO tot infant and toddler feeding, cleaning and bathing products and our OXO Good Grips line of interlocking deep drawer plastic storage bins, will begin to ship to a limited number of customers during the second half of fiscal 2011.

 

The Housewares segment’s performance continues to demonstrate resistance to recessionary trends; however, future net sales revenue growth in this segment of our business will be dependent on new product innovation, continued product line expansion, new sources of distribution, and geographic expansion.  Domestically, our Housewares segment’s market opportunities are maturing and its current customer base amongst all tiers of retailers is extensive.  Accordingly, we remain cautious about our ability to maintain this same pace of net sales revenue growth in the foreseeable future.

 

Consolidated gross profit margin:

 

Consolidated gross profit margin as a percentage of net sales revenue for the fiscal quarter ended August 31, 2010 increased 3.4 percentage points to 45.9 percent compared to 42.5 percent for the same period last year.  Consolidated gross profit margin as a percentage of net sales revenue for the six month period ended August 31, 2010 increased 4.0 percentage points to 45.6 percent compared to 41.6 percent for the same period last year.

 

Gross profit margin improvements for the three- and six-month periods ended August 31, 2010 were primarily due to:

 

·                  the impact of commodity price decreases in fiscal 2010 that continue to cycle through cost of goods sold; and

 

·                  a change in sales mix as grooming, skin care and hair care solutions products with comparatively higher margins became a more significant portion of the Company’s overall net sales revenue, particularly as a result of our more recent brand acquisitions.

 

Our product sourcing mix is heavily dependent on imports from China.  China has stated that it will move its currency off a peg to the U.S. dollar, which will likely increase our product costs over time.  In addition, there has been upward pressure on raw material, labor and inbound transportation costs.  Accordingly, we remain cautious about the expectation of sustained gross profit margin improvement throughout the remainder of fiscal 2011.

 

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Table of Contents

 

Selling, general and administrative expense:

 

In order to provide a better understanding of the impact that certain specified items had on our operations, the analysis that follows reports SG&A excluding the items described in the table below.  This financial measure is non-GAAP financial information as contemplated by SEC Regulation G, Rule 100, and the accompanying table reconciles this measure to the corresponding GAAP-based measure presented in our consolidated condensed statements of income.

 

IMPACT OF SPECIFIED ITEMS ON SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

(dollars in thousands)

 

Quarter Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A, as reported

 

$

52,621

 

$

48,250  

 

 

$

4,371  

 

9.1%

 

 

30.1%

 

29.7%

 

Foreign exchange gains (loss)

 

631

 

668  

 

 

(37)

 

-5.5%

 

 

0.4%

 

0.4%

 

Insurance claim gains

 

356

 

(1)

 

 

357  

 

*    

 

 

0.2%

 

0.0%

 

SG&A, without specified items

 

$

53,608

 

$

48,917  

 

 

$

4,691  

 

9.6%

 

 

30.7%

 

30.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A, as reported

 

$

101,815

 

$

87,572  

 

 

$

14,243  

 

16.3%

 

 

30.4%

 

28.6%

 

Foreign exchange gains (loss)

 

91

 

3,294  

 

 

(3,203)

 

*    

 

 

0.0%

 

1.1%

 

Insurance claim gains

 

356

 

543  

 

 

(187)

 

-34.4%

 

 

0.1%

 

0.2%

 

SG&A, without specified items

 

$

102,262

 

$

91,409  

 

 

$

10,853  

 

11.9%

 

 

30.5%

 

29.9%

 

 

*    Calculation is not meaningful

 

The Company believes that this non-GAAP measure provides useful information to management and investors regarding financial and business trends relating to its financial condition and results of operations.  The Company believes that this non-GAAP measure, in combination with the Company’s financial results calculated in accordance with GAAP, provides investors with additional perspective regarding the impact of specified items on SG&A.  The Company further believes that the specified items excluded from SG&A do not accurately reflect the underlying performance of its continuing operations for the period in which they are incurred, even though some of these excluded items may be incurred and reflected in the Company’s GAAP financial results in the foreseeable future.  The material limitation associated with the use of non-GAAP financial measures is that non-GAAP measures do not reflect the full economic impact of the Company’s activities.  The Company’s non-GAAP measure is not prepared in accordance with GAAP, is 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.

 

For the fiscal quarter ended August 31, 2010, SG&A reported in our consolidated condensed statement of income as a percentage of net sales revenue increased 0.4 percentage points to 30.1 percent compared to 29.7 percent for the same period last year.  For the six month period ended August 31, 2010, SG&A reported in our consolidated condensed statement of income as a percentage of net sales revenue increased 1.8 percentage points to 30.4 percent compared to 28.6 percent for the same period last year.

 

SG&A for the three- and six-months ended August 31, 2010 includes net foreign exchange gains of $0.63 and $0.09 million, respectively, and an insurance claim gain of $0.36 million.  Together, these items resulted in a net favorable impact on SG&A for the three- and six-months ended August 31, 2010 of $0.99 and $0.45 million, respectively.  SG&A for the three- and six-months ended August 31, 2009 included net foreign exchange gains of $0.67 and 3.29 million, respectively.  SG&A for the six month period ended August 31, 2009 also included an insurance claim gain of $0.54 million.  Together, these items resulted in a net favorable impact to SG&A for the three- and six-months ended August 31, 2009 of $0.67 and $3.84 million, respectively.   The preceding table shows the impact of excluding these specified items from both periods.  Excluding the impact of the specified

 

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items shown in the previous table from the fiscal quarters presented, SG&A as a percentage of net sales increased 0.5 percentage points to 30.7 percent for the fiscal quarter ended August 31, 2010 compared to 30.2 percent for the same period last year.  Excluding the impact of the specified items shown in the previous table from the six months presented, SG&A as a percentage of net sales increased 0.6 percentage points to 30.5 percent for the six months ended August 31, 2010 compared to 29.9 percent for the same period last year.  These increases relate primarily to a year-over-year increases in advertising expense, higher intangible asset amortization as a result of recent acquisitions and certain transition service charges incurred in connection with the Pert Plus and Sure business acquisition.  The transition service charge expenses ended in June 2010, as the Pert Plus and Sure business operations were integrated into the Company by that time.   We expect the recent trend of higher SG&A expense levels to continue through the remainder of the year due to the cost of new Personal Care media advertising campaigns for Pert Plus, Sure and Infusium products which we expect to begin during the third and fourth quarters of fiscal 2011.  In the third fiscal quarter of 2011, we expect advertising expense to exceed last year’s third fiscal quarter advertising expense by approximately $4.50 million. We plan to continue providing advertising support to these brands with expenditures occurring over all four quarters in the next fiscal year on a more normalized basis.

 

Operating income before impairment by segment:

 

The following table sets forth, for the periods indicated, our operating income before impairment charges by segment, as a year-over-year percentage change, and as a percentage of net sales revenue for each segment and the Company overall:

 

OPERATING INCOME BY SEGMENT BEFORE IMPAIRMENT

(dollars in thousands)

 

Quarter Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

14,743

 

$

9,319

 

 

$

5,424

 

58.2%

 

 

12.4%

 

8.3%

Housewares

 

12,912

 

11,325

 

 

1,587

 

14.0%

 

 

23.2%

 

22.4%

Total operating income before impairment

 

$

27,655

 

$

20,644

 

 

$

7,011

 

34.0%

 

 

15.8%

 

12.7%

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

 28,326

 

$

 19,912

 

 

$

 8,414

 

42.3%

 

 

12.2%

 

9.4%

Housewares

 

22,562

 

19,919

 

 

2,643

 

13.3%

 

 

21.8%

 

21.4%

Total operating income before impairment

 

$

 50,888

 

$

 39,831

 

 

$

 11,057

 

27.8%

 

 

15.2%

 

13.0%

 

The Personal Care segment’s operating income before impairment charges increased $5.42 million, or 58.2 percent, for the fiscal quarter ended August 31, 2010, when compared to the same period last year.  The segment’s operating income before impairment charges increased $8.41 million, or 42.3 percent, for the six months ended August 31, 2010, when compared to the same period last year. These improvements were due to an overall improvement in gross margin combined with the favorable impact of the Pert Plus, Sure and Infusium acquisitions on the sales and profitability of our domestic grooming, skin care and hair care solutions products business.

 

The Housewares segment’s operating income before impairment charges increased $1.59 million, or 14.0 percent, for the fiscal quarter ended August 31, 2010, when compared to the same period last year. The segment’s operating income before impairment charges increased $2.64 million, or 13.3 percent, for the six months ended August 31, 2010, when compared to the same period last year.  These increases in operating income are principally due to increases in net sales revenue of $5.14 and $10.38 million, respectively, and associated gross margin improvements over the same three- and six-month periods last year.

 

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Operating income before impairment charges for each operating segment is computed based on net sales revenue, less cost of goods sold and any SG&A associated with the segment, not including impairment charges. The SG&A used to compute each segment’s operating income includes SG&A directly associated with the segment, plus overhead expenses that are allocable to the segment.

 

Impairment Charges:

 

The Company conducts its annual test of impairment of goodwill and indefinite-lived intangible assets in the first quarter of each fiscal year. The Company also tests for impairment if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is below its carrying amount.

 

As a result of its testing during the fiscal quarter ended May 31, 2010, the Company recorded a non-cash impairment charge of $0.50 million ($0.49 million after tax).  The charge was related to an indefinite-lived trademark in our Personal Care segment which was written down to its fair value, determined on the basis of future discounted cash flows using the relief from royalty method.

 

During the fiscal quarter ended August 31, 2009, a significant customer decided to discontinue carrying our Skin Milk® brand of skin care products.   Sales to this customer accounted for a substantial portion of the total sales of this brand and, accordingly, non-cash impairment charges were recorded to write off the remaining $0.90 million ($0.89 million after tax) in carrying value of the associated trademark.

 

Interest expense and nonoperating income (expense), net:

 

Interest expense for the three- and six-month periods ended August 31, 2010 was $2.14 and $4.30 million, respectively, compared to $2.59 and $6.05 million, respectively, for the same periods last year.  Interest expense was lower when compared to the previous period primarily due to lower outstanding debt.

 

Nonoperating income (expense), net, for the three- and six-month periods ended August 31, 2010 was $0.16 and $0.33 million, respectively, compared to $0.36 and $0.80 million, respectively, for the same periods last year. The following table sets forth, for the periods indicated, the key components of nonoperating income (expense), net as a year-over-year percentage change and as a percentage of net sales revenue:

 

NONOPERATING INCOME (EXPENSE), NET

(dollars in thousands)

 

Quarter Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

112

 

$

108

 

 

$

4

 

3.7%

 

 

0.1%

 

0.1%

Unrealized gains on securities

 

-    

 

205

 

 

(205

)

-100.0%

 

 

0.0%

 

0.1%

Miscellaneous other income (expense)

 

52

 

48

 

 

4

 

8.3%

 

 

0.0%

 

0.0%

Total nonoperating income (expense), net

 

$

164

 

$

361

 

 

$

(197

)

-54.6%

 

 

0.1%

 

0.2%

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

 

 

 

 

% of Sales Revenue, net

 

 

2010

 

2009

 

 

$ Change

 

% Change

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

250

 

$

321

 

 

$

(71

)

-22.1%

 

 

0.1%

 

0.1%

Unrealized gains on securities

 

-    

 

420

 

 

(420

)

-100.0%

 

 

0.0%

 

0.1%

Miscellaneous other income (expense)

 

84

 

62

 

 

22

 

35.5%

 

 

0.0%

 

0.0%

Total nonoperating income (expense), net

 

$

334

 

$

803

 

 

$

(469

)

-58.4%

 

 

0.1%

 

0.3%

 

Interest income was lower for the three- and six-month periods ended August 31, 2010, when compared to the same periods last year due primarily to lower interest rates earned.

 

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Income tax expense:

 

Income tax expense for the three- and six-month periods ended August 31, 2010 was 8.6 and 9.8 percent, respectively, of income before income taxes compared to 9.2 and 9.7 percent, respectively, for the same periods last year.  The fluctuations in our effective tax rates for the periods presented are generally attributable to shifts in the mix of taxable income earned between the various high and low tax rate jurisdictions in which we conduct our business.

 

In April 2010, the IRS concluded its audit of the Company’s 2007 and 2008 tax returns.  No adjustments were made to either year’s tax returns.

 

Net income:

 

Our net income was $23.47 and $41.86 million, respectively, for the three- and six-month periods ended August 31, 2010 compared to $15.91 and $30.42 million for the same periods last year, representing period-over-period net income increases of 47.5 and 37.6 percent, respectively.   Our diluted earnings per share was $0.75 and $1.34, respectively, for the three- and six-month periods ended August 31, 2010 compared to $0.51 and $0.99, respectively, for the same periods last year, representing period-over-period diluted earnings per share increases of 47.1 and 35.4 percent, respectively.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Selected measures of our liquidity and capital resources for the six-month periods ended August 31, 2010 and 2009 are shown below:

 

SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL RESOURCES

 

 

Six Months Ended August 31,

 

 

2010

 

2009

 

 

 

 

 

 

 

Accounts Receivable Turnover (Days) (1)

 

65.7

 

67.6

 

Inventory Turnover (Times) (1)

 

2.6

 

2.3

 

Working Capital (in thousands)

 

$187,630

 

$207,235

 

Current Ratio

 

2.1 : 1

 

3.1 : 1

 

Debt to Equity Ratio (2)

 

20.9%

 

24.8%

 

Return on Average Equity (1)

 

14.3%

 

-7.7%

 

 

(1)  Accounts receivable turnover, inventory turnover and return on average equity computations use 12-month trailing sales, cost of sales, or net income components as required by the particular measure.   The current and four prior quarters’ ending balances of accounts receivable, inventory and equity are used for the purposes of computing the average balance component as required by the particular measure.

 

(2)  Debt is defined as all debt outstanding at the balance sheet date.  This includes the sum of the following lines on our consolidated balance sheets: “Long-term debt, current maturities” and “Long-term debt, excluding current maturities.”

 

(3)  Return on average equity for the six months ended August 31, 2009 reflects the impact of non-cash impairment charges of $99.51 million (99.06 million after tax) recorded in the fourth quarter of fiscal 2009.

 

Operating activities:

 

Operating activities provided $11.78 million of cash during the first six months of fiscal 2011, compared to $50.71 million of cash provided during the same period in fiscal 2010.  The decrease in operating cash flow was primarily due to the timing of fluctuations in working capital components, particularly an increase in inventory when compared year-over-year.

 

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Accounts receivable increased $12.59 million to $122.31 million as of August 31, 2010, compared to $109.72 million at the end of fiscal 2010.  The increase was due to trade receivables acquired with the Pert Plus and Sure business and overall net sales revenue growth.  Accounts receivable turnover improved to 65.7 days at August 31, 2010 from 67.6 days at August 31, 2009.  This calculation is based on a rolling five quarter accounts receivable balance.

 

Inventories increased $43.48 million to $167.50 million as of August 31, 2010, compared to $124.02 million at the end of fiscal 2010.  Inventory turnover improved to 2.6 times at August 31, 2010 compared to 2.3 times at August 31, 2009.  The increase in inventories reflects a normal seasonal build up in anticipation of our heavy shipping season which begins in early August and continues through November.  The inventory increase also reflects the addition of Pert Plus and Sure inventory as a result of the March 31, 2010 acquisition.

 

Working capital decreased to $187.63 million at August 31, 2010, compared to $207.98 million at August 31, 2009.  Our current ratio decreased to 2.1:1 at August 31, 2010, compared to 3.2:1 at August 31, 2009. The decrease in our working capital and current ratio was primarily caused by $50.00 million of long-term debt scheduled to mature in June 2011, which became classified as a current liability during the quarter ended August 31, 2010.

 

Investing activities:

 

Investing activities used $70.74 million of cash during the six months ended August 31, 2010. Highlights of those activities follow:

 

·                  In addition to certain capital assets acquired in connection with the Pert Plus hair care and Sure anti-perspirant and deodorant acquisition discussed immediately below, we spent $0.68 million on molds and tooling, $0.79 million on information technology infrastructure, $0.22 million on various other fixed asset additions and $0.30 million on the development of new patents.

 

·                  We used $69.00 million of cash to acquire accounts receivable, finished goods inventories, prepaid expenses, goodwill, patents, trademarks, tradenames, product design specifications, production know-how, certain fixed assets, distribution rights and customer lists, less certain product related operating accruals and other current liabilities of the Pert Plus hair care and Sure anti-perspirant and deodorant businesses from Innovative Brands, LLC.

 

·                  We liquidated $0.20 million of ARS at par.

 

Financing activities:

 

Financing activities used $2.18 million of cash during the six months ended August 31, 2010.  Highlights of those activities follow:

 

·                  We paid a $3 million installment on long-term debt.

 

·                  We repurchased and retired 80,000 shares of common stock at a total purchase price of $1.80 million, for a $22.49 per share average price.

 

·                  Employees and directors exercised options to purchase 108,475 shares of common stock, providing $2.28 million of cash.

 

·                  Purchases of common stock through our employee stock purchase plan provided $0.22 million of cash.

 

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Revolving Line of Credit Agreement and Other Debt Agreements:

 

We have a Revolving Line of Credit Agreement (“RCA”) with Bank of America, N.A. that provides for a total revolving commitment of up to $50.00 million, subject to certain limitations as discussed below.  For additional information regarding the terms and conditions of the RCA, see Note 10 to the accompanying consolidated condensed financial statements of this quarterly report on Form 10-Q.

 

As of August 31, 2010, we had an aggregate principal balance of $131.00 million of Senior Notes with varying maturities due through June 2014.

 

All of our long-term debt, including our Senior Notes, is unconditionally guaranteed by the parent company, Helen of Troy Limited and/or certain subsidiaries on a joint and several basis.  Our RCA and other debt agreements require the maintenance of certain debt/EBITDA and interest coverage ratios, specify minimum consolidated net worth levels and contain other customary covenants.  As of August 31, 2010, our debt agreements effectively limited our ability to incur more than $296.41 million of additional debt from all sources, including draws on our RCA.  Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions, and limits our ability to repurchase our common stock.  As of August 31, 2010, we were in compliance with the terms of the RCA and our other debt agreements.

 

Contractual obligations and commercial commitments:

 

Our contractual obligations and commercial commitments, at August 31, 2010, were:

 

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED AUGUST 31:

(in thousands)

 

 

 

 

2011

 

2012

 

2013

 

2014

 

2015

 

After

 

 

 

Total

 

1 year

 

2 years

 

3 years

 

4 years

 

5 years

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term debt - fixed rate

 

$

6,000

 

$

3,000

 

$

3,000

 

$

-

 

$

-

 

$

-

 

$

-

 

Term debt - floating rate (1)

 

125,000

 

50,000

 

-    

 

-    

 

75,000

 

-    

 

-    

 

Long-term incentive plan payouts

 

4,210

 

1,941

 

1,676

 

593

 

-    

 

-    

 

-    

 

Interest on fixed rate debt

 

597

 

407

 

190

 

-    

 

-    

 

-    

 

-    

 

Interest on floating rate debt (1)

 

19,733

 

6,961

 

4,508

 

4,508

 

3,756

 

-    

 

-    

 

Open purchase orders

 

76,107

 

76,107

 

-    

 

-    

 

-    

 

-    

 

-    

 

Minimum royalty payments

 

69,699

 

6,368

 

5,922

 

5,599

 

5,097

 

4,927

 

41,786

 

Advertising and promotional

 

79,911

 

11,050

 

6,235

 

5,831

 

5,403

 

5,421

 

45,971

 

Operating leases

 

11,083

 

2,071

 

1,681

 

1,365

 

1,331

 

1,122

 

3,513

 

Capital spending commitments

 

319

 

319

 

-    

 

-    

 

-    

 

-    

 

-    

 

Total contractual obligations (2)

 

$

392,659

 

$

158,224

 

$

23,212

 

$

17,896

 

$

90,587

 

$

11,470

 

$

91,270

 

 

(1) The Company uses interest rate hedge agreements (the “swaps”)  in conjunction with its unsecured floating interest rate $50 million, 7 year and $75 million, 10 year Senior Notes.  The swaps are a hedge of the variable LIBOR rates used to reset the floating rates on these Senior Notes.  The swaps effectively fix the interest rates on the 7 and 10 year Senior Notes at 5.89 and 6.01 percent, respectively.   Accordingly, the future interest obligations related to this debt have been estimated using these rates.

 

(2) In addition to the contractual obligations and commercial commitments in the table above, as of August 31, 2010, we have recorded a provision for our uncertain tax positions of $1.83 million. We are unable to reliably estimate the timing of future payments, if any, related to uncertain tax positions; therefore, we have excluded these tax liabilities from the table above.

 

Off-balance sheet arrangements:

 

We have no existing activities involving special purpose entities or off-balance sheet financing.

 

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Current and future capital needs:

 

As of August 31, 2010, we have no outstanding borrowings and $0.20 million of open letters of credit under our RCA.

 

Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund our foreseeable short- and long-term liquidity requirements.  We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we continue to evaluate acquisition opportunities on a regular basis and may augment our internal growth with acquisitions of complementary businesses or product lines. We may finance acquisition activity with available cash, the issuance of common stock, additional debt or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition.

 

The Company may elect to repurchase additional common stock from time to time based upon its assessment of its liquidity position and market conditions at the time, and subject to limitations contained in its debt agreements.  For additional information, see Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” in this Form 10-Q.

 

CRITICAL ACCOUNTING POLICIES

 

The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Critical Accounting Policies” in our annual report on Form 10-K for the year ended February 28, 2010. There have been no material changes to the Company’s critical accounting policies from the information provided in our Form 10-K.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

See Note 2 – “New Accounting Pronouncements,” to the accompanying consolidated condensed financial statements of this quarterly report on Form 10-Q, for a discussion of the status and potential impact of new accounting pronouncements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Changes in currency exchange rates, interest rates and the liquidity of our investments are our primary financial market risks.

 

Foreign currency risk:

 

Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the three- and six- month periods ended August 31, 2010, approximately 11 and 12 percent, respectively, of our net sales revenue were in foreign currencies. During the three- and six- month periods ended August 31, 2009, approximately 15 percent of our net sales revenue were in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Chilean Pesos, Peruvian Soles and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses are recognized in SG&A.

 

We identify foreign currency risk by regularly monitoring our foreign currency-denominated transactions and balances.  Where operating conditions permit, we 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 have historically hedged against certain foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar.  In these transactions, we execute a forward currency contract that will settle at the end of a forecasted period.  Because the size and terms of the forward contract are designed so that it’s fair market value will move in the opposite direction and approximate magnitude of the underlying foreign currency’s forecasted exchange gain or loss during the forecasted period, a hedging relationship is created.  To the extent that we forecast the expected foreign currency cash flows from the period we enter into the forward contract until the date it will settle with reasonable accuracy, we significantly lower or materially eliminate a particular currency’s exchange risk exposure over the life of the related forward contract.  We enter into these types of agreements where we believe we have meaningful exposure to foreign currency exchange risk and the hedge pricing appears reasonable.  It is not practical for us to hedge all our exposures, nor are we able to project in any meaningful way the possible effect and interplay of all foreign currency fluctuations on translated amounts or future earnings.  This is due to our constantly changing exposure to various currencies, the fact that each foreign currency reacts differently to the U.S. Dollar, and the significant number of currencies involved. Accordingly, we will always be subject to foreign exchange rate-risk on exposures we have not hedged, and these risks may be material.  We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

 

Interest rate risk:

 

Interest on our long-term debt outstanding as of August 31, 2010 is both floating and fixed. Fixed rates are in place on $6 million of Senior Notes at 7.24 percent and floating rates are in place on $125 million of Senior Notes, which reset as described in Note 13, and have been effectively converted to fixed rate debt using interest rate swaps, as described below.

 

Our levels of debt, certain additional draws against our RCA (whose interest rates can vary with the term of each draw), and the uncertainty regarding the level of future interest rates increase our risk profile. We manage our floating rate debt using interest rate swaps (the “swaps”). As of August 31, 2010, we had two swaps that

 

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converted an aggregate notional principal of $125 million from floating interest rate payments under our 7 and 10 year Senior Notes to fixed interest rate payments at 5.89 and 6.01 percent, respectively. In the swap transactions, we maintain two contracts to pay fixed rates of interest on an aggregate notional principal amount of $125 million at rates of 5.04 and 5.11 percent on our 7 and 10 year Senior Notes, respectively, while simultaneously receiving floating rate interest payments set at 0.53 percent as of August 31, 2010 on the same notional amounts. The fixed rate side of the swap will not change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap fully offset the change in any period of the underlying debt’s floating rate payments. These swaps are used to reduce the Company’s risk of increased interest costs; however, when interest rates drop significantly below the swap rates, we lose the benefit that our floating rate debt would provide, if not managed with swaps. The swaps are considered highly effective.

 

The following tables summarize the fair values of our various derivative instruments at August 31, 2010 and February 28, 2010:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS IN THE CONSOLIDATED BALANCE SHEETS

(in thousands)

August 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Final

 

 

 

Derivative

 

Derivative

 

and Other

 

Derivative

 

 

 

 

 

Settlement

 

Notional

 

Assets,

 

Assets,

 

Current

 

Liabilities,

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Current

 

Noncurrent

 

Liabilities

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2011

 

£

6,700

 

$

561

 

$

-    

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2011

 

$

12,000

 

 

228

 

 

348

 

 

-

 

 

-

 

Currency contracts - sell Euros

 

Cash flow

 

2/2011

 

3,000

 

 

283

 

 

-    

 

 

-

 

 

-

 

Subtotal

 

 

 

 

 

 

 

1,072

 

348

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,874

 

8,272

 

Total fair value

 

 

 

 

 

 

 

$

1,072

 

$

348

 

$

4,874

 

$

8,272

 

 

February 28, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Final

 

 

 

Derivative

 

Derivative

 

and Other

 

Derivative

 

 

 

 

 

Settlement

 

Notional

 

Assets,

 

Assets,

 

Current

 

Liabilities,

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Current

 

Noncurrent

 

Liabilities

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2011

 

£

5,000

 

$

651

 

$

-

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2010

 

$

6,000

 

144

 

-

 

-

 

-

 

Subtotal

 

 

 

 

 

 

 

795

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,951

 

7,070

 

Total fair value

 

 

 

 

 

 

 

$

795

 

$

-    

 

$

4,951

 

$

7,070

 

 

We expect that as currency market conditions warrant, and our foreign denominated transaction exposure grows, we will continue to execute additional contracts in order to hedge against certain potential foreign exchange losses.

 

Counterparty Credit Risk - Financial instruments, including foreign currency contracts and interest rate swaps, expose us to counterparty credit risk for nonperformance.  We manage our exposure to counterparty credit risk through only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments.  Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote.

 

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Risks inherent in cash, cash equivalents and investment holdings:

 

Our cash, cash equivalents and investments are subject to interest rate risk, credit risk and liquidity risk.  Cash consists of both interest bearing and non-interest bearing disbursement or short-term investment accounts.  Cash equivalents consist of commercial paper and money market investment accounts.  Long-term investments consist of AAA rated ARS.  The following table summarizes our cash, cash equivalents and long-term investments we held at August 31, 2010 and February 28, 2010:

 

CASH, CASH EQUIVALENTS AND LONG-TERM INVESTMENTS

(in thousands)

 

 

August 31, 2010

 

February 28, 2010

 

 

 

Carrying

 

Range of

 

Carrying

 

Range of

 

 

 

Amount

 

Interest Rates

 

Amount

 

Interest Rates

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash, interest and non-interest-bearing accounts - unrestricted

 

$

7,662

 

0.00 to 1.65%

 

$

6,234

 

0.00 to 2.00%

 

Cash, interest and non-interest-bearing accounts - restricted

 

733

 

0.00 to 1.50%

 

1,053

 

0.00 to 2.50%

 

Commercial paper

 

14,810

 

0.12 to 0.13%

 

88,822

 

0.03 to 0.18%

 

Money market accounts

 

25,864

 

0.11 to 3.37%

 

14,099

 

0.01 to 3.98%

 

Total cash and cash equivalents

 

$

49,069

 

 

 

$

110,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments - auction rate securities

 

$

20,330

 

0.00 to 2.766%

 

$

20,534

 

1.73 to 8.44%

 

 

Our cash balances at August 31, 2010 and February 28, 2010 include restricted cash of $0.73 and $1.05 million, respectively, denominated in Venezuelan Bolivares Fuertes, shown above under the heading “Cash, interest and non-interest-bearing accounts – restricted.” The balances arise from our operations within the Venezuelan market.  The Venezuelan government enforces restrictions on transfers of cash out of the country and controls exchange rates.  We have made formal applications to repatriate this cash at an official exchange rate currently pertinent to us, which is 4.30 Bolivares Fuertes to $1; however, the Company has not yet received approval of these applications.  Until we are able to officially repatriate cash from Venezuela, we intend to use these cash balances in-country to continue to fund operations.  We do not otherwise rely on these restricted funds as a source of liquidity.

 

Most of our cash equivalents and investments are in commercial paper, money market accounts and ARS with frequent rate resets; therefore, we believe there is no material interest rate risk.  In addition, our commercial paper and ARS are from issuers with high credit ratings; therefore, we believe the commercial paper and ARS do not present a significant credit risk.

 

We hold investments in ARS collateralized by student loans (with underlying maturities from 18 to 35 years).  Substantially all of the collateral is guaranteed by the U.S. government under the Federal Family Education Loan Program.  Liquidity for these securities was normally dependent on an auction process that reset the applicable interest rate at pre-determined intervals, ranging from 7 to 35 days.  Beginning in February 2008, the auctions for the ARS held by us and others were unsuccessful, requiring us to hold them beyond their typical auction reset dates. Auctions fail when there is insufficient demand.  However, this does not represent a default by the issuer of the security. Upon an auction’s failure, the interest rates reset based on a formula contained in the security.  The securities will continue to accrue interest and be auctioned until one of the following occurs: the auction succeeds; the issuer calls the securities; or the securities mature.  ARS are currently classified as non-current assets held for sale under the heading “Other assets” in our accompanying consolidated condensed balance sheets.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the SEC, in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “should”, “seeks”, “estimates”, “project”, “predict”, “potential”, “continue”, “intends”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results and statements expressing general expectations about future operating results, are forward-looking statements and are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct.  Forward-looking statements are subject to risks that could cause them to differ materially from actual results.  Accordingly, the Company cautions readers not to place undue reliance on forward-looking statements. We believe that these risks include, but are not limited to, the risks described in Part 1, “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended February 28, 2010 and risks otherwise described from time to time in our SEC reports as filed.  Such risks, uncertainties and other important factors include, among others:

 

·     the departure and recruitment of key personnel;

 

·     our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;

 

·     our projections of product demand, sales and net income are highly subjective in nature and future sales and net income could vary in a material amount from such projections;

 

·     our relationship with key customers and licensors;

 

·     the costs of complying with the business demands and requirements of large sophisticated customers;

 

·     our dependence on foreign sources of supply and foreign manufacturing, and associated operational risks including but not limited to long lead times, consistent local labor availability and capacity, and timely availability of sufficient shipping carrier capacity;

 

·     the impact of changing costs of raw materials and energy on cost of goods sold and certain operating expenses;

 

·     the inability to liquidate auction rate securities;

 

·     circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets;

 

·     the risks associated with the use of trademarks licensed from third parties;

 

·     our dependence on the strength of retail economies and vulnerabilities to a prolonged economic downturn;

 

·     our ability to develop and introduce a continuing stream of innovative new products to meet changing consumer preferences;

 

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·     the potential impact of further disruptions in U.S. and international credit markets;

 

·     exchange rate risks;

 

·     expectations regarding future acquisitions and our ability to effectively integrate acquired businesses;

 

·     our use of debt and the constraints it may impose on our ability to operate our business;

 

·     the risks associated with tax audits and related disputes with taxing authorities;

 

·     the risks of potential changes in laws, including tax laws and the complexities of compliance with such laws; and

 

·     our ability to continue to avoid classification as a controlled foreign corporation.

 

We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

 

Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), maintains disclosure controls and procedures as defined in Rules 13a-15(e) under the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

 

Our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended August 31, 2010. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of August 31, 2010, the end of the period covered by this quarterly report on Form 10-Q.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

In connection with the evaluation described above, we identified no change in our internal control over financial reporting as defined in Rule 13a-15(f) that occurred during our fiscal quarter ended August 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.   OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

ITEM 1A.   RISK FACTORS

 

The ownership of our common stock involves a number of risks and uncertainties.  When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended February 28, 2010.  Since the filing of our annual report on Form 10-K, there have been no material changes in our risk factors from those disclosed therein.

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Under the latest program approved by our Board of Directors, as of August 31, 2010, we are authorized to purchase up to 1,200,650 shares of common stock in the open market or through private transactions.   During the fiscal quarter ended August 31, 2010, we repurchased and retired 80,000 shares of common stock at a total purchase price of $1.80 million, for a $22.49 per share average price. The following schedule sets forth the purchase activity for the three months ended August 31, 2010.

 

ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED AUGUST 31, 2010

Period

 

Total Number of
Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

 

Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs

 

 

 

 

 

 

 

 

 

 

 

June 1 through June 30, 2010

 

-    

 

 

 

-    

 

1,280,650

 

July 1 through July 30, 2010

 

70,000

 

22.50

 

70,000

 

1,210,650

 

Aug 1 through Aug 31, 2010

 

10,000

 

22.41

 

10,000

 

1,200,650

 

Total

 

80,000

 

$22.49

 

80,000

 

1,200,650

 

 

ITEM 6.    EXHIBITS

 

(a)       Exhibits

 

31.1     Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2     Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32         Joint certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

  HELEN OF TROY LIMITED

 

  (Registrant)

 

 

 

 

Date:    October 6, 2010

  /s/ Gerald J. Rubin

 

  Gerald J. Rubin

 

  Chairman of the Board, Chief
  Executive Officer, President, Director

 

  and Principal Executive Officer

 

 

 

 

Date:    October 6, 2010

  /s/ Thomas J. Benson

 

  Thomas J. Benson

 

  Senior Vice-President

 

  and Chief Financial Officer

 

 

 

 

Date:    October 6, 2010

  /s/ Richard J. Oppenheim

 

  Richard J. Oppenheim

 

  Financial Controller

 

  and Principal Accounting Officer

 

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Index to Exhibits

 

31.1*

 

Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32**

 

Joint Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*   Filed herewith.

 

** Furnished herewith.

 

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