Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

T

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

 

 

 

For the quarterly period ended November 30, 2014

 

 

 

or

 

 

£

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

 

 

 

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

 

Commission file number: 001-14669

 

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda

 

74-2692550

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

Clarenden House

 

 

2 Church Street

 

 

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address)

 

(Zip Code)

(915) 225-8000

(Registrant’s telephone number, including area code)

 

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 x    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 T

Accelerated filer £

Non-accelerated filer £

Smaller Reporting Company £

 

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 January 5, 2015

Common Shares, $0.10 par value, per share

28,428,055 shares

 


 



Table of Contents

 


 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

PART I.

FINANCIAL  INFORMATION

 

 

 

 

Item 1.

Financial Statements

2

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of  Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

48

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

PART 2.

OTHER  INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 6.

Exhibits

57

 

 

 

SIGNATURES

58

 


 

1

 



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)

 

 

November 30,
2014

 

February 28,

 

 

 

 

2014

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Assets, current:

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,056

 

 

$

70,027

 

Receivables - principally trade, less allowances of $6,248 and $4,679

 

289,449

 

 

213,054

 

Inventory, net

 

318,823

 

 

289,255

 

Prepaid expenses and other current assets

 

9,118

 

 

10,097

 

Income taxes receivable

 

-

 

 

3,783

 

Deferred tax assets, net

 

30,110

 

 

29,260

 

Total assets, current

 

668,556

 

 

615,476

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $81,217 and $71,516

 

128,588

 

 

129,117

 

Goodwill

 

549,828

 

 

453,241

 

Other intangible assets, net of accumulated amortization of $113,093 and $94,698

 

404,872

 

 

322,309

 

Deferred tax assets, net

 

917

 

 

2,523

 

Other assets, net of accumulated amortization of $8,664 and $6,781

 

10,935

 

 

10,636

 

Total assets

 

$

1,763,696

 

 

$

1,533,302

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

 

Revolving line of credit

 

$

440,000

 

 

$

-

 

Accounts payable, principally trade

 

101,435

 

 

75,585

 

Accrued expenses and other current liabilities

 

164,097

 

 

156,688

 

Income taxes payable

 

4,312

 

 

-

 

Deferred tax liabilities, net

 

198

 

 

181

 

Long-term debt, current maturities

 

21,900

 

 

96,900

 

Total liabilities, current

 

731,942

 

 

329,354

 

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

93,807

 

 

95,707

 

Deferred tax liabilities, net

 

53,299

 

 

56,988

 

Other liabilities, noncurrent

 

25,658

 

 

21,766

 

Total liabilities

 

904,706

 

 

503,815

 

 

 

 

 

 

 

 

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; 28,425,523 and 32,272,519 shares issued and outstanding

 

2,843

 

 

3,227

 

Additional paid in capital

 

174,633

 

 

180,861

 

Accumulated other comprehensive income (loss)

 

128

 

 

(1,091

)

Retained earnings

 

681,386

 

 

846,490

 

Total stockholders’ equity

 

858,990

 

 

1,029,487

 

Total liabilities and stockholders’ equity

 

$

1,763,696

 

 

$

1,533,302

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

2

 



Table of Contents

 


 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

Consolidated Condensed Statements of Income (Unaudited)

 

(in thousands, except per share data)

 

 

Three Months Ended November 30,

 

Nine Months Ended November 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

435,674

 

 

$

380,730

 

 

$

1,067,401

 

 

$

1,004,633

 

Cost of goods sold

 

254,263

 

 

233,029

 

 

632,726

 

 

613,513

 

Gross profit

 

181,411

 

 

147,701

 

 

434,675

 

 

391,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

116,368

 

 

98,308

 

 

312,906

 

 

278,697

 

Asset impairment charges

 

-

 

 

-

 

 

9,000

 

 

12,049

 

Operating income

 

65,043

 

 

49,393

 

 

112,769

 

 

100,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income, net

 

87

 

 

13

 

 

234

 

 

153

 

Interest expense

 

(4,173

)

 

(2,513

)

 

(11,588

)

 

(7,647

)

Income before income taxes

 

60,957

 

 

46,893

 

 

101,415

 

 

92,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

9,328

 

 

10,911

 

 

14,255

 

 

24,780

 

Deferred

 

(3,748

)

 

(1,542

)

 

(3,454

)

 

(7,133

)

Net income

 

$

55,377

 

 

$

37,524

 

 

$

90,614

 

 

$

75,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.95

 

 

$

1.17

 

 

$

3.17

 

 

$

2.35

 

Diluted

 

$

1.92

 

 

$

1.16

 

 

$

3.12

 

 

$

2.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

28,414

 

 

32,047

 

 

28,630

 

 

31,982

 

Diluted

 

28,824

 

 

32,482

 

 

29,070

 

 

32,311

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

3

 



Table of Contents

 


 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

 

(in thousands)

 

 

Three Months Ended November 30,

 

 

2014

 

2013

 

 

 

Before

 

 

 

Net of

 

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

 

Tax

 

Tax

 

Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

$

60,957

 

$

(5,580

)

$

55,377

 

 

$

46,893

 

$

(9,369

)

$

37,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

-

 

-

 

-

 

 

(70

)

24

 

(46

)

Settlements reclassified to income

 

-

 

-

 

-

 

 

946

 

(330

)

616

 

Subtotal

 

-

 

-

 

-

 

 

876

 

(306

)

570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

301

 

(59

)

242

 

 

(641

)

125

 

(516

)

Settlements reclassified to income

 

(201

)

31

 

(170

)

 

78

 

(15

)

63

 

Subtotal

 

100

 

(28

)

72

 

 

(563

)

110

 

(453

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

100

 

(28

)

72

 

 

313

 

(196

)

117

 

Comprehensive income

 

$

61,057

 

$

(5,608

)

$

55,449

 

 

$

47,206

 

$

(9,565

)

$

37,641

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30,

 

 

2014

 

2013

 

 

 

Before

 

 

 

Net of

 

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

 

Tax

 

Tax

 

Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

$

101,415

 

$

(10,801

)

$

90,614

 

 

$

92,880

 

$

(17,647

)

$

75,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

28

 

(10

)

18

 

 

(97

)

34

 

(63

)

Settlements reclassified to income

 

1,199

 

(420

)

779

 

 

2,785

 

(975

)

1,810

 

Subtotal

 

1,227

 

(430

)

797

 

 

2,688

 

(941

)

1,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

515

 

(97

)

418

 

 

(673

)

136

 

(537

)

Settlements reclassified to income

 

15

 

(11

)

4

 

 

(246

)

39

 

(207

)

Subtotal

 

530

 

(108

)

422

 

 

(919

)

175

 

(744

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

1,757

 

(538

)

1,219

 

 

1,769

 

(766

)

1,003

 

Comprehensive income

 

$

103,172

 

$

(11,339

)

$

91,833

 

 

$

94,649

 

$

(18,413

)

$

76,236

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

4

 



Table of Contents

 


 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

Consolidated Condensed Statements of Cash Flows (Unaudited)

 

(in thousands)

 

 

Nine Months Ended November 30,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

Cash provided (used) by operating activities:

 

 

 

 

 

 

Net income

 

$

90,614

 

 

$

75,233

 

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

 

 

 

 

 

 

Depreciation and amortization

 

29,075

 

 

25,184

 

Amortization of financing costs

 

1,457

 

 

677

 

Provision for doubtful receivables

 

417

 

 

744

 

Non-cash share-based compensation

 

4,539

 

 

9,200

 

Intangible asset impairment charges

 

9,000

 

 

12,049

 

(Gain) loss on the sale of property and equipment

 

43

 

 

74

 

Deferred income taxes and tax credits

 

(3,454

)

 

(7,136

)

Changes in operating capital, net of effects of acquisition of businesses:

 

 

 

 

 

 

Receivables

 

(76,555

)

 

(60,724

)

Inventories

 

(23,468

)

 

(9,018

)

Prepaid expenses and other current assets

 

2,946

 

 

955

 

Other assets and liabilities, net

 

4,638

 

 

(1,340

)

Accounts payable

 

19,377

 

 

21,478

 

Accrued expenses and other current liabilities

 

(113

)

 

22,787

 

Accrued income taxes

 

4,956

 

 

949

 

Net cash provided by operating activities

 

63,472

 

 

91,112

 

 

 

 

 

 

 

 

Cash provided (used) by investing activities:

 

 

 

 

 

 

Capital and intangible asset expenditures

 

(4,893

)

 

(38,563

)

Payment to acquire a business, net of cash received

 

(195,943

)

 

-

 

Net cash used by investing activities

 

(200,836

)

 

(38,563

)

 

 

 

 

 

 

 

Cash provided (used) by financing activities:

 

 

 

 

 

 

Proceeds from line of credit

 

694,400

 

 

107,300

 

Repayment of line of credit

 

(254,400

)

 

(184,400

)

Proceeds from issuance of long-term debt

 

-

 

 

35,509

 

Repayment of long-term debt

 

(76,900

)

 

-

 

Payment of financing costs

 

(2,321

)

 

(127

)

Proceeds from share issuances under share-based compensation plans, including tax benefits

 

5,267

 

 

5,019

 

Payment of tax obligations resulting from cashless share award exercises

 

(4,569

)

 

(483

)

Payments for repurchases of common stock

 

(273,598

)

 

(1,311

)

Share-based compensation tax benefit

 

514

 

 

1,877

 

Net cash provided (used) by financing activities

 

88,393

 

 

(36,616

)

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(48,971

)

 

15,933

 

Cash and cash equivalents, beginning balance

 

70,027

 

 

12,842

 

Cash and cash equivalents, ending balance

 

$

21,056

 

 

$

28,775

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

5

 



Table of Contents

 


 

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

November 30, 2014

 

Note 1 – Basis of Presentation and Conventions Used in this Report

 

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 November 30, 2014 and February 28, 2014, and the results of our consolidated operations for the interim periods presented. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2014, and our other reports on file with the Securities and Exchange Commission (the “SEC”).

 

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.” References to “OXO” refer to the operations of OXO International and certain of its affiliated subsidiaries that comprise our Housewares segment. References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries, which comprise a segment within the Company referred to as the Healthcare / Home Environment segment.  References to “Healthy Directions” refer to the operations of Healthy Directions, LLC and its subsidiaries, acquired on June 30, 2014, that comprise the Nutritional Supplements segment.  Product and service names mentioned in this report are used for identification purposes only and may be protected in the United States and other jurisdictions by trademarks, trade names, service marks, and other intellectual property rights of the Company and other parties. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks, and logos referenced herein belong to their respective owners. References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.

 

We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have four segments: Housewares, Healthcare / Home Environment, Nutritional Supplements, and Personal Care. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation tools, gadgets and storage containers, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, as well as other health products sold directly to consumers.  Our Personal Care segment products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid-, solid- and powder-based personal care and grooming products.

 

Our business is seasonal due to different calendar events, holidays and seasonal weather patterns. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

 

 

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Our consolidated condensed financial statements are prepared in U.S. Dollars and in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  We have reclassified, combined or separately disclosed certain amounts in the prior period’s consolidated condensed financial statements and accompanying footnotes to conform to the current period’s presentation.

 

Note 2 - Change in Accounting Estimate

 

In the third quarter of fiscal year 2015, we revised our product liability estimates to reflect more relevant historical claims experience.  The effect of the change in estimate was recorded in selling, general and administrative expense (“SG&A”) and increased operating income and net income by $2.22 million and $1.36 million, respectively, for the fiscal quarter and year-to-date ended November 30, 2014.   The effect of the change in estimate increased diluted earnings per share $0.05 per share for both the third fiscal quarter and fiscal year-to-date ended November 30, 2014.

 

Note 3 – New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt according to the various timetables the FASB specifies.  Unless otherwise discussed below, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position, results of operations and cash flows upon adoption.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606.  The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for us beginning in fiscal year 2018 and can be adopted either retrospectively or as a cumulative effect adjustment as of the date of adoption.  We are currently evaluating the effect this new accounting guidance will have on our consolidated results of operations, cash flows and financial position.

 

 

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Note 4 – Commitments and Contingencies

 

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.

 

Notes 8, 10, 11, 12, 13, and 14 provide additional information regarding certain of our significant commitments and certain significant contingencies we have provided for in the accompanying consolidated condensed financial statements.

 

Our products are under warranty against defects in material and workmanship for periods ranging from two to five years. We estimate our warranty accrual using historical trends and believe that these trends are the most reliable method by which we can estimate our warranty liability.  The following table summarizes the activity in our warranty accrual for the periods covered below:

 

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

 

 

Three Months Ended November 30,

 

 

Nine Months Ended November 30,

 

 

 

2014 (1)

 

 

2013

 

 

2014 (2)

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

  $

22,492

 

 

$

21,357

 

 

  $

19,269

 

 

$

23,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to the accrual

 

16,574

 

 

12,931

 

 

46,088

 

 

38,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reductions of the accrual - payments and credits issued

 

(13,821

)

 

(12,197

)

 

(40,112

)

 

(39,100

)

Ending balance

 

  $

25,245

 

 

$

22,091

 

 

  $

25,245

 

 

$

22,091

 

 

(1)

For the fiscal quarter ended November 30, 2014, the table includes accrual additions of $2.18 million and related payments and credits of $2.37 million attributed to Healthy Directions.

 

 

(2)

For the nine months ended November 30, 2014, the table includes additions to the accrual of $5.37 million and related payments and credits of $4.20 million attributed to Healthy Directions.

 

Note 5 – Earnings per Share

 

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period.  We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities.  Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive.  See Note 16 to these consolidated condensed financial statements for more information regarding share-based payment arrangements.

 

For the periods covered below, the basic and diluted shares are as follows:

 

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

 

 

Three Months Ended November 30,

 

 

Nine Months Ended November 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

28,414

 

 

32,047

 

 

28,630

 

 

31,982

 

Incremental shares from share-based payment arrangements

 

410

 

 

435

 

 

440

 

 

329

 

Weighted average shares outstanding, diluted

 

28,824

 

 

32,482

 

 

29,070

 

 

32,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities, as a result of in-the-money options

 

643

 

 

574

 

 

686

 

 

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities, as a result of unvested or unsettled share awards

 

278

 

 

408

 

 

267

 

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive securities, as a result of out-of-the-money options

 

245

 

 

358

 

 

240

 

 

586

 

 

 

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Note 6 –Segment Information

 

The following tables contain segment information for the periods covered below:

 

THREE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

(in thousands)

 

 

 

 

Healthcare /

 

Nutritional

 

Personal

 

 

 

November 30, 2014

 

Housewares

 

Home Environment

 

Supplements (1)

 

Care

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

85,984

 

$

176,994

 

$

38,462

 

$

134,234

 

$

435,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

18,275

 

18,694

 

6,214

 

21,860

 

65,043

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and intangible asset expenditures

 

233

 

535

 

211

 

226

 

1,205

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

892

 

5,125

 

2,032

 

2,533

 

10,582

 

 

 

 

 

 

Healthcare /

 

Nutritional

 

Personal

 

 

 

November 30, 2013

 

Housewares

 

Home Environment

 

Supplements (1)

 

Care

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

74,776

 

$

165,752

 

$

-

 

$

140,202

 

$

380,730

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

15,278

 

10,665

 

-

 

23,450

 

49,393

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and intangible asset expenditures

 

193

 

3,207

 

-

 

585

 

3,985

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

871

 

5,149

 

-

 

2,726

 

8,746

 

 

NINE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

(in thousands)

 

 

 

 

Healthcare /

 

Nutritional

 

Personal

 

 

 

November 30, 2014

 

Housewares

 

Home Environment

 

Supplements (1)

 

Care

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

222,377

 

$

445,701

 

$

63,096

 

$

336,227

 

$

1,067,401

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-

 

-

 

-

 

9,000

 

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

45,201

 

31,919

 

6,324

 

29,325

 

112,769

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and intangible asset expenditures

 

1,275

 

2,022

 

388

 

1,208

 

4,893

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,669

 

15,384

 

3,391

 

7,631

 

29,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare /

 

Nutritional

 

Personal

 

 

 

November 30, 2013

 

Housewares

 

Home Environment

 

Supplements (1)

 

Care

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

208,471

 

$

424,398

 

$

-

 

$

371,764

 

$

1,004,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-

 

-

 

-

 

12,049

 

12,049

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

41,506

 

22,175

 

-

 

36,693

 

100,374

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and intangible asset expenditures

 

574

 

36,321

 

-

 

1,668

 

38,563

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,868

 

14,298

 

-

 

8,018

 

25,184

 

 

(1)

The Nutritional Supplements segment includes three- and five-months of operating results, respectively, for the fiscal quarter and year-to-date ended November 30, 2014, as the segment was acquired on June 30, 2014. Operating income includes acquisition-related expenditures of $3.61 million for the five months of operating results included in the fiscal year-to-date ended November 30, 2014. For further information regarding the acquisition, see Note 10 to these consolidated condensed financial statements.

 

We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment, plus overhead expenses that are allocable to the segment.  The operations for the Nutritional Supplements segment do not include any allocation of corporate costs for fiscal year 2015.  As the new segment is further integrated into our operating structure, we expect to make an allocation of corporate costs

 

 

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to the segment in future fiscal years. When we decide such allocations are appropriate, there may be some reduction in the operating income of the Nutritional Supplements segment offset by increases in operating income of our other segments. The extent of this operating income impact between the segments has not yet been determined.  We do not allocate nonoperating income and expense, including interest or income taxes, to operating segments.

 

Note 7 - Comprehensive Income (Loss)

 

The table below presents the changes in accumulated other comprehensive income (loss) by component and the amounts reclassified out of accumulated other comprehensive income (loss) for the 2015 fiscal year-to-date:

 

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT

(in thousands)

 

 

 

Unrealized Holding Gains (Losses)

 

 

 

 

 

On Cash Flow Hedges

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

Interest Rate

 

Currency

 

 

 

 

 

Swaps (1)

 

Contracts (2)

 

Total

 

 

 

 

 

 

 

 

 

Balance at February 28, 2014

 

$

(797

)

$

(294

)

$

(1,091

)

 

 

 

 

 

 

 

 

Other comprehensive income before reclassification

 

28

 

515

 

543

 

 

 

 

 

 

 

 

 

Amounts reclassified out of accumulated other comprehensive income (loss)

 

1,199

 

15

 

1,214

 

 

 

 

 

 

 

 

 

Tax effects

 

(430

)

(108

)

(538

)

Other comprehensive income

 

797

 

422

 

1,219

 

 

 

 

 

 

 

 

 

Balance at November 30, 2014

 

$

-

 

$

128

 

$

128

 

 

(1)  Includes net deferred tax benefits of $0.43 million at February 28, 2014.

 

(2)  Includes net deferred tax (expense) benefits of ($0.03) and $0.08 million at November 30, 2014 and February 28, 2014, respectively.

 

Note 8 - Supplemental Balance Sheet Information

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

Estimated

 

 

 

 

 

 

 

 

Useful Lives

 

November 30,

 

 

February 28,

 

 

 

(Years)

 

2014

 

 

2014

 

 

 

 

 

 

 

 

 

 

Land

 

   -     

 

$

12,800

 

 

$

12,800

 

Building and improvements

 

3 - 40

 

102,040

 

 

98,660

 

Computer, furniture and other equipment

 

3 - 15

 

66,593

 

 

60,291

 

Tools, molds and other production equipment

 

1 - 10

 

25,580

 

 

23,017

 

Construction in progress

 

   -     

 

2,792

 

 

5,865

 

Property and equipment, gross

 

 

 

209,805

 

 

200,633

 

Less accumulated depreciation

 

 

 

(81,217

)

 

(71,516

)

Property and equipment, net

 

 

 

$

128,588

 

 

$

129,117

 

 

 

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

 

 

November 30,

 

 

February 28,

 

 

 

2014

 

 

2014

 

 

 

 

 

 

 

 

Accrued compensation, benefits and payroll taxes

 

  $

41,994

 

 

$

69,877

 

Accrued sales returns, discounts and allowances

 

35,817

 

 

25,297

 

Accrued warranty returns

 

25,245

 

 

19,269

 

Accrued advertising

 

24,970

 

 

16,414

 

Accrued product liability, legal and professional fees

 

6,429

 

 

5,705

 

Accrued royalties

 

9,214

 

 

5,712

 

Accrued property, sales and other taxes

 

9,624

 

 

6,835

 

Derivative liabilities, current

 

-

 

 

1,596

 

Liability for uncertain tax positions

 

-

 

 

453

 

Other

 

10,804

 

 

5,530

 

Total accrued expenses and other current liabilities

 

  $

164,097

 

 

$

156,688

 

 

OTHER LIABILITIES, NONCURRENT

(in thousands)

 

 

November 30,

 

 

February 28,

 

 

 

2014

 

 

2014

 

 

 

 

 

 

 

 

Deferred compensation liability

 

  $

8,412

 

 

$

7,257

 

Liability for uncertain tax positions

 

10,846

 

 

13,471

 

Other liabilities

 

6,400

 

 

1,038

 

Total other liabilities, noncurrent

 

  $

25,658

 

 

$

21,766

 

 

Note 9 - Goodwill and Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2015 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2015.  As a result of our testing of indefinite-lived trademarks and licenses, we recorded a non-cash asset impairment charge of $9.00 million ($8.16 million after tax).  The charge was related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2014 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2014.  As a result of our testing of indefinite-lived trademarks and licenses, we recorded a non-cash asset impairment charge of $12.05 million ($12.03 million after tax).  The charge was related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

November 30, 2014

 

 

February 28, 2014

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Description

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

166,132

 

$

-

 

$

-

 

$

166,132

 

 

$

166,132

 

$

-

 

$

-

 

$

166,132

 

Trademarks - indefinite

 

75,200

 

-

 

-

 

75,200

 

 

75,200

 

-

 

-

 

75,200

 

Other intangibles - finite

 

15,923

 

-

 

(12,090

)

3,833

 

 

15,693

 

-

 

(11,149

)

4,544

 

Total Housewares

 

257,255

 

-

 

(12,090

)

245,165

 

 

257,025

 

-

 

(11,149

)

245,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare / Home Environment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

251,758

 

-

 

-

 

251,758

 

 

251,758

 

-

 

-

 

251,758

 

Trademarks - indefinite

 

54,000

 

-

 

-

 

54,000

 

 

54,000

 

-

 

-

 

54,000

 

Licenses - finite

 

15,300

 

-

 

(8,637

)

6,663

 

 

15,300

 

-

 

(6,416

)

8,884

 

Other intangibles - finite

 

114,918

 

-

 

(42,789

)

72,129

 

 

114,490

 

-

 

(34,606

)

79,884

 

Total Healthcare / Home Environment

 

435,976

 

-

 

(51,426

)

384,550

 

 

435,548

 

-

 

(41,022

)

394,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional Supplements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (1)

 

96,587

 

-

 

-

 

96,587

 

 

-

 

-

 

-

 

-

 

Brand assets - indefinite

 

65,500

 

-

 

-

 

65,500

 

 

-

 

-

 

-

 

-

 

Other intangibles - finite

 

43,800

 

-

 

(2,607

)

41,193

 

 

-

 

-

 

-

 

-

 

Total Nutritional Supplements

 

205,887

 

-

 

(2,607

)

203,280

 

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

81,841

 

(46,490

)

-

 

35,351

 

 

81,841

 

(46,490

)

-

 

35,351

 

Trademarks - indefinite

 

54,754

 

-

 

-

 

54,754

 

 

63,754

 

-

 

-

 

63,754

 

Trademarks - finite

 

150

 

-

 

(81

)

69

 

 

150

 

-

 

(77

)

73

 

Licenses - indefinite

 

10,300

 

-

 

-

 

10,300

 

 

10,300

 

-

 

-

 

10,300

 

Licenses - finite

 

18,683

 

-

 

(16,123

)

2,560

 

 

18,683

 

-

 

(15,887

)

2,796

 

Other intangibles - finite

 

49,437

 

-

 

(30,766

)

18,671

 

 

49,437

 

-

 

(26,563

)

22,874

 

Total Personal Care

 

215,165

 

(46,490

)

(46,970

)

121,705

 

 

224,165

 

(46,490

)

(42,527

)

135,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,114,283

 

$

(46,490

)

$

(113,093

)

$

954,700

 

 

$

916,738

 

$

(46,490

)

$

(94,698

)

$

775,550

 

 

(1)      Includes $1.28 million of acquisition adjustments recorded in the fiscal quarter ending August 31, 2014.

 

On October 24, 2014, we amended the terms of our trademark licensing agreement with Honeywell International Inc. to relinquish the rights to market Honeywell branded portable air purifiers after December 31, 2015 in twelve selected developing countries, including China.  In exchange for the amendment, we received a one-time cash payment of $7 million ($6.98 million after tax), which was recorded as a gain in SG&A.  For the fiscal quarter and year-to-date ended November 30, 2014, sales into the relinquished countries accounted for approximately 1.1 and 1.0 percent, respectively, of the Healthcare / Home Environment segment’s total net sales.  For the fiscal quarter and year-to-date ended November 30, 2013, sales into the relinquished countries accounted for approximately 0.4 and 0.5 percent, respectively, of the Healthcare / Home Environment segment’s total net sales.  We plan to market portable air purifiers in the relinquished markets under non-Honeywell branded trademarks and retained the rights to market Honeywell portable air purifiers in other countries, including the United States, Canada and all European countries.  For categories such as portable fans, portable heaters and portable humidifiers, we remain the Honeywell global licensee under the same material terms as our previous agreement.

 

 

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The following table summarizes the amortization expense attributable to intangible assets for the periods covered in this quarterly report, as well as our estimated amortization expense for the fiscal years 2015 through 2020.

 

AMORTIZATION OF INTANGIBLE ASSETS

 

 

 

(in thousands)

 

 

 

Aggregate Amortization Expense

 

 

 

For the three months ended

 

 

 

 

 

 

 

November 30, 2014

 

$

6,853

 

November 30, 2013

 

$

5,407

 

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the nine months ended

 

 

 

 

 

 

 

November 30, 2014

 

$

18,427

 

November 30, 2013

 

$

16,246

 

 

 

 

 

 

Estimated Amortization Expense

 

 

 

For the fiscal years ended

 

 

 

 

 

 

 

February 2015

 

$

25,257

 

February 2016

 

$

27,150

 

February 2017

 

$

26,835

 

February 2018

 

$

23,030

 

February 2019

 

$

18,306

 

February 2020

 

$

16,720

 

 

 

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Note 10 – Acquisitions

 

On June 30, 2014, we completed the acquisition of Healthy Directions, LLC and its subsidiaries (“Healthy Directions”), a leader in the premium branded vitamin, mineral and supplement market for a total cash purchase price of $195.94 million.  The purchase price was funded from borrowings under the Credit Agreement, as described below, and cash on hand.  The sellers were certain funds controlled by American Securities, LLC and ACI Capital Co., LLC.  Significant assets acquired include inventory, property and equipment, customer relationships, brand assets, and goodwill.  Acquisition-related expenses incurred through November 30, 2014 are approximately $3.61 million ($2.31 million after tax).  Healthy Directions reports its operations as the Nutritional Supplements segment.

 

The following schedule presents the acquisition date fair value of the net assets of Healthy Directions.  These balances are preliminary and may be subject to additional adjustment.

 

HEALTHY DIRECTIONS - NET ASSETS RECORDED UPON ACQUISITION AT JUNE 30, 2014

(in thousands)

 

 

 

 

 

 

 

Assets:

 

 

 

Receivables

 

$

257

 

Inventory

 

6,226

 

Prepaid expenses and other current assets

 

1,875

 

Property and equipment

 

5,962

 

Goodwill

 

95,308

 

Brand assets - indefinite

 

65,500

 

Customer relationships - definite

 

43,800

 

Subtotal - assets

 

218,928

 

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

6,479

 

Accrued expenses

 

13,964

 

Other long-term liabilities

 

2,542

 

Subtotal - liabilities

 

22,985

 

 

 

 

 

Net assets recorded

 

$

195,943

 

 

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. Key assumptions included various discount rates based upon a 14.6 percent weighted average cost of capital, a royalty rate of 5 percent used in the determination of brand assets and a customer attrition rate of 14 percent per year used in the determination of customer relationship values. The goodwill recognized is expected to be deductible for income tax purposes.

 

The impact of the Healthy Directions acquisition on the Company’s consolidated condensed statements of income from the acquisition date through the three- and five-month periods ended November 30, 2014 is as follows:

 

HEALTHY DIRECTIONS - IMPACT ON CONSOLIDATED CONDENSED STATEMENT OF INCOME

June 30, 2014 (Acquisition Date) through November 30, 2014

(in thousands, except earnings per share data)

 

 

November 30, 2014

 

 

 

Three Months

 

Five Months

 

 

 

Ended

 

Ended

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

38,462

 

 

$

63,096

 

Net income

 

3,091

 

 

3,156

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.11

 

Diluted

 

$

0.11

 

 

$

0.11

 

 

 

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Net income for the five months ended November 30, 2014 includes after tax acquisition-related expenses of $2.31 million.

 

The following supplemental pro forma information presents the Company’s financial results as if the Healthy Directions acquisition had occurred as of the beginning 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, 2013. Accordingly, this information is not intended to be indicative of future results.

 

HEALTHY DIRECTIONS - PRO FORMA IMPACT ON CONSOLIDATED CONDENSED STATEMENTS OF INCOME

As if the Acquisition had been completed at the beginning of March 1, 2013

(in thousands, except earnings per share data)

 

 

Three Months Ended November 30,

 

Nine Months Ended November 30,

 

 

 

2014

 

 

2013

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

435,674

 

 

$

417,042

 

$

1,120,519

 

 

$

1,115,313

 

Net income

 

55,377

 

 

38,318

 

94,064

 

 

77,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.95

 

 

$

1.20

 

$

3.29

 

 

$

2.43

 

Diluted

 

$

1.92

 

 

$

1.18

 

$

3.24

 

 

$

2.40

 

 

Note 11 – Debt

 

We have a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $570 million as of November 30, 2014. The commitment under the Credit Agreement terminates on December 30, 2015.  Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement.  With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time.  We also incur loan commitment fees and letter of credit fees under the Credit Agreement.  Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis.  As of November 30, 2014, the outstanding revolving loan principal balance was $440 million and there were $0.77 million of open letters of credit outstanding against the Credit Agreement.  For the fiscal quarter and year-to-date ended November 30, 2014, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.90 to 4.38 percent for both periods.  For the fiscal quarter and year-to-date ended November 30, 2013, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.17 to 3.25 percent and 1.17 to 3.63 percent, respectively.  As of November 30, 2014, the amount available for borrowings under the Credit Agreement was $129.23 million.

 

 

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A summary of our long-term debt is as follows:

 

LONG-TERM DEBT

(dollars in thousands)

 

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

Interest

 

 

 

November 30,

 

 

February 28,

 

 

 

Borrowed

 

Rates

 

Matures

 

2014

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$37.61 million unsecured loan with the Mississippi Business Finance Corporation (“MBFC Loan”), interest is set and payable quarterly at a Base Rate, plus a margin of up to 1.125%, or applicable LIBOR plus a margin of up to 2.125%, as determined by the interest rate elected.  Loan subject to holder’s call on or after March 1, 2018. Loan can be prepaid without penalty. (1)

 

03/13

 

2.28%

 

03/23

 

  $

35,707

 

 

$

37,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million unsecured floating interest rate Senior Notes. Interest set and payable quarterly at three month LIBOR plus 90 basis points.  Principal was due and paid on June 30, 2014. (2)

 

06/04

 

6.01%

 

06/14

 

-

 

 

75,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million unsecured Senior Notes payable at a fixed interest rate of 3.90%. Interest payable semi-annually.  Annual principal payments of $20 million began in January 2014.  Prepayment of notes are subject to a “make whole” premium.

 

01/11

 

3.90%

 

01/18

 

80,000

 

 

80,000

 

Total long-term debt

 

 

 

 

 

 

 

115,707

 

 

192,607

 

Less current maturities of long-term debt

 

 

 

 

 

 

 

(21,900

)

 

(96,900

)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

  $

 93,807

 

 

$

95,707

 

 

(1)      A $1.90 million principal payment was made on March 1, 2014.   The remaining loan balance is payable as follows: $1.90 million on March 1 in each of 2015, 2018, 2019, 2020, 2021, and 2022; $3.80 million on March 1, 2016; $5.70 million on March 1, 2017; and $14.81 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

 

(2)      Floating interest rates were hedged with an interest rate swap to effectively fix interest rates while the Senior Notes were outstanding.  Additional information regarding the swap is provided in Note 14 to these consolidated condensed financial statements.

 

The fair market value of the fixed rate debt at November 30, 2014, computed using a discounted cash flow analysis was $82.67 million compared to the $80 million book value and represents a Level 2 liability.  Our other long-term debt has floating interest rates, and its book value approximates its fair value at November 30, 2014.

 

All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain financial covenants, including maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms is defined in the various agreements). Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting the Company, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends.

As of November 30, 2014, our debt agreements effectively limited our ability to incur more than $149.11 million of additional debt from all sources, including the Credit Agreement.  We were in compliance with the terms of these agreements as of November 30, 2014.

 

 

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Note 12 - Income Taxes

 

Income tax expense for the fiscal quarter and year-to-date ended November 30, 2014 was 9.2 and 10.7 percent of income before income taxes, respectively, compared to 20.0 and 19.0 percent, respectively, for the same periods last year. The year-over-year comparison of our effective tax rates was primarily impacted by shifts in the mix of taxable income in our various tax jurisdictions. In the fiscal quarter ended November 30, 2014, the Company also recorded a $0.85 million tax benefit associated with a net reduction in the valuation allowance for net operating loss carryforwards and a $0.52 million tax benefit resulting from the finalization of certain tax returns.  In addition, during the fiscal quarter ended August 31, 2014, the Company recorded a tax benefit of $2.07 million related to the resolution of an uncertain tax position with a foreign tax authority, resulting in a lower effective tax rate for the fiscal year-to-date ended November 30, 2014 when compared to the same period last year.  The gain from the amendment of the license agreement with Honeywell International Inc. described in Note 9 also decreased our effective tax rate by 1.2 and 0.8 percentage points for the fiscal quarter and year-to-date ended November 30, 2014, respectively.  Our effective tax rates were unfavorably impacted by asset impairment charges of $9.00 million for the fiscal quarter ended May 31, 2014, and $12.05 million for the fiscal quarter ended May 31, 2013, for which the related tax benefits were $0.86 and $0.02 million, respectively.

 

 

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Note 13 - Fair Value

 

The fair value hierarchy of our financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:

 

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

(in thousands)

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

 

Active Markets

 

Observable

 

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

 

November 30, 2014

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Money market accounts

 

 

$

370

 

$

370

 

$

-    

 

Foreign currency contracts

 

 

162

 

-    

 

162

 

Total assets

 

 

$

532

 

$

370

 

$

162

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

 

$

82,674

 

$

-    

 

$

82,674

 

Long-term debt - floating rate

 

 

35,707

 

-    

 

35,707

 

Total liabilities

 

 

$

118,381

 

$

-    

 

$

118,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

 

Active Markets

 

Observable

 

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

 

February 28, 2014

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Money market accounts

 

 

$

1,549

 

$

1,549

 

$

-    

 

Foreign currency contracts

 

 

-    

 

-    

 

-    

 

Total assets

 

 

$

1,549

 

$

1,549

 

$

-    

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

 

$

83,951

 

$

-    

 

$

83,951

 

Long-term debt - floating rate

 

 

112,607

 

-    

 

112,607

 

Interest rate swaps and foreign currency contracts

 

 

1,596

 

-    

 

1,596

 

Total liabilities

 

 

$

198,154

 

$

-    

 

$

198,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturity of these items. Money market accounts are included in cash and cash equivalents in the accompanying consolidated condensed balance sheets and are classified as Level 1 items.

 

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of these financial liabilities requires the use of discount rates based upon current market rates of interest for debt with comparable remaining terms. Such comparable rates are significant other observable market inputs. The fair market value of the fixed rate debt was computed using a discounted cash flow analysis and discount rates of 1.76 percent at November 30, 2014 and 1.75 percent at February 28, 2014.  All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

 

 

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We use derivatives for hedging purposes.  As of November 30, 2014, our derivatives consist of foreign currency contracts. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair value hierarchy. See Notes 7, 8, 11, and 14 for more information on our hedging activities.

 

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 non-recurring basis as part of the Company’s impairment assessments and as circumstances require.  As discussed in Note 9, in connection with our annual impairment testing during the fiscal quarter ended May 31, 2014, we recorded a non-cash asset impairment charge of $9.00 million ($8.16 million after tax). The charge related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

Note 14 – 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 both the fiscal quarter and year-to-date periods ended November 30, 2014, approximately 15 percent of our net sales revenue was in foreign currencies.  During the fiscal quarter and year-to-date periods ended November 30, 2013, approximately 16 and 15 percent, respectively, of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars.  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 from remeasurement are recognized in SG&A. For the fiscal quarter and year-to-date periods ended November 30, 2014, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($2.21) and ($3.34) million, respectively, in SG&A and $0.18 and $0.28 million, respectively, in income tax expense.  For the fiscal quarter and year-to-date periods ended November 30, 2013, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of $0.17 and ($0.33) million, respectively, in SG&A and ($0.19) and ($0.17) 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.

 

Venezuelan Bolivar Currency Exchange Uncertainties - In February 2013, the Venezuelan government devalued its currency from 4.30 to 6.30 Bolivars per U.S. Dollar for all goods and services. In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism known as SICAD 1.  SICAD 1 was made available to certain companies that operate in designated industry sectors.  At November 30, 2014, the SICAD 1 rate was 12 Bolivars to the U.S. Dollar.  In early 2014, the Venezuelan government created a National Center of Foreign Commerce (“CENCOEX”) to control the multiple currency exchange rate mechanisms that may be available for a company to exchange funds.  CENCOEX was granted the authority to determine the sectors that will be allowed to buy U.S. dollars in SICAD auctions, and subsequently introduced a more accessible market-based, SICAD 2 daily auction exchange market.  At November 30, 2014, the SICAD 2 rate was approximately 50 Bolivars to the U.S. Dollar.

 

 

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Despite the recent announcements made by the Venezuelan government advocating further changes to the current system, there remains a significant degree of uncertainty as to which exchange markets might be available for particular types of transactions. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD 1 or SICAD 2 auctions, nor do we intend to.  As of November 30, 2014, these auctions had not eliminated or changed the official rate of 6.30 Bolivars per U.S. Dollar.

 

Our business in Venezuela continues to be entirely self-funded with earnings from operations.  We have no current need or intention to repatriate Venezuelan earnings and remain committed to the business for the long-term.  Within Venezuela, we market primarily liquid-, solid- and powder-based personal care and grooming products, which are sourced almost entirely within the country.  We do not have, nor do we foresee having, any need to access SICAD 1 or SICAD 2.  Accordingly, we continue to utilize the official rate of 6.30 Bolivars per U.S. Dollar to re-measure our Venezuelan financial statements.

 

For both of the fiscal quarters ended November 30, 2014 and 2013, sales in Venezuela represented approximately 0.8 percent of the Company’s consolidated net sales revenue.  For the fiscal years-to-date ended November 30, 2014 and 2013, sales in Venezuela represented approximately 0.8 and 0.7 percent, respectively, of the Company’s consolidated net sales revenue.  At November 30, 2014, we had a U.S. Dollar based net investment in our Venezuelan business of $9.61 million, consisting almost entirely of working capital.

 

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, and we cannot assess impacts, if any, such events may have on our Venezuelan business.  We will continue to closely monitor the applicability and viability of the various exchange mechanisms.  A future devaluation, if any, would result in additional charges against income, and these charges could be material.

 

Interest Rate Risk - Interest on our outstanding debt as of November 30, 2014 is both floating and fixed. Fixed rates are in place on $80 million of 3.90 percent Senior Notes due January 2018, while floating rates are in place on the balance of all other debt outstanding, which totaled $475.71 million as of November 30, 2014.  If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and MBFC Loan.

 

At February 28, 2014, floating rate $75 million Senior Notes due June 2014 had been effectively converted to fixed rate debt using an interest rate swap (the “swap”).  The swap converted the total aggregate notional principal from floating interest rate payments to fixed interest rate payments at 6.01 percent.  Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. The swap was 100 percent effective. As of June 30, 2014, the swap ended concurrent with the repayment at maturity of $75 million of principal on the related Senior Notes.

 

 

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The fair values of our various derivative instruments are as follows:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

 

November 30, 2014

 

 

 

 

 

 

 

 

Prepaid

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

Expenses

 

 

 

 

 

Final

 

 

 

and Other

 

and Other

 

 

 

 

 

Settlement

 

Notional

 

Current

 

Current

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - sell Pounds

 

Cash flow

 

 

2/2015

 

£

1,500

 

$

162

 

$

-    

 

 

February 28, 2014

 

 

 

 

 

 

 

 

Prepaid

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

Expenses

 

 

 

 

 

Final

 

 

 

and Other

 

and Other

 

 

 

 

 

Settlement

 

Notional

 

Current

 

Current

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - sell Euro

 

Cash flow

 

6/2014

 

2,850

 

$

-    

 

$

89

 

Foreign currency contracts - sell Pounds

 

Cash flow

 

11/2014

 

£

4,250

 

-    

 

280

 

Interest rate swap

 

Cash flow

 

6/2014

 

$

75,000

 

-    

 

1,227

 

Total fair value

 

 

 

 

 

 

 

$

-    

 

$

1,596

 

 

The pre-tax effect of derivative instruments for the periods covered in this quarterly report are as follows:

 

PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS

(in thousands)

 

 

 

Three months ended November 30,

 

 

Gain / (Loss)

 

Gain / (Loss) Reclassified

 

 

Recognized in OCI

 

from Accumulated Other

 

 

(effective portion)

 

Comprehensive Income (Loss) into Income

 

 

2014

 

2013

 

Location

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - cash flow hedges

 

 $

301

 

$

(641)

 

SG&A

 

 $

201

 

 

$

(78

)

Interest rate swaps - cash flow hedges

 

-    

 

(70)

 

Interest expense

 

-    

 

 

(946

)

Total

 

 $

301

 

$

(711)

 

 

 

 $

201

 

 

$

(1,024

)

 

 

 

 

 

Nine months ended November 30,

 

 

Gain / (Loss)

 

Gain / (Loss) Reclassified

 

 

Recognized in OCI

 

from Accumulated Other

 

 

(effective portion)

 

Comprehensive Income (Loss) into Income

 

 

2014

 

2013

 

Location

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - cash flow hedges

 

 $

515

 

$

(673)

 

SG&A

 

 $

(15

)

 

$

246

 

Interest rate swaps - cash flow hedges

 

28

 

(97)

 

Interest expense

 

(1,199

)

 

(2,785

)

Total

 

 $

543

 

$

(770)

 

 

 

 $

(1,214

)

 

$

(2,539

)

 

We expect net gains of $0.16 million associated with foreign currency contracts currently reported in accumulated other comprehensive income, to be reclassified into income over the next three months. The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle.

 

 

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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 by 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 losses is remote.

 

Note 15 – Repurchase of Helen of Troy Common Stock

 

As of November 30, 2014, we were authorized by our Board of Directors to purchase up to $265.43 million of common stock in the open market or through private transactions.  On March 14, 2014, the Company completed a modified “Dutch auction” tender offer resulting in the repurchase of 3,693,816 shares of its outstanding common stock at a total cost of $247.83 million, including tender offer transaction-related costs.  The Company also repurchased 408,327 shares of outstanding common stock on the open market at a total cost of $25.77 million during the fiscal quarter ended May 31, 2014.

 

Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to the amounts due.  These transactions are accounted for by the Company as a purchase and retirement of shares and are included in the table on the following page as common stock received in connection with share-based compensation.

 

During the fiscal quarter ended May 31, 2014, certain employees tendered 1,993 shares of common stock having a market value of $59.13 per share, or $0.12 million in the aggregate, and our former CEO tendered 68,086 shares of common stock having a market value of $67.10 per share, or $4.57 million in the aggregate, as payment for related federal tax obligations arising from the vesting and settlement of performance-based restricted stock units and restricted stock awards.  During the fiscal quarter ended May 31, 2013, 9,898 shares of common stock having a market value of $35.55 per share, or $0.35 million in the aggregate, were withheld as payment for related federal tax obligations arising from the vesting and settlement of performance-based restricted stock awards.

 

For the fiscal quarters ended August 31 and November 30, 2014, we did not repurchase any shares of common stock.  Additionally, no shares of common stock were tendered by our employees in “net exercise” transactions.

 

The following table summarizes our share repurchase activity for the periods covered below:

 

SHARE REPURCHASES

 

 

 

Three months ended November 30,

 

Nine months ended November 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Common stock repurchased on the open market or through tender offer

 

 

 

 

 

 

 

 

Number of shares

 

-

 

-

 

4,102,143

 

33,862

Aggregate market value of shares (in thousands)

 

 $

-

 

 $

-

 

 $

273,599

 

 $

1,311

Average price per share

 

 $

-

 

 $

-

 

 $

66.70

 

 $

38.71

 

 

 

 

 

 

 

 

 

Common stock received in connection with share-based compensation

 

 

 

 

 

 

 

 

Number of shares

 

-

 

-

 

70,079

 

13,453

Aggregate market value of shares (in thousands)

 

 $

-

 

 $

-

 

 $

4,686

 

 $

490

Average price per share

 

 $

-

 

 $

-

 

 $

66.87

 

 $

36.44

 

 

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Note 16 – Share-Based Compensation Plans

 

We have share-based awards outstanding under several share-based compensation plans.  During the fiscal quarter and year-to-date periods ended November 30, 2014, the Company had the following share-based compensation activity:

 

·                 We granted options to purchase 7,500 and 248,000 shares of common stock, respectively, to certain of our officers and employees. The fair values of these options were estimated using the Black-Scholes option pricing model to estimate fair values ranging from $19.02 to $26.05 for grants with terms of four and five years.  The following assumptions were used for the grants:  expected lives ranging from 4.05 to 4.35 years for grants with terms of four and five years; risk-free interest rates ranging from 1.22 to 1.49 percent; zero dividend yield; and expected volatilities ranging from 41.49 to 50.53 percent.

 

·                 We issued 2,107 and 7,363 restricted shares, respectively, to non-employee Board members with total grant date fair values of $0.12 and $0.44 million, respectively, and average share prices of $58.22 and $60.98, respectively.

 

·                 During the fiscal quarter ended May 31, 2014, performance stock units and restricted stock awards held by our former CEO covering 100,000 shares and 62,304 shares of common stock, respectively, vested and/or settled at a fair value of $67.10 per share.  As payment for the related federal tax obligations arising from the settlement and vesting of these awards, 68,086 shares were withheld by the Company.

 

·                 Employees exercised stock options to purchase 22,292 and 121,711 shares of common stock, respectively.

 

·                 Employees purchased 13,848 shares of common stock for $0.69 million through our employee stock purchase plan during the nine months ended November 30, 2014.  There was no activity in the quarter ended November 30, 2014.

 

·                 Directors exercised stock options to purchase -0- and 20,000 shares, respectively.

 

We recorded the following share-based compensation expense in SG&A for the periods covered below:

 

SHARE-BASED PAYMENT EXPENSE

(in thousands, except per share data)

 

 

 

Three months ended November 30,

 

Nine months ended November 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 $

869

 

 $

589

 

 $

2,483

 

 $

1,791

 

Directors stock compensation

 

175

 

151

 

641

 

438

 

Performance-based and other stock awards

 

336

 

1,708

 

1,441

 

6,944

 

Employee stock purchase plan

 

-   

 

-   

 

167

 

158

 

Share-based payment expense

 

1,380

 

2,448

 

4,732

 

9,331

 

Less income tax benefits

 

(141)

 

(466)

 

(514)

 

(1,877

)

Share-based payment expense, net of income tax benefits

 

 $

1,239

 

 $

1,982

 

 $

4,218

 

 $

7,454

 

 

 

 

 

 

 

 

 

 

 

Earnings per share impact of share-based payment expense:

 

 

 

 

 

 

 

 

 

Basic

 

 $

0.04

 

 $

0.06

 

 $

0.15

 

 $

0.23

 

Diluted

 

 $

0.04

 

 $

0.06

 

 $

0.15

 

 $

0.23

 

 

 

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

 

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

 

Throughout MD&A, we refer to certain measures used by management to evaluate financial performance.  We also may refer to a number of financial measures that are not defined under GAAP, but have corresponding GAAP-based measures.  Where non-GAAP measures appear, we provide tables reconciling these to their corresponding GAAP-based measures and make reference to a discussion of their use.  We believe these measures provide investors with important information that is useful in understanding our business results and trends.  Please see “Explanation of Certain Terms and Measures Used in MD&A” beginning on page 45 for more information on the use and calculation of certain GAAP-based and non-GAAP financial measures.

 

OVERVIEW

 

We operate our business under four segments: Housewares, Healthcare / Home Environment, Nutritional Supplements, and Personal Care. The Housewares segment reports the operations of OXO, whose product offerings include food preparation tools, gadgets and storage containers, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment sells products in the following categories: healthcare devices, such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Because our Nutritional Supplements segment was formed with the June 30, 2014 acquisition of Healthy Directions, the accompanying consolidated condensed financial statements include five months of operating results for fiscal year 2015.  Healthy Directions is a leading provider of premium vitamins, minerals and supplements, as well as other health products sold directly to consumers.  Our Personal Care segment offers products in three categories: electric hair care, beauty care and wellness appliances; grooming tools and hair accessories; and liquid-, solid- and powder-based personal care and grooming products.

 

The Nutritional Supplements segment sells directly to consumers.  Our other 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 extensively through beauty supply retailers and wholesalers, and the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores.

 

Our core business is seasonal due to different calendar events, holidays and weather patterns; however, the overall sales pattern for our Nutritional Supplements segment is not highly seasonal. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th.

 

Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy, as approximately 77 percent of our fiscal year 2014 net sales revenue was from U.S. shipments.  Domestically, we believe that consumers are becoming more relaxed with their discretionary spending due to lower gasoline prices, continued low interest rates and improving employment activity, contributing to higher net sales revenue during the fiscal quarter ended November 30, 2014, as compared to the same period last year.  Seasonal cough/cold/flu patterns also influence sales in this quarter for the Healthcare / Home Environment segment.  In the United States, the season historically runs from November

 

 

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through March with peak activity in January-March, but there can be substantial activity as early as November and December.  Early indications from the U.S. Center for Disease Control (the “CDC”) suggest the current season flu incidence trend is slightly ahead of the prior year through mid-December.  The prior year flu season was slightly below historical averages.  Many of our new product launches in thermometry have demonstrated early point-of-sale strength in proportion to the CDC reported trends.

 

During the third fiscal quarter, international sales were dampened by the strengthening of the U.S. Dollar against most currencies, in particular the British Pound, Euro, Canadian Dollar, and Mexican Peso.  For these currencies, purchasing power against the U.S. Dollar dropped approximately 5, 5, 3, and 4 percent, respectively, at the end of the third fiscal quarter compared to the end of the second fiscal quarter.

 

We believe that the growth in the internet as a sales channel continues to erode market share in the traditional “brick and mortar” channels.  For the fiscal quarter and year-to-date periods ended November 30, 2014, sales to our internet-based customers grew approximately 46 and 40 percent, respectively, compared with the same periods last year and comprised approximately 10 and 9 percent, respectively, of our total consolidated net sales revenue for the third fiscal quarter and nine months ended November 30, 2014.  We believe it will become increasingly important to leverage our domestic distribution capabilities to meet the logistical challenge of higher frequency, smaller order size shipments.  We also believe the acquisition of Healthy Directions has brought additional internet and direct-to-consumer expertise to our Company, which we hope will provide us with future operational scale to further develop the internet channel across all our product lines.

 

Significant Recent Developments

 

·                 On October 24, 2014, we amended the terms of our trademark licensing agreement with Honeywell International Inc. to relinquish the rights to market Honeywell branded portable air purifiers after December 31, 2015 in twelve selected developing countries, including China.  In exchange for the amendment, we received a one-time cash payment of $7 million ($6.98 million after tax), which was recorded as a gain in SG&A.  For the fiscal quarter and year-to-date ended November 30, 2014, sales into the relinquished countries accounted for approximately 1.1 and 1.0 percent, respectively, of the Healthcare / Home Environment segment’s total net sales.  For the fiscal quarter and year-to-date ended November 30, 2013, sales into the relinquished countries accounted for approximately 0.4 and 0.5 percent, respectively, of the Healthcare / Home Environment segment’s total net sales.  We plan to market portable air purifiers in the relinquished markets under non-Honeywell branded trademarks and retained the rights to market Honeywell portable air purifiers in all other countries subject to the previous agreement, including the United States, Canada and all European countries. For categories such as portable fans, portable heaters and portable humidifiers, we remain the Honeywell global licensee under the same material terms as our previous agreement.

 

·                 Initial shipments of a new line of cookware were made by the Cookware Company (“TCC”) during the third quarter of fiscal year 2015 under a licensing agreement with OXO to bring to market high quality cookware under the OXO Good Grips brand name. Under the arrangement, TCC has collaborated with OXO to develop three initial collections using an innovative new “smart shapes” concept built with premium materials consisting of two lines of hard anodized aluminum cookware and one line of stainless steel cookware. These are being marketed by TCC into OXO’s normal channels of distribution.  While we do not expect meaningful royalty income in fiscal year 2015, the agreement allows entry into a new category, enhances brand recognition, and is expected to complement future adjacent product category extension.

 

 

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Financial Performance Highlights for the Third Fiscal Quarter and Nine Months Ended November 30, 2014

 

Consolidated net sales revenue for the third fiscal quarter and first nine months of fiscal year 2015 increased $54.94 and $62.77 million, or 14.4 and 6.2 percent, to $435.67 and $1,067.40 million, respectively, compared to $380.73 and $1,004.63 million, respectively, for the same periods last year. Net sales revenue in our Housewares segment increased $11.21 million for the third fiscal quarter, or 15.0 percent, and increased $13.91 million for the first nine months, or 6.7 percent, compared to the same periods last year. Net sales revenue in our Healthcare / Home Environment segment increased $11.24 million for the third  fiscal quarter, or 6.8 percent, and increased $21.30 million for the first nine months, or 5.0 percent, compared to the same periods last year.  For the third fiscal quarter and the first five months of operations included in the nine months ended November 30, 2014, the Nutritional Supplements segment contributed net sales revenue of $38.46 and $63.10 million, respectively.  Net sales revenue in our Personal Care segment decreased $5.97 million for the third fiscal quarter, or 4.3 percent, and decreased $35.54 million for the first nine months, or 9.6 percent, compared to the same periods last year.

 

In addition to our net sales revenue performance discussed above, key results for the third fiscal quarter and first nine months of fiscal year 2015 include the following:

 

·                 Consolidated gross profit margin as a percentage of net sales revenue for the third fiscal quarter increased 2.8 percentage points to 41.6 percent compared to 38.8 percent for the same period last year. Consolidated gross profit margin as a percentage of net sales revenue for the first nine months increased 1.8 percentage points to 40.7 percent compared to 38.9 percent for the same period last year.

 

·                 SG&A as a percentage of net sales revenue increased 0.9 percentage points to 26.7 percent for the third fiscal quarter compared to 25.8 percent for the same period last year.  The SG&A ratio increased 1.6 percentage points to 29.3 percent for the first nine months compared to 27.7 percent for the same period last year.

 

·                 For the third fiscal quarter, operating income increased $15.65 million, or 31.7 percent, to $65.04 million compared to $49.39 million for the same period last year. For the first nine months, operating income increased $12.40 million, or 12.3 percent, to $112.77 million compared to $100.37 million for the same period last year.  Operating income for the first nine months includes a non-cash asset impairment charge of $9.00 million compared to $12.05 million for the same period last year.

 

·                 For the third fiscal quarter, net income increased $17.85 million, or 47.6 percent, to $55.38 million compared to $37.52 million for the same period last year. For the first nine months, net income increased $15.38 million, or 20.4 percent, to $90.61 million compared to $75.23 million for the same period last year.

 

·                 For the third fiscal quarter, diluted EPS was $1.92 compared to $1.16 for the same period last year. For the first nine months, diluted EPS was $3.12 compared to $2.33 for the same period last year.

 

·                 For the third fiscal quarter, adjusted income (excluding non-cash asset impairment charges, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation, as applicable) increased $17.91 million, or 40.1 percent, to $62.56 million compared to $44.65 million for the same period last year. For the first nine months, adjusted income increased $11.68 million, or 10.6 percent, to $121.87 million compared to $110.19 million for the same period last year.

 

·                 For the third fiscal quarter, adjusted diluted EPS (excluding non-cash asset impairment charges, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation, as applicable) was $2.17 compared to $1.37 for the same period last year.  For the first nine months, adjusted diluted EPS was $4.19 compared to $3.41 for the same period last year.

 

 

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·                 As previously discussed under “Significant Recent Developments”, SG&A, operating income, net income and adjusted income for the third quarter and first nine months include a $7 million gain ($6.98 million after tax) from the amendment of a trademark license agreement with Honeywell International Inc.  This gain had a $0.24 impact on diluted EPS and adjusted diluted EPS.  There was no comparable gain or income in the same periods last year.

 

The effects of the Healthy Directions acquisition on net sales revenue are discussed on pages 29 and 34.  Adjusted income and adjusted diluted EPS are non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. These measures are discussed further, and reconciled to their applicable GAAP-based measures, on pages 33, 38 and 39.

 

 

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RESULTS OF OPERATIONS

 

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. We will refer to this table in the discussion of results of operations which follows:

 

SELECTED OPERATING DATA

(dollars in thousands)

 

 

Three Months Ended November 30,

 

 

 

 

 

% of Sales Revenue, net

 

 

2014 (1)

 

2013

 

$ Change

 

% Change

 

2014 (1)

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

 $

85,984

 

 $

74,776

 

 $

11,208

 

15.0%

 

19.7%

 

19.6%

Healthcare / Home Environment

 

176,994

 

165,752

 

11,242

 

6.8%

 

40.6%

 

43.5%

Nutritional Supplements

 

38,462

 

-    

 

38,462

 

*   

 

8.8%

 

0.0%

Personal Care

 

134,234

 

140,202

 

(5,968)

 

-4.3%

 

30.8%

 

36.8%

Total sales revenue, net

 

435,674

 

380,730

 

54,944

 

14.4%

 

100.0%

 

100.0%

Cost of goods sold

 

254,263

 

233,029

 

21,234

 

9.1%

 

58.4%

 

61.2%

Gross profit

 

181,411

 

147,701

 

33,710

 

22.8%

 

41.6%

 

38.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

116,368

 

98,308

 

18,060

 

18.4%

 

26.7%

 

25.8%

Asset impairment charges

 

-    

 

-    

 

-    

 

0.0%

 

0.0%

 

0.0%

Operating income

 

65,043

 

49,393

 

15,650

 

31.7%

 

14.9%

 

13.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

87

 

13

 

74

 

*   

 

0.0%

 

0.0%

Interest expense

 

(4,173)

 

(2,513)

 

(1,660)

 

66.1%

 

-1.0%

 

-0.7%

Total other income (expense)

 

(4,086)

 

(2,500)

 

(1,586)

 

63.4%

 

-0.9%

 

-0.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

60,957

 

46,893

 

14,064

 

30.0%

 

14.0%

 

12.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

5,580

 

9,369

 

(3,789)

 

-40.4%

 

1.3%

 

2.5%

Net income

 

 $

55,377

 

 $

37,524

 

 $

17,853

 

47.6%

 

12.7%

 

9.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30,

 

 

 

 

 

% of Sales Revenue, net

 

 

2014 (2)

 

2013

 

$ Change

 

% Change

 

2014 (2)

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

 $

222,377

 

 $

208,471

 

 $

13,906

 

6.7%

 

20.8%

 

20.8%

Healthcare / Home Environment

 

445,701

 

424,398

 

21,303

 

5.0%

 

41.8%

 

42.2%

Nutritional Supplements

 

63,096

 

-    

 

63,096

 

*   

 

5.9%

 

0.0%

Personal Care

 

336,227

 

371,764

 

(35,537)

 

-9.6%

 

31.5%

 

37.0%

Total sales revenue, net

 

1,067,401

 

1,004,633

 

62,768

 

6.2%

 

100.0%

 

100.0%

Cost of goods sold

 

632,726

 

613,513

 

19,213

 

3.1%

 

59.3%

 

61.1%

Gross profit

 

434,675

 

391,120

 

43,555

 

11.1%

 

40.7%

 

38.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

312,906

 

278,697

 

34,209

 

12.3%

 

29.3%

 

27.7%

Asset impairment charges

 

9,000

 

12,049

 

(3,049)

 

-25.3%

 

0.8%

 

1.2%

Operating income

 

112,769

 

100,374

 

12,395

 

12.3%

 

10.6%

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

234

 

153

 

81

 

52.9%

 

0.0%

 

0.0%

Interest expense

 

(11,588)

 

(7,647)

 

(3,941)

 

51.5%

 

-1.1%

 

-0.8%

Total other income (expense)

 

(11,354)

 

(7,494)

 

(3,860)

 

51.5%

 

-1.1%

 

-0.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

101,415

 

92,880

 

8,535

 

9.2%

 

9.5%

 

9.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

10,801

 

17,647

 

(6,846)

 

-38.8%

 

1.0%

 

1.8%

Net income

 

 $

90,614

 

 $

75,233

 

 $

15,381

 

20.4%

 

8.5%

 

7.5%

 

(1)  Includes three months of operations for Healthy Directions.

(2)  Includes five months of operations for Healthy Directions, which was acquired on June 30, 2014.

*    Calculation is not meaningful

 

 

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In the discussion that follows, our usage of the terms SG&A ratio, operating expense ratio, operating margin,  and operating leverage are further described and explained beginning on page 45.

 

Third Quarter of Fiscal Year 2015 Compared to Third Quarter of Fiscal Year 2014

 

Consolidated net sales revenue:

 

Consolidated net sales revenue for the third fiscal quarter increased $54.94 million, or 14.4 percent, to $435.67 million, compared to $380.73 million for the same period last year.  Net sales revenue in our Housewares segment increased $11.21 million, or 15.0 percent, compared to the same period last year. Net sales revenue in our Healthcare / Home Environment segment increased $11.24 million, or 6.8 percent, compared to the same period last year. For the third fiscal quarter, the Nutritional Supplements segment contributed net sales revenue of $38.46 million. Net sales revenue in our Personal Care segment decreased $5.97 million, or 4.3 percent, compared to the same period last year. Of the decline, $3.90 million, or 2.8 percent, relates to sales in the third quarter of fiscal year 2014 from a product distribution agreement in Europe that did not repeat in fiscal year 2015.

 

Impact of acquisitions on net sales revenue:

 

On June 30, 2014, we purchased Healthy Directions, resulting in the formation of our Nutritional Supplements segment.  The following table summarizes the impact that the acquisition had on our net sales revenue for the periods indicated.

 

IMPACT OF ACQUISITIONS ON NET SALES REVENUE

(in thousands)

 

 

Three Months Ended November 30,

 

 

2014

 

2013

 

 

 

 

 

Prior year’s sales revenue, net

 

  $

380,730

 

  $

374,599

 

 

 

 

 

Components of net sales revenue change

 

 

 

 

Core business

 

16,482

 

6,131

Incremental net sales revenue from acquisitions (non-core business):

 

 

 

 

Healthy Directions (three months in fiscal year 2015)

 

38,462

 

-    

Change in sales revenue, net

 

54,944

 

6,131

Sales revenue, net

 

  $

435,674

 

  $

380,730

 

 

 

 

 

Total net sales revenue growth

 

14.4%

 

1.6%

Core business

 

4.3%

 

1.6%

Acquisitions

 

10.1%

 

-    

 

Impact of foreign currencies on net sales revenue:

 

During the third quarter of fiscal years 2015 and 2014, approximately 15 and 16 percent, respectively, of our net sales revenue was in foreign currencies. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars.  For the third quarter of fiscal year 2015, the impact of net foreign currency exchange rate fluctuations decreased our reported international net sales revenue by approximately $2.78 million. In our Personal Care segment, where our Canadian and Latin American operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $1.02 million unfavorable impact on reported net sales revenues.  In our Housewares and Healthcare / Home environment segments, where our European operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $1.76 million unfavorable impact on reported net sales revenues.  Substantially all sales in our Nutritional Supplements segment are transacted in U.S. Dollars.

 

 

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Segment net sales revenue:

 

Housewares Segment - Net sales revenue in the Housewares segment for the third fiscal quarter increased $11.21 million, or 15.0 percent, to $85.98 million compared with $74.78 million for the same period last year.  Higher unit volumes contributed approximately 15.7 percent to the increase in net sales revenue. This was partially offset by a slight decline in average unit selling price of 0.7 percent, primarily due to promotional discounts early in the quarter. Growth was in the double digits both domestically and internationally.  Growth was driven by new product introductions, continued distribution gains with key retailers, holiday promotional programs and strong point-of-sale at retail. Point-of-sale growth was driven by new Thanksgiving promotional programs with three key domestic retailers and the continued success of the segment’s line extensions.  OXO tot (our infant and toddler product line) continues to gain traction with consumers, with category net sales revenue growth of over 36 percent, when compared to the same fiscal quarter last year.  Top contributing categories accounting for approximately half of the fiscal quarter’s sales growth were in the cooking utensil, infant and toddler, barware, and food measuring categories.  Approximately $3.00 million of shipments moved into the third quarter of fiscal year 2015 based on customer promotion timing and order flow.  These orders have historically shipped in the fourth quarter of the fiscal year.

 

Healthcare / Home Environment Segment - Net sales revenue in the Healthcare / Home Environment segment for the third fiscal quarter increased $11.24 million, or 6.8 percent, to $176.99 million compared with $165.75 million for the same period last year.  Slightly higher unit volumes contributed approximately 0.3 percent to the increase in net sales revenue.  An increase in the average unit selling price, primarily due to a better sales mix, contributed approximately 6.5 percent to the increase in net sales revenue.  Worldwide sales gains continue in thermometry and associated consumables primarily as a result of a strong portfolio of new product introductions over the last year.  Strong performance in air purification, late season fan orders and improvements in humidification were offset by comparable period declines in heaters and water filter sales.  A relatively warm fall season had the offsetting effects of improving fan sales and weakening early season heater shipments.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes the operating results of Healthy Directions, which we acquired on June 30, 2014.  Net sales revenue for the third fiscal quarter was $38.46 million.

 

Personal Care Segment - Net sales revenue in the Personal Care segment for the third fiscal quarter decreased $5.97 million, or 4.3 percent, to $134.23 million compared with $140.20 million for the same period last year.  Higher unit volumes contributed approximately 4.3 percent growth, offset by a decrease in average unit selling prices of approximately 8.6 percent, primarily due to a shift in category mix.  The decrease in net sales revenue was primarily in our North American and European retail appliance businesses.  The decline in North America is due to overall weakness in the category, an unfavorable sales mix year-over-year and the loss of distribution with a Canadian retailer. The loss of the distribution is expected to have an ongoing year-over-year impact on net sales revenue over the next several quarters, but the impact on operating income is not expected to be material. The majority of the year-over-year decline in Europe is due to approximately $3.90 million of sales in the third quarter of fiscal year 2014 from a product distribution agreement that did not repeat in fiscal year 2015.  These declines were partially offset by year-over-year distribution gains with domestic retailers in our brush category.  The grooming, skin and hair care solutions product category sales were slightly higher year-over-year, while continuing to confront significant competitive product launches and promotional spending in hair care.

 

 

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Consolidated gross profit margin:

 

Consolidated gross profit margin for the third fiscal quarter increased 2.8 percentage points to 41.6 percent compared to 38.8 percent for the same period last year.  The Nutritional Supplements segment had a favorable impact of 2.9 percentage points on the third fiscal quarter consolidated gross profit margin.  Overall gross profit margin for the core business declined 0.1 percentage points compared to the same period last year due to product category mix changes.

 

While China’s currency intervention strategy with respect to the U.S. Dollar is continuously evolving, we believe that China’s currency may continue to fluctuate against the U.S. Dollar in the short-to-intermediate term, which could result in increased product costs over time.

 

Selling, general and administrative expense:

 

Our consolidated SG&A ratio increased 0.9 percentage points, to 26.7 percent for the third fiscal quarter, compared to 25.8 percent for the same period last year.  The increase in the SG&A ratio is primarily due to the following items:

 

·                 The Nutritional Supplements segment operates with a higher SG&A ratio than the core business.  The addition of the operations of this segment increased our SG&A ratio by 2.8 percentage points;

 

·                 Higher marketing and advertising expenditures in the core business increased our SG&A ratio by 0.5 percentage points; and

 

·                 Net foreign currency exchange losses in the core business increased our SG&A ratio by 0.7 percentage points.

 

These increases were partially offset by the following:

 

·                 A $7 million gain from the amendment of our trademark license agreement with Honeywell International Inc.  decreased the SG&A ratio by 1.8 percentage points;

 

·                 A decrease in our product liability estimates to reflect more relevant historical claim experience in the core business resulted in a 0.6 percentage point decline in the SG&A ratio; and

 

·                 Lower incentive compensation expense in the core business resulted in a decrease of 1.1 percentage points.

 

 

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Segment Operating Income:

 

The following table sets forth segment operating income, for the periods covered below:

 

OPERATING INCOME BY SEGMENT

(dollars in thousands)

 

 

Three Months Ended November 30,

 

 

 

 

 

% of Sales Revenue, net

 

 

2014

 

2013

 

$ Change

 

% Change

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

  $

18,275

 

 $

15,278

 

$

2,997

 

19.6%

 

21.3%

 

20.4%

Healthcare / Home Environment

 

18,694

 

10,665

 

8,029

 

75.3%

 

10.6%

 

6.4%

Nutritional Supplements

 

6,214

 

-    

 

6,214

 

*   

 

16.2%

 

0.0%

Personal Care

 

21,860

 

23,450

 

(1,590

)

-6.8%

 

16.3%

 

16.7%

Total operating income

 

  $

65,043

 

 $

49,393

 

$

15,650

 

31.7%

 

14.9%

 

13.0%

 

Housewares Segment - Segment operating income for the third fiscal quarter increased $3.00 million, or 19.6 percent, compared to the same period last year.  Segment operating margin increased 0.9 percentage points to 21.3 percent, compared to 20.4 percent for the same period last year.  The increase in segment operating margin was due to increased operating leverage as a result of higher net sales revenue, partially offset by increased product costs.

 

Healthcare / Home Environment Segment - Segment operating income for the third fiscal quarter increased $8.03 million, or 75.3 percent, compared to the same period last year.  Segment operating margin increased 4.2 percentage points to 10.6 percent, compared to 6.4 percent for the same period last year. The increase was due to higher net sales revenue and a lower operating expense ratio.  The lower operating expense ratio was primarily the result of lower incentive compensation costs, lower product liability costs due to a decrease in our product liability estimates to reflect more relevant historical claims experience, and a $7 million gain on the amendment of our trademark license agreement with Honeywell International Inc.  These operating expense reductions were partially offset by an increase in foreign exchange losses and media advertising, promotional and marketing expenses.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes the operating results of Healthy Directions, which we acquired on June 30, 2014.  Segment operating income for the third quarter of fiscal year 2015 was $6.21 million, resulting in an operating margin of 16.2 percent.

 

Personal Care Segment - Segment operating income for the third fiscal quarter decreased $1.59 million, or 6.8 percent, compared to the same period last year.  Segment operating margin decreased 0.4 percentage points to 16.3 percent, compared to 16.7 percent for the same period last year.  The decline in operating margin was principally due to foreign exchange losses combined with decreased operating leverage against the segment’s fixed costs, as a result of the segment’s net sales revenue decline of 4.3 percent for the quarter.

 

Interest expense:

 

Interest expense for the third fiscal quarter was $4.17 million compared to $2.51 million for the same period last year.  The increase in interest expense is due to higher levels of debt as a result of borrowings used to fund the repurchase of $278.29 million of the Company’s outstanding common stock in the first quarter of fiscal year 2015, and to fund the $195.94 million acquisition of Healthy Directions in the second quarter of fiscal year 2015.  For further information regarding share repurchases, see Note 15 to the accompanying consolidated condensed financial statements.  For further information regarding the Healthy Directions acquisition, see Notes 6, 9, 10, and 11, to the accompanying consolidated condensed financial statements.

 

 

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Income tax expense:

 

Income tax expense for the third fiscal quarter was $5.58 million, or 9.2 percent of income before taxes compared to $9.37 million, or 20.0 percent of income before taxes, for the same period last year.  The year-over-year comparison of our effective tax rates was primarily impacted by shifts in the mix of taxable income in our various tax jurisdictions.  In the fiscal quarter ended November 30, 2014, the Company also recorded a $0.85 million tax benefit associated net reduction in the valuation allowance for net operating loss carryforwards and a $0.52 million tax benefit resulting from the finalization of certain tax returns.  A $7 million gain from the amendment of our trademark license agreement with Honeywell International Inc. also decreased the effective tax rate by 1.2 percentage points for the fiscal quarter ended November 30, 2014.

 

Net income:

 

Net income for the third fiscal quarter increased by $17.85 million compared to the same period last year.  Diluted earnings per share increased $0.76 to $1.92 compared to $1.16 for the same period last year.

 

Adjusted income and earnings per share (“EPS”):

 

In order to provide a better understanding of the impact of certain items on our net income and EPS,  the analysis that follows reports the comparative after tax impact of amortization of intangible assets and non-cash share-based compensation on our net income, and basic and diluted EPS for the periods covered below.

 

ADJUSTED INCOME AND EPS

(dollars in thousands, except per share data)

 

 

Three Months Ended November 30,

 

Basic EPS

 

Diluted EPS

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported (GAAP)

 

 $

55,377

 

 $

37,524

 

 $

1.95

 

$

1.17

 

 $

1.92

 

 $

1.16

Non-cash share-based compensation, net of tax (1)

 

1,187

 

1,937

 

0.04

 

0.06

 

0.04

 

0.05

Amortization of intangible assets, net of tax (2)

 

5,993

 

5,189

 

0.21

 

0.16

 

0.21

 

0.16

Adjusted income (non-GAAP)

 

 $

62,557

 

 $

44,650

 

 $

2.20

 

$

1.39

 

 $

2.17

 

 $

1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing basic and diluted earnings per share

 

 

 

28,414

 

32,047

 

28,824

 

32,482

 

(1)      Non-cash share-based compensation of $1.33 million ($1.19 million after tax) and $2.40 million ($1.94 million after tax), for the third quarter of fiscal years 2015 and 2014, respectively.

 

(2)      Amortization of intangible assets of $6.85 million ($5.99 million after tax) and $5.41 million ($5.19 million after tax), for the third quarter of fiscal years 2015 and 2014, respectively.

 

Adjusted income increased $17.91 million, or 40.1 percent, for the third fiscal quarter, compared to the same period last year.  The increase in adjusted income was primarily due to higher overall sales, lower incentive compensation costs, the net favorable changes in SG&A expense as previously described, an overall increase in operating leverage against fixed costs, and a lower effective tax rate.

 

Adjusted diluted EPS was $2.17 for the third fiscal quarter, compared to $1.37 for the same period last year.  Share repurchases in the first quarter of fiscal year 2015 resulted in lower diluted shares outstanding for the third fiscal quarter, when compared to the same period last year.

 

 

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Adjusted income and adjusted basic and diluted EPS are non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. For further information concerning these measures, including the reasons why management believes these measures provide useful information, see page 39.

 

 

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First Nine Months of Fiscal Year 2015 Compared to First Nine Months of Fiscal Year 2014

 

Consolidated net sales revenue:

 

Consolidated net sales revenue for the first nine months increased $62.77 million, or 6.2 percent, to $1,067.40 million, compared to $1,004.63 million for the same period last year. Net sales revenue in our Housewares segment increased $13.91 million, or 6.7 percent, compared to the same period last year. Net sales revenue in our Healthcare / Home Environment segment increased $21.30 million, or 5.0 percent, compared to the same period last year. For the five months of operations included in the first nine months of fiscal year 2015, the Nutritional Supplements segment contributed net sales revenue of $63.10 million.  Net sales revenue in our Personal Care segment decreased $35.54 million, or 9.6 percent, compared to the same period last year.

 

Impact of acquisitions on net sales revenue:

 

On June 30, 2014 we made our most recent acquisition, resulting in the Nutritional Supplements segment.  The following table summarizes the impact that the acquisition had on our net sales revenue for the periods indicated.

 

IMPACT OF ACQUISITIONS ON NET SALES REVENUE

(in thousands)

 

 

Nine Months Ended November 30,

 

 

2014

 

2013

 

 

 

 

 

Prior year’s sales revenue, net

 

 $

1,004,633

 

 $

962,221

 

 

 

 

 

Components of net sales revenue change

 

 

 

 

Core business

 

(328)

 

42,412

Incremental net sales revenue from acquisitions (non-core business):

 

 

 

 

Healthy Directions (five months in fiscal year 2015)

 

63,096

 

-    

Change in sales revenue, net

 

62,768

 

42,412

Sales revenue, net

 

 $

1,067,401

 

 $

1,004,633

 

 

 

 

 

Total net sales revenue growth

 

6.2%

 

4.4%

Core business

 

0.0%

 

4.4%

Acquisitions

 

6.2%

 

-    

 

Impact of foreign currencies on net sales revenue:

 

During the first nine months of fiscal years 2015 and 2014, approximately 15 percent of our net sales revenue was in foreign currencies for both periods. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars.  For the first nine months of fiscal year 2015, the impact of net foreign currency exchange rate fluctuations decreased our reported international net sales revenue by approximately $2.12 million. In our Personal Care segment, where our Canadian and Latin American operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $2.06 million unfavorable impact on reported net sales revenues.  In our Healthcare / Home environment segment, where our European operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $0.65 million unfavorable impact on reported net sales revenues.  In our Housewares segment, where our foreign revenue is primarily denominated in British Pounds, foreign exchange fluctuations had a $0.59 million favorable impact on reported net sales. Substantially all sales in our Nutritional Supplements segment are transacted in U.S. Dollars.

 

 

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Segment net sales revenue:

 

Housewares Segment - Net sales revenue in the Housewares segment for the first nine months increased $13.91 million, or 6.7 percent, to $222.38 million compared with $208.47 million for the same period last year.  Higher unit volumes contributed the vast majority of the growth.  Unit selling prices remained essentially flat despite a better product sales mix and a better channel mix due to higher promotional discounting during the year.  From a product perspective, OXO had net sales revenue growth through line extensions in our infant and toddler category and gains in the gadgets, cutlery, bath, baking and measuring categories.  OXO tot (our infant and toddler product line) continues to gain traction with consumers, resulting in net sales revenue growth of over 30 percent, when compared to the same period last year.  OXO has now expanded its lines to over 800 items and growth continues to be driven by expanded shelf space and assortments at key traditional and internet retailers.

 

Healthcare / Home Environment Segment - Net sales revenue in the Healthcare / Home Environment segment for the first nine months increased $21.30 million, or 5.0 percent, to $445.70 million compared with $424.40 million for the same period last year.  Slightly higher unit volume contributed approximately 0.3 percent and an increase in average unit selling prices contributed approximately 4.7 percent to the increase in net sales revenue.  The segment experienced growth in thermometry, air purification and fans, partially offset by declines in humidification and water filtration.  Worldwide sales gains continue in thermometry and associated consumables as a result of a strong portfolio of new product introductions over the year and a slightly higher fever incidence at the early stages of the cold/cough/flu season.  Strong performance in air purification, fans and seasonal humidification were offset by comparable period declines in water filter sales. A relatively warm fall had the offsetting effects of improving fan sales and weakening early season heater shipments.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes the operating results from Healthy Directions, which we acquired on June 30, 2014.  Net sales revenue for the five months of its operation during the first nine months of fiscal year 2015 was $63.10 million.

 

Personal Care Segment - Net sales revenue in the Personal Care segment for the first nine months decreased $35.54 million, or 9.6 percent, to $336.23 million compared with $371.76 million for the same period last year.  Lower unit volumes contributed approximately 7.1 percent and a decrease in the average unit selling prices contributed approximately 2.5 percent to the decrease in net sales revenue.  While there were some signs of improvement in the retail environment during the third fiscal quarter, the year-to-date decrease in net sales revenue was spread across most major product categories within the segment.  The environment for most categories in this segment has been difficult and highly promotional for a large part of the fiscal year-to-date as a result of low demand and a retail and consumer focus on lower price-point merchandise.  The grooming, skin care and hair care solutions product category continued to confront significant competitive product launches and promotional spending in hair care.  The results for the first nine months also include the impact of an inventory reduction in the retail appliance category at our largest customer.  The retail appliances category was also negatively impacted by the loss of distribution with a Canadian retailer in the third quarter of fiscal year 2015.  The loss of distribution is expected to have an ongoing year-over-year impact on net sales revenue for the next several quarters, but the impact on operating income is not expected to be material.  In addition, during the first nine months we experienced an approximate $12.49 million year-over-year decline in our European appliance net sales revenue attributed to a product distribution agreement that did not repeat in fiscal year 2015.

 

 

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Consolidated gross profit margin:

 

Consolidated gross profit margin for the first nine months increased 1.8 percentage points to 40.7 percent compared to 38.9 percent for the same period last year. The addition of five months operations of the Nutritional Supplements segment had a favorable impact of 2.0 percentage points on the consolidated gross profit margin.  Because of the nature of its product and direct to consumer business model, this segment’s spending patterns differ from the core business.  As a result, higher gross margins are partially offset by comparatively higher percentages of spending devoted to selling, promotional and distribution activities.  Overall gross profit margins for the core business declined 0.2 percentage points for the first nine months, compared to the same period last year, mainly due to the impacts of higher promotional program spending, shifts in margin mix and product cost increases in certain categories.

 

While China’s currency intervention strategy with respect to the U.S. Dollar is continuously evolving, we believe that China’s currency may continue to fluctuate against the U.S. Dollar in the short-to-intermediate term, which could result in increased product costs over time.

 

Selling, general and administrative expense:

 

Our consolidated SG&A ratio increased 1.6 percentage points, to 29.3 percent for the first nine months, compared to 27.7 percent for the same period last year.  The increase in the SG&A ratio compared to the same period last year is primarily due to the following items:

 

·                 The Nutritional Supplements segment operates with a higher SG&A ratio than the core business.  The addition of five months of operations of this segment, excluding the acquisition-related expenses discussed below, increased the consolidated SG&A ratio by 1.7 percentage points;

 

·                 Expenses of $3.61 million incurred in connection with the Healthy Directions acquisition during the second fiscal quarter increased our SG&A ratio for the first nine months by 0.4 percentage points; and

 

·                A decrease of 0.5 percentage points in the SG&A ratio for the core business due to a combination of: lower incentive compensation expense; the impact of a $7 million gain from the amendment of our trademark license agreement with Honeywell International Inc.; lower product liability expense due to a decrease in our product liability estimates to reflect more relevant historical claims experience; partially offset by higher media and advertising expenses and higher foreign currency exchange losses.

 

Asset impairment charges:

 

We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2015.  As a result of our testing of indefinite-lived trademarks and licenses, we recorded a non-cash asset impairment charge of $9.00 million ($8.16 million after tax) during the first quarter of fiscal year 2015. The charge was related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method. The Company recorded a similar charge of $12.05 million ($12.03 million after tax) in the first quarter of fiscal year 2014.

 

 

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Segment Operating Income:

 

The following table sets forth segment operating income, for the periods covered below:

 

OPERATING INCOME BY SEGMENT

(dollars in thousands)

 

 

Nine Months Ended November 30,

 

 

 

 

 

% of Sales Revenue, net

 

 

2014

 

2013

 

$ Change

 

% Change

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

 $

45,201

 

 $

41,506

 

$

3,695

 

8.9%

 

20.3%

 

19.9%

Healthcare / Home Environment

 

31,919

 

22,175

 

9,744

 

43.9%

 

7.2%

 

5.2%

Nutritional Supplements (1)

 

6,324

 

-    

 

6,324

 

*   

 

10.0%

 

0.0%

Personal Care

 

29,325

 

36,693

 

(7,368

)

-20.1%

 

8.7%

 

9.9%

Total operating income (1)

 

 $

112,769

 

 $

100,374

 

$

12,395

 

12.3%

 

10.6%

 

10.0%

 

(1)         Includes five months of operations for Healthy Directions, which was acquired on June 30, 2014.

*                 Calculation is not meaningful.

 

Housewares Segment - Segment operating income for the first nine months increased $3.70 million, or 8.9 percent, compared to the same period last year.  Segment operating margin increased 0.4 percentage points to 20.3 percent, compared to 19.9 percent for the same period last year.  The increase in segment operating margin was due to higher net sales revenues and an increase in operating leverage, partially offset by a slightly lower margin mix and certain product cost increases compared to the same period last year.

 

Healthcare / Home Environment Segment - Segment operating income for first nine months increased $9.74 million, or 43.9 percent, compared to the same period last year.  Segment operating margin increased 2.0 percentage points to 7.2 percent, compared to 5.2 percent for the same period last year. The increase in segment operating margin was due to higher net sales revenue and a lower operating expense ratio.  The lower operating expense ratio was primarily the result of lower incentive compensation costs, lower product liability expense due to a decrease in our product liability estimates to reflect more relevant historical claims experience, and a $7 million gain on the amendment of our trademark license agreement with Honeywell International Inc. These operating expense reductions were partially offset by an increase in foreign exchange losses.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes five months of operating results from Healthy Directions, which we acquired on June 30, 2014.  Segment operating income for the five months of operation during the first nine months of fiscal year 2015 was $6.32 million, resulting in an operating margin of 10.0 percent. The fiscal year-to-date operating income includes expense of $3.61 million incurred in connection with the acquisition.

 

Personal Care Segment - Segment operating income for the first nine months decreased $7.37 million, or 20.1 percent, compared to the same period last year.  Segment operating margin decreased 1.2 percentage points to 8.7 percent, compared to 9.9 percent for the same period last year.  The decline in operating margin was principally due to the combined impacts of higher advertising and other marketing expenses, foreign exchange losses and decreased operating leverage against the segment’s fixed costs, as a result of the segment’s net sales revenue decline of 9.6 percent. Operating income includes non-cash intangible asset impairment charges totaling $9.00 million ($8.16 million after tax) and $12.05 million ($12.03 million after tax), recorded during the fiscal quarters ending May 31, 2014 and 2013, respectively.

 

Interest expense:

 

Interest expense for the first nine months was $11.59 million compared to $7.65 million for the same period last year.  The increase in interest expense is due to higher levels of debt as a result of borrowings used to fund the repurchase of $278.29 million of the Company’s outstanding common stock through a combination of a

 

 

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modified “Dutch auction” tender offer, the settlement of certain stock awards, and open market transactions in the first quarter of fiscal year 2015, and to fund the $195.94 million acquisition of Healthy Directions in the second quarter of fiscal year 2015.  For further information regarding share repurchases, see Note 15 to the accompanying consolidated condensed financial statements.  For further information regarding the Healthy Directions acquisition, see Notes 6, 9, 10, and 11, to the accompanying consolidated condensed financial statements.

 

Income tax expense:

 

Income tax expense for the first nine months was $10.80 million, or 10.7 percent of income before taxes compared to $17.65 million, or 19.0 percent of income before taxes, for the same period last year.  The year-over- year comparison of our effective tax rates was primarily impacted by shifts in the mix of taxable income in our various tax jurisdictions.  In the fiscal quarter ended November 30, 2014, the Company also recorded a $0.85 million tax benefit associated with a net reduction in the valuation allowance for net operating loss carryforwards and a $0.52 million tax benefit resulting from the finalization of certain tax returns.  In addition, during the fiscal quarter ended August 31, 2014, the Company recorded a tax benefit of $2.07 million related to the resolution of an uncertain tax position with a foreign tax authority, resulting in a lower effective tax rate for the fiscal year-to-date ended November 30, 2014 when compared to the same period last year.  A $7 million gain from the amendment of our trademark license agreement with Honeywell International Inc. also decreased the effective tax rate by 0.8 percentage points for the nine months ended November 30, 2014.

 

Net income:

 

Net income for the first nine months increased by $15.38 million compared to the same period last year.  Diluted earnings per share increased $0.79 to $3.12, compared to $2.33 for the same period last year.

 

Adjusted income and EPS:

 

In order to provide a better understanding of the impact of certain items on our net income and EPS, the analysis that follows reports the comparative after tax impact of asset impairment charges, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation on our net income, and basic and diluted EPS for the periods covered below.

 

ADJUSTED INCOME AND EPS

(dollars in thousands, except per share data)

 

 

Nine Months Ended November 30,

 

Basic EPS

 

Diluted EPS

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported (GAAP)

 

 $

90,614

 

 $

75,233

 

 $

3.17

 

$

2.35

 

 $

3.12

 

 $

2.33

Non-cash share-based compensation, net of tax (1)

 

4,026

 

7,325

 

0.14

 

0.23

 

0.14

 

0.23

Amortization of intangible assets, net of tax (2)

 

16,767

 

15,593

 

0.59

 

0.49

 

0.58

 

0.48

Acquisition-related expenses, net of tax (3)

 

2,306

 

-    

 

0.08

 

-   

 

0.08

 

-   

Asset impairment charges, net of tax (4)

 

8,155

 

12,034

 

0.28

 

0.38

 

0.28

 

0.37

Adjusted income (non-GAAP)

 

 $

121,868

 

 $

110,185

 

 $

4.26

 

$

3.45

 

 $

4.19

 

 $

3.41

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing basic and diluted earnings per share

 

 

 

28,630

 

31,982

 

29,070

 

32,311

 

(1)      Non-cash share-based compensation of $4.54 million ($4.03 million after tax) and $9.20 million ($7.33 million after tax), for the first nine months of fiscal years 2015 and 2014, respectively.

 

(2)      Amortization of intangible assets of $18.43 million ($16.77 million after tax) and $16.25 million ($15.59 million after tax), for the first nine months of fiscal years 2015 and 2014, respectively.

 

 

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(3)      Expenses of $3.61 million ($2.31 million after tax) incurred in connection with the Healthy Directions acquisition in the first nine months of fiscal year 2015.

 

(4)      Non-cash intangible asset impairment charges totaling $9.00 million ($8.16 million after tax) and $12.05 million ($12.03 million after tax), incurred during the first quarter of fiscal years 2015 and 2014, respectively.

 

Adjusted income increased $11.68 million, or 10.6 percent, for the first nine months compared to the same period last year.  The increase in adjusted income was primarily due to higher sales, a lower SG&A ratio and lower income tax expense in the core business, and the accretive impact of the Healthy Directions acquisition.

 

Adjusted diluted EPS was $4.19 for the first nine months, compared to $3.41 for the same period last year.  Share repurchases in the first quarter of fiscal year 2015 resulted in lower diluted shares outstanding, when compared to the same period last year.

 

The tables referred to above entitled “Adjusted Income and EPS” report income and EPS without the after tax impact of non-cash intangible asset impairment charges, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The preceding table reconciles these measures to their corresponding GAAP-based measures presented in our consolidated condensed statements of income. We believe that adjusted income and EPS provide useful information to management and investors regarding financial and business trends relating to its financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with the Company’s financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on net income and earnings per share. We also believe that these non-GAAP measures facilitate a more direct comparison of the Company’s performance with its competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of the Company’s continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in the Company’s GAAP financial results in the foreseeable future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of the Company’s activities. The Company’s adjusted income and EPS are not prepared in accordance with GAAP, are not an alternative to GAAP financial information and may be calculated differently than non-GAAP financial information disclosed by other companies.  Accordingly, undue reliance should not be placed on non-GAAP information.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

The following are selected measures of our liquidity and capital resources for the periods covered below:

 

SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL UTILIZATION (1)

 

 

Nine Months Ended November 30,

 

 

2014

 

2013

 

 

 

 

 

 

 

Accounts Receivable Turnover (Days)

 

64.4

 

65.5

 

Inventory Turnover (Times)

 

2.6

 

2.7

 

Working Capital (in thousands)

 

 $

(63,386)

 

 $

278,837

 

Current Ratio

 

0.9 : 1

 

1.8 : 1

 

Ending Debt to Ending Equity Ratio

 

64.7%

 

21.3%

 

Return on Average Equity (2)

 

11.3%

 

11.3%

 

 

(1)      Our computation and use of the measures in this table are further described and explained beginning on page 45.

 

 

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(2)      Net income and average equity for the first nine months of fiscal years 2015 and 2014 include after tax non-cash asset impairment charges of $8.16 and $12.03 million, respectively.  In addition, net income and average equity for the first nine months of fiscal year 2015 include after tax acquisition-related expenses of $2.31 million. Twelve month trailing net income and average equity used in the calculation also include after tax CEO succession costs of $16.34 million recorded in the fourth quarter of fiscal year 2014.  These items had an unfavorable impact of 2.5 and 1.2 percentage points on the return on average equity for the periods shown above.

 

Operating Activities:

 

Operating activities provided $63.47 million of cash during the first nine months of fiscal year 2015 compared to $91.11 million of cash provided during the same period last year.  The decrease is attributable to the timing of fluctuations in other working capital components, particularly an increase in the levels of inventory when compared to the same period last year.  The decrease in operating cash flow was also impacted by the settlement of certain CEO succession cost obligations in the first quarter of fiscal year 2015 in connection with our former CEO’s separation at the end of fiscal year 2014.

 

Accounts receivable increased $76.40 million to $289.45 million as of November 30, 2014, compared to $213.05 million at the end of fiscal year 2014. Accounts receivable turnover decreased to 64.4 days at November 30, 2014 compared to 65.5 days for the same period last year. This calculation is based on a rolling five quarter accounts receivable balance.

 

Inventory increased $29.56 million to $318.82 million as of November 30, 2014, compared to $289.26 million at the end of fiscal year 2014.  Inventory turnover was 2.6 times at November 30, 2014, compared to 2.7 times at November 30, 2013.  The decrease in inventory turnover is primarily due to lower than expected sales for the first half of the fiscal year and selected opportunistic forward inventory purchases. Inventory at November 30, 2014 included $6.75 million of inventory from our Nutritional Supplements segment.

 

Working capital was ($63.39) million at November 30, 2014, compared to $278.84 million at November 30, 2013.   The decrease in working capital over the last twelve months is primarily due to an increase in current debt over the last three fiscal quarters.  The increased debt was used to fund the first quarter repurchase of $278.29 million of the Company’s outstanding common stock through a combination of a modified “Dutch auction” tender offer, the settlement of certain stock awards, and open market transactions and to fund the $195.94 million acquisition of Healthy Directions.  As a result, our current ratio decreased to 0.9:1 as of November 30, 2014, compared to 1.8:1 as of November 30, 2013.

 

Investing activities:

 

Investing activities used $200.84 million of cash during the first nine months of fiscal year 2015.  Highlights of those activities follow:

 

·                 We spent $0.91 million on building and improvements, $1.50 million on computers, furniture and other equipment, $1.79 million on tools, molds and other capital asset additions, and $0.69 million on the development of new patents; and

 

·                 We paid $195.94 million to acquire Healthy Directions.

 

Financing activities:

 

Financing activities provided $88.39 million of cash during the first nine months of fiscal year 2015.  Highlights of those activities follow:

 

 

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·                 We had draws of $694.40 million against our Credit Agreement;

 

·                 We repaid $254.40 million drawn against our Credit Agreement;

 

·                 We repaid $76.90 million of our long-term debt;

 

·                 We incurred $2.32 million in financing costs in connection with the amendment of our Credit Agreement and certain related guarantees in the second quarter of fiscal year 2015;

 

·                 Employees and certain non-employee members of our Board of Directors exercised options to purchase 141,711 shares of common stock, providing $4.58 million of cash, including tax benefits;

 

·                 Employees purchased 13,848 shares of common stock for $0.69 million through our employee stock purchase plan;

 

·                 We paid $4.57 million in tax obligations in connection with the vesting of certain stock awards to our former CEO and non-employee members of our Board of Directors;

 

·                 We repurchased and retired 4,172,222 shares of common stock at an average price of $66.70 per share for a total purchase price of $278.29 million through a combination of a modified “Dutch auction” tender offer, the settlement of certain stock awards and open market purchases; and

 

·                 Share-based compensation provided $0.51 million in current tax benefits.

 

Revolving Credit Agreement:

 

We have a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $570 million as of November 30, 2014. The commitment under the Credit Agreement terminates on December 30, 2015.  Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement.  With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time.  We also incur loan commitment fees and letter of credit fees under the Credit Agreement.  Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis.  As of November 30, 2014, the outstanding revolving loan principal balance was $440 million and there were $0.77 million of open letters of credit outstanding against the Credit Agreement.  For the third quarter and first nine months of fiscal year 2015, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.90 to 4.38 percent for both periods.  For the third quarter and first nine months of fiscal year 2014, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.17 to 3.25 percent and 1.17 to 3.63 percent, respectively.  As of November 30, 2014, the amount available for borrowings under the Credit Agreement was $129.23 million.

 

 

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Other Debt Agreements:

 

In addition to the Credit Agreement, at November 30, 2014, we had an aggregate principal balance of $80 million of 3.90 percent Senior Notes due January 2018 with varying maturities due between January 2015 and January 2018.  $75 million of principal on our 6.01 percent Senior Notes was repaid at maturity on June 30, 2014.

 

In March 2014, the Company concluded its borrowings under a loan agreement with the Mississippi Business Finance Corporation (the “MBFC Loan”). Under the MBFC Loan, a principal balance of $37.61 million was incurred to fund construction of our Olive Branch, Mississippi distribution facility.  A $1.90 million principal payment was made on March 1, 2014.   The remaining loan balance is  payable as follows: $1.90 million on March 1 in each of 2015, 2018, 2019, 2020, 2021, and 2022; $3.80 million on March 1, 2016; $5.70 million on March 1, 2017; and $14.81 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

 

Our debt agreements require the maintenance of certain financial covenants, including maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms are defined in the various agreements). Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting the Company, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt. Under the terms of our Credit Agreement, the commitments of the lenders to make loans to us are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the revolving credit facility.

 

 

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The table below provides the formulas in effect for certain key financial covenants as defined in our various debt agreements as of November 30, 2014:

 

 

 

 

 

 

 

 

Applicable Financial Covenant

 

 

Credit Agreement and MBFC Loan

 

 

$100 Million 3.90% Fixed Rate Senior Notes

 

 

 

 

 

 

 

Minimum Consolidated Net Worth

 

 

None

 

 

 

$500 Million

+

25% of Fiscal Quarter Net Earnings

After August 31, 2010 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Coverage Ratio

 

 

EBIT (2)

 

 

EBIT (2)

 

 

÷

 

 

÷

 

 

Interest Expense (2)

 

 

Interest Expense (2)

 

 

Minimum Required: 3.00 to 1.00

 

 

Minimum Required: 2.50 to 1.00

Maximum Leverage Ratio

 

 

Total Current and Long Term Debt (3)

 

 

Total Current and Long Term Debt (3)

 

 

÷

 

 

÷

 

 

[EBITDA (2) + Pro Forma Effect of Acquisitions]

 

 

[ EBITDA (2) + Pro Forma Effect of Acquisitions ]

 

 

Maximum Allowed: 3.25 to 1.00

 

 

Maximum Allowed: 3.25 to 1.00

 

Key Definitions:

 

EBIT:

Earnings Before Non-Cash Charges, Interest Expense and Taxes

 

 

EBITDA:

EBIT + Depreciation and Amortization Expense + Share Based Compensation

 

 

Total Capitalization:

Total Current and Long Term Debt + Total Equity

 

 

Pro Forma Effect of Acquisitions:

For any acquisition, pre-acquisition EBITDA of the acquired business is included so that the EBITDA of the acquired business included in the computation equals its twelve month trailing total.

 

Notes:

(1) Excluding any fiscal quarter net losses.

(2) Computed using totals for the latest reported four consecutive fiscal quarters.

(3) Computed using the ending balances as of the latest reported fiscal quarter.

 

 

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Contractual obligations and commercial commitments:

 

Our contractual obligations and commercial commitments at November 30, 2014, were:

 

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED THE LAST DAY OF NOVEMBER:

(in thousands)

 

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

After

 

 

 

Total

 

1 year

 

2 years

 

3 years

 

4 years

 

5 years

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term debt - fixed rate

 

$

80,000

 

$

20,000

 

$

20,000

 

$

20,000

 

$

20,000

 

$

-    

 

$

-    

 

Term debt - floating rate

 

35,707

 

1,900

 

3,800

 

5,700

 

1,900

 

1,900

 

20,507

 

Long-term incentive plan payouts

 

12,514

 

5,308

 

3,584

 

3,622

 

-    

 

-    

 

-    

 

Interest on fixed rate debt

 

5,044

 

2,431

 

1,651

 

871

 

91

 

-    

 

-    

 

Interest on floating rate debt

 

4,338

 

782

 

706

 

587

 

522

 

479

 

1,262

 

Open purchase orders

 

217,281

 

217,281

 

-    

 

-    

 

-    

 

-    

 

-    

 

Long-term purchase commitments

 

2,667

 

1,001

 

606

 

606

 

454

 

-    

 

-    

 

Minimum royalty payments

 

70,950

 

12,046

 

12,020

 

11,931

 

9,208

 

8,375

 

17,370

 

Advertising and promotional

 

52,601

 

13,329

 

6,141

 

5,758

 

5,749

 

5,858

 

15,766

 

Operating leases

 

18,134

 

3,853

 

3,049

 

2,570

 

2,339

 

1,375

 

4,948

 

Capital spending commitments

 

457

 

457

 

-    

 

-    

 

-    

 

-    

 

-    

 

Total contractual obligations (1)

 

$

499,693

 

$

278,388

 

$

51,557

 

$

51,645

 

$

40,263

 

$

17,987

 

$

59,853

 

 

(1)  In addition to the contractual obligations and commercial commitments in the table above, as of November 30, 2014, we have recorded a provision for our uncertain tax positions of $10.85 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.

 

Current and Future Capital Needs:

 

Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund our foreseeable short- and long-term liquidity requirements.  We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet.  In addition, we continue to evaluate acquisition opportunities on a regular basis. We may finance acquisition activity with available cash, the issuance of shares of common stock, additional debt, or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition. The Company may also elect to repurchase additional shares of common stock up to the balance of its current authorization over the next two fiscal years, subject to limitations contained in its debt agreements and based upon its assessment of a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions, financial conditions, any applicable contractual limitations and other factors, including alternative investment opportunities. For additional information, see Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” in this report.

 

 

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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, 2014. There have been no material changes to the Company’s critical accounting policies from the information provided in our annual report on Form 10-K.

 

NEW ACCOUNTING GUIDANCE

 

See Note 3 “New Accounting Pronouncements” in the accompanying consolidated condensed financial statements for a discussion of the status and potential impact of any new accounting pronouncements.

 

EXPLANATION OF CERTAIN TERMS AND MEASURES USED IN MD&A

 

Accounts receivable turnover: Twelve month trailing net sales revenue divided by the average of the current and prior four fiscal quarters’ ending accounts receivable balances.  This result is divided into 365 to express turnover in terms of average days outstanding.

 

Core business:  Core business is net sales revenue and related operations associated with product lines or brands after the first twelve months from the date the product line or brand was acquired.  Net sales revenue and related operations from internally-developed product lines or brands are always considered core business.

 

Corporate costs: All general corporate managerial and related administrative compensation costs, legal, accounting, and regulatory compliance costs together with associated operating overhead that is not directly attributable to any one operating segment, but benefits the Company as a whole. These charges are allocated to each operating segment based upon a number of factors depending on the nature of the expense.  Such factors include relative revenues, estimates of relative labor expenditures for each segment, and certain intangible asset levels held by each segment.

 

Current Ratio: Current assets divided by current liabilities at the end of a reporting period, expressed as a ratio.

 

Ending debt to ending equity ratio: Total interest bearing short- and long-term debt divided by shareholder’s equity.

 

Inventory turnover: Twelve month trailing cost of goods sold divided by the average of the current and prior four fiscal quarters’ ending inventory balances.

 

Net sales growth from acquisitions:  Net sales revenue growth associated with product lines or brands that we have acquired and operated for less than twelve months during each period presented.

 

Operating expense ratio: Total operating expense (SG&A plus asset impairment charges) for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Operating leverage: The improvement in operating margin that the Company achieves with sales growth, due to the fixed nature of certain operating expenses.

 

Operating margin: Operating income for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Return on average equity: Twelve month trailing net income divided by the average of the current and prior four fiscal quarters’ ending shareholders’ equity.

 

 

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Segment operating income: We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, and any asset impairment charges associated with the segment. The SG&A used to compute each segment operating income is directly associated with the segment.  We then deduct allocations for operational shared services and corporate costs.  We do not allocate nonoperating income and expense, including interest or income taxes to operating segments.

 

SG&A ratio: This is total SG&A for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Working capital: Current assets less current liabilities.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Changes in currency exchange rates and interest rates 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 both the fiscal quarter and year-to-date periods ended November 30, 2014, approximately 15 percent of our net sales revenue was in foreign currencies.  During the fiscal quarter and year-to-date periods ended November 30, 2013, approximately 16 and 15 percent, respectively, of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars.  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 from remeasurement 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 its 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 rate 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 rate 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. 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.

 

 

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Chinese Renminbi Currency Exchange Uncertainties - A significant portion of the products we sell are purchased from third-party manufacturers in China. For the first three quarters of fiscal year 2015, the Chinese Renminbi has remained relatively flat against the U.S. Dollar. During fiscal year 2014, the Chinese Renminbi appreciated against the U.S. Dollar approximately 3 percent. While China’s currency intervention strategy with respect to the U.S. Dollar is continuously evolving, we believe that China’s currency may continue to fluctuate against the U.S. Dollar in the short-to-intermediate term, which could result in increased product costs over time.

 

Venezuelan Bolivar Currency Exchange Uncertainties - In February 2013, the Venezuelan government devalued its currency from 4.30 to 6.30 Bolivars per U.S. Dollar for all goods and services. In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism known as SICAD 1.  SICAD 1 was made available to certain companies that operate in designated industry sectors.  At November 30, 2014, the SICAD 1 rate was 12 Bolivars to the U.S. Dollar.  In early 2014, the Venezuelan government created a National Center of Foreign Commerce (“CENCOEX”) to control the multiple currency exchange rate mechanisms that may be available for a company to exchange funds.  CENCOEX was granted the authority to determine the sectors that will be allowed to buy U.S. dollars in SICAD auctions, and subsequently introduced a more accessible market-based, SICAD 2 daily auction exchange market.  At November 30, 2014, the SICAD 2 rate was approximately 50 Bolivars to the U.S. Dollar.

 

Despite the recent announcements made by the Venezuelan government advocating further changes to the current system, there remains a significant degree of uncertainty as to which exchange markets might be available for particular types of transactions. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD 1 or SICAD 2 auctions, nor do we intend to.  As of November 30, 2014, these auctions had not eliminated or changed the official rate of 6.30 Bolivars per U.S. Dollar.

 

Our business in Venezuela continues to be entirely self-funded with earnings from operations.  We have no current need or intention to repatriate Venezuelan earnings and remain committed to the business for the long-term.  Within Venezuela, we market primarily liquid, solid- and powder-based personal care and grooming products which are sourced almost entirely within the country.  We do not have, nor do we foresee having, any need to access SICAD 1 or SICAD 2.  Accordingly, we continue to utilize the official rate of 6.30 Bolivars per U.S. Dollar to re-measure our Venezuelan financial statements.

 

For both of the fiscal quarters ended November 30, 2014 and 2013, sales in Venezuela represented approximately 0.8 percent of the Company’s consolidated net sales revenue.  For the fiscal years-to-date ended November 30, 2014 and 2013, sales in Venezuela represented approximately 0.8 and 0.7 percent, respectively, of the Company’s consolidated net sales revenue.  At November 30, 2014, we had a U.S. Dollar based net investment in our Venezuelan business of $9.61 million, consisting almost entirely of working capital.

 

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, and we cannot assess impacts, if any, such events may have on our Venezuelan business.  We will continue to closely monitor the applicability and viability of the various exchange mechanisms.  A future devaluation, if any, would result in additional charges against income, and these charges could be material.

 

Interest Rate Risk:

 

Interest on our outstanding debt as of November 30, 2014 is both floating and fixed. Fixed rates are in place on $80 million of 3.90 percent Senior Notes due January 2018, while floating rates are in place on the balance of all other debt outstanding, which totaled $475.71 million as of November 30, 2014.  If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and MBFC Loan.

 

 

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At February 28, 2014, floating rate $75 million Senior Notes due June 2014 had been effectively converted to fixed rate debt using an interest rate swap (the “swap”).  The swap converted the total aggregate notional principal from floating interest rate payments to fixed interest rate payments at 6.01 percent. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. The swap was 100 percent effective. As of June 30, 2014, the swap ended concurrent with the repayment at maturity of $75 million of principal on the related Senior Notes.

 

The fair values of our various derivative instruments are as follows:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

November 30, 2014

 

 

 

 

 

 

 

 

Prepaid

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

Expenses

 

 

 

 

 

Final

 

 

 

and Other

 

and Other

 

 

 

 

 

Settlement

 

Notional

 

Current

 

Current

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - sell Pounds

 

Cash flow

 

 

2/2015

 

£

1,500

 

$

162

 

$

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2014

 

 

 

 

 

 

 

 

Prepaid

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

Expenses

 

 

 

 

 

Final

 

 

 

and Other

 

and Other

 

 

 

 

 

Settlement

 

Notional

 

Current

 

Current

 

Designated as hedging instruments

 

Hedge Type

 

Date

 

Amount

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - sell Euro

 

Cash flow

 

6/2014

 

2,850

 

$

-    

 

$

89

 

Foreign currency contracts - sell Pounds

 

Cash flow

 

11/2014

 

£

4,250

 

-    

 

280

 

Interest rate swap

 

Cash flow

 

6/2014

 

$

75,000

 

-    

 

1,227

 

Total fair value

 

 

 

 

 

 

 

$

-    

 

$

1,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty Credit Risks:

 

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 by 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 losses is remote.

 

 

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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 Securities and Exchange Commission (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 our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report under Item 1A., “Risk Factors” of our annual report on Form 10-K for the year ended February 28, 2014 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;

 

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

 

·                 our relationships with key customers and licensors;

 

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

 

·                 expectations regarding our recent and future acquisitions, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses;

 

·                 foreign currency exchange rate fluctuations;

 

·                 disruptions in U.S., Euro zone, Venezuela, and other international credit markets;

 

·                 risks associated with weather conditions;

 

·                 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;

 

·                 risks to the Nutritional Supplements segment associated with the availability, purity and integrity of materials used in the manufacture of vitamins, minerals and supplements;

 

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

 

·                 our geographic concentration of certain U.S. distribution facilities increases our exposure to significant shipping disruptions and added shipping and storage costs;

 

·                 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;

 

·                 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 and to third parties;

 

 

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

 

·                 increased products liability and reputational risks associated with the formulation and distribution of vitamins, minerals and supplements;

 

·                 the risks associated with adverse publicity and negative public perception regarding the use of vitamins, minerals and supplements;

 

·                 trade barriers, exchange controls, expropriations, and other risks associated with foreign operations;

 

·                 debt leverage and the constraints it may impose on our cash resources and ability to operate our business;

 

·                 the costs, complexity and challenges of upgrading and managing our global information systems;

 

·                 the risks associated with information security breaches;

 

·                 the increased complexity of compliance with a number of new government regulations as a result of adding vitamins, minerals and supplements to the Company’s portfolio of products;

 

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

 

·                 the risks of potential changes in laws, including tax laws, health insurance laws and new regulations related to conflict minerals along with the costs and 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 November 30, 2014. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of November 30, 2014, 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) of the Exchange Act that occurred during our fiscal quarter ended November 30, 2014, 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, 2014.  Since the filing of our annual report on Form 10-K, we have formed the Nutritional Supplements segment with the acquisition of Healthy Directions, LLC and its subsidiaries on June 30, 2014.   Healthy Directions is a leading provider of premium vitamins, minerals and supplements, as well as other health products sold directly to consumers.  Because of the different nature of its product and direct-to-consumer business model, the following material risk factors have now become part of our risk profile:

 

The Nutritional Supplements segment may be subject to product liability claims, which could materially and adversely affect our business, financial condition, results of operation or reputation.

 

As a formulator and distributor of products designed for human consumption or use on or in the body, our Nutritional Supplements segment may be subject to product liability claims if the use of our products is alleged to have resulted in illness or injury or if our products include inadequate instructions or warnings.  These products generally consist of vitamins, minerals, herbs, and other ingredients that are classified as foods, over-the-counter drugs, dietary supplements, and medical devices and generally are not subject to pre-market regulatory approval or clearance by governmental authorities.  In the event products contained spoiled or contaminated substances, or, in the case of products that contain ingredients that do not have long histories of human consumption, previously unknown adverse reactions resulting from human consumption of these ingredients could occur.  We could also be subject to product liability claims, including among others, that our products include insufficient instructions for use or inadequate warnings concerning possible side effects or interactions with other substances. Any product liability claim against us could result in increased costs and adversely affect our reputation with our customers, which in turn could materially adversely affect our business, financial condition or results of operations.

 

The Nutritional Supplements segment may be subject to the effects of adverse publicity and negative public perception.

 

Consumer acceptance of the safety, efficacy and quality of the Nutritional Supplements segment’s products, as well as similar products distributed by other companies can be significantly influenced by scientific research or findings, national media attention and other publicity about product use. A product may initially be received favorably, resulting in high sales associated with that product that may not be sustainable as consumer preferences change. In addition, recent studies have challenged the safety or benefit of certain nutritional supplements and dietary ingredients. Future scientific research or publicity could be unfavorable to the industry or any of our products and may not be consistent with earlier favorable research or publicity.  Any research or publicity that is perceived by consumers as less than favorable or that questions earlier favorable research or publicity could have a material adverse effect on the Nutritional Supplements segment’s ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities or otherwise, whether or not accurate, that associates consumption of products or any other similar products with illness or other adverse

 

 

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effects, or that questions the benefits of our or similar products, or that claims that such products are ineffective could have a material adverse effect on our business, reputation, financial condition or results of operations.

 

The availability, purity and integrity of raw materials used in the manufacture of the Nutritional Supplements segment’s products could be compromised.

 

The Nutritional Supplements segment depends on outside suppliers for raw materials, acquiring all of its raw materials for the manufacture of its products from third-party suppliers.  The segment uses multiple agreements for the supply of materials used in the manufacture of its products in order to hedge against shortages or potential spikes in material costs.  The segment also contracts with third-party manufacturers and suppliers for the production of its products. In the event of a loss of any significant supplier, the segment could experience difficulties in finding or transitioning to alternative suppliers, which could result in product shortages or product back orders, which could harm its business. There can be no assurance that suppliers will be able to provide the segment with the raw materials in the quantities and at the appropriate level of quality requested or at prices it will be willing to pay.  The segment is also subject to the delays caused by any interruption in the production of these materials including weather, crop conditions, climate change, transportation interruptions, and natural disasters or other catastrophic events.

 

Occasionally, suppliers have experienced production difficulties with respect to the segment’s products, including the delivery of materials or products that do not meet rigorous quality control standards. These quality problems have in the past resulted in, and in the future could result in, stock outages or shortages of our products, and could harm sales or create inventory write-offs for unusable product.

 

The products, business practices and manufacturing activities of the Nutritional Supplements segment are subject to extensive government regulations and could be subject to additional laws and regulations in the future.

 

The addition of the Nutritional Supplements segment brings with it requirements to comply with an extensive new body of regulations by national, state and provincial governmental authorities including regulations issued in the United States by the Food and Drug Administration, the Federal Trade Commission, the Consumer Products Safety Commission and the United Stated Department of Agriculture.  These regulations, and their evolving nature can from time-to-time require us to reformulate products for specific markets, conform product labeling to market regulations and register or qualify products or obtain necessary approvals with the applicable governmental authorities in order to market products in these markets. Failure to comply with the regulatory requirements of these various governmental agencies and authorities could result in enforcement actions including: cease and desist orders, injunctions, limits on advertising, consumer redress, divestitures of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these regulations could result in substantial financial or other penalties.  Any action against us could materially affect our ability to successfully market not only the affected products, but other products as well.

 

In the future, we may be subject to additional laws or regulations administered by the FDA or other federal, state, local or regulatory authorities, the repeal or amendment of laws or regulations which we consider favorable and/or more stringent interpretations of current laws or regulations. We can neither predict the nature of such future laws, regulations, interpretations or applications, nor what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business. However, they could require reformulation of certain products to meet new standards, recall or discontinuance of certain products not able to be reformulated, imposition of additional record-keeping requirements, expanded documentation of the properties of certain products, expanded or altered labeling and/or scientific substantiation. Any or all such requirements could increase our costs of operating the Nutritional Supplements segment, and which could have a material adverse effect on our business, reputation, financial condition, or results of operations.

 

 

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

 

As of November 30, 2014, we were authorized by our Board of Directors to purchase up to $265.43 million of common stock in the open market or through private transactions.  The program will remain in effect until terminated or otherwise modified by the Board of Directors.  Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to the amounts due.  These transactions are accounted for by the Company as a purchase and retirement of shares.

 

During the fiscal quarter ended November 30, 2014, we did not repurchase any shares of common stock.  Additionally, no shares of common stock were tendered by our employees in “net exercise” transactions.  Accordingly, the following schedule shows no purchase activity for the months presented.

 

ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

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

 

Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 1 through September 30, 2014

 

-     

 

$

-    

 

-     

 

$

265,428

 

October 1 through October 31, 2014

 

-     

 

-    

 

-     

 

265,428

 

November 1 through November 31, 2014

 

-     

 

-    

 

-     

 

265,428

 

Total

 

-     

 

$

-    

 

-     

 

 

 

 

 

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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.

 

101.INS *         XBRL Instance Document

101.SCH *        XBRL Taxonomy Extension Schema

101.CAL *        XBRL Taxonomy Extension Calculation Linkbase

101.DEF *        XBRL Taxonomy Extension Definition Linkbase

101.LAB *        XBRL Taxonomy Extension Label Linkbase

101.PRE *         XBRL Taxonomy Extension Presentation Linkbase

 

*    Filed herewith.

 

**  Furnished herewith.

 

 

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SIGNATURES

 

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

 

 

HELEN OF TROY LIMITED

 

(Registrant)

 

 

 

 

Date:   January 9, 2015

/s/ Julien R. Mininberg

 

Julien R. Mininberg

 

Chief Executive Officer,
Director and Principal Executive Officer

 

 

 

 

Date:   January 9, 2015

/s/ Brian L. Grass

 

Brian L. Grass

 

Chief Financial Officer

 

and Principal Financial Officer

 

 

 

 

Date:   January 9, 2015

/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.

 

101.INS *

 

XBRL Instance Document

101.SCH *

 

XBRL Taxonomy Extension Schema

101.CAL *

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF *

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB *

 

XBRL Taxonomy Extension Label Linkbase

101.PRE *

 

XBRL Taxonomy Extension Presentation Linkbase

 

*           Filed herewith.

 

**         Furnished herewith.

 

 

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