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EX-32 - EX-32 - HELEN OF TROY LTDa11-1872_1ex32.htm
EX-31.1 - EX-31.1 - HELEN OF TROY LTDa11-1872_1ex31d1.htm
EX-31.2 - EX-31.2 - HELEN OF TROY LTDa11-1872_1ex31d2.htm

 

 

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

 

FORM 10-Q

 

x

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

 

 

 

 

For the quarterly period ended November 30, 2010

 

 

 

 

 

or

 

 

 

 

o

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

 

 

 

 

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

 

 

Commission file number: 001-14669

 

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda

 

74-2692550

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Clarenden House

Church Street

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

 

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address)

 

(Zip Code)

 

(915) 225-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                    Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes o    No o

 

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

 

Large accelerated filer o

 

Accelerated filer   x

 

 

 

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

 

Smaller reporting company   o

 

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

 

Yes o     No x

 

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

 

Class

 

Outstanding at January 4, 2011

Common Shares, $0.10 par value, per share

 

30,714,023 shares

 

 



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

INDEX – FORM 10-Q

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets (unaudited)

 

 

 

 

 

as of November 30, 2010 and February 28, 2010

 

3

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Income (unaudited)

 

 

 

 

 

for the Three- and Nine-Months Ended

 

 

 

 

 

November 30, 2010 and November 30, 2009

 

4

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows (unaudited)

 

 

 

 

 

for the Nine Months Ended

 

 

 

 

 

November 30, 2010 and November 30, 2009

 

5

 

 

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements (unaudited)

 

6

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

 

 

 

 

 

and Results of Operations

 

25

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

46

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

47

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

47

 

 

 

 

 

 

 

 

Signatures

 

48

 

2



 

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,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Asset, current:

 

 

 

 

 

Cash and cash equivalents

 

$

70,623

 

$

110,208

 

Derivative assets, current

 

556

 

795

 

Receivables - principally trade, less allowances of $3,834 and $3,346

 

152,414

 

109,722

 

Inventory, net

 

152,312

 

124,021

 

Prepaid expenses

 

4,337

 

2,485

 

Income taxes receivable

 

1,618

 

597

 

Deferred tax assets, net

 

11,936

 

11,526

 

Total assets, current

 

393,796

 

359,354

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $63,400 and $58,464

 

78,991

 

82,113

 

Goodwill

 

201,542

 

185,937

 

Other intangible assets, net of accumulated amortization of $32,729 and $33,449

 

218,417

 

177,124

 

Other assets, net of accumulated amortization of $3,997 and $3,825

 

30,688

 

30,205

 

Total assets

 

$

923,434

 

$

834,733

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

Accounts payable, principally trade

 

$

39,210

 

$

35,005

 

Accrued expenses and other current liabilities

 

82,068

 

67,289

 

Long-term debt, current maturities

 

53,000

 

3,000

 

Total liabilities, current

 

174,278

 

105,294

 

 

 

 

 

 

 

Deferred compensation liability

 

4,110

 

3,758

 

Other liabilities, noncurrent

 

715

 

75

 

Deferred tax liabilities, net

 

1,441

 

1,202

 

Long-term debt, excluding current maturities

 

78,000

 

131,000

 

Liability for uncertain tax positions

 

1,326

 

2,562

 

Derivative liabilities, noncurrent

 

7,621

 

7,070

 

Total liabilities

 

267,491

 

250,961

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

-   

 

-   

 

Common stock, $0.10 par. Authorized 50,000,000 shares; 30,656,277 and 30,571,813 shares issued and outstanding

 

3,065

 

3,057

 

Additional paid in capital

 

125,393

 

120,761

 

Accumulated other comprehensive loss

 

(8,446

)

(8,574

)

Retained earnings

 

535,931

 

468,528

 

Total stockholders’ equity

 

655,943

 

583,772

 

Total liabilities and stockholders’ equity

 

$

923,434

 

$

834,733

 

 

See accompanying notes to consolidated condensed financial statements.

 

3



 

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,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

205,001

 

$

189,399

 

$

539,977

 

$

495,465

 

Cost of goods sold

 

112,256

 

105,877

 

294,529

 

284,540

 

Gross profit

 

92,745

 

83,522

 

245,448

 

210,925

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

61,205

 

53,658

 

163,020

 

141,230

 

Operating income before impairment

 

31,540

 

29,864

 

82,428

 

69,695

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-     

 

-     

 

501

 

900

 

Operating income

 

31,540

 

29,864

 

81,927

 

68,795

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

156

 

125

 

490

 

927

 

Interest expense

 

(2,081

)

(2,146

)

(6,377

)

(8,192

)

Income before income taxes

 

29,615

 

27,843

 

76,040

 

61,530

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

Current

 

2,191

 

2,589

 

7,365

 

3,887

 

Deferred

 

361

 

521

 

(248

)

2,490

 

Net income

 

$

27,063

 

$

24,733

 

$

68,923

 

$

55,153

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

$

0.81

 

$

2.25

 

$

1.83

 

Diluted

 

$

0.86

 

$

0.80

 

$

2.20

 

$

1.79

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

30,644

 

30,357

 

30,640

 

30,110

 

Diluted

 

31,297

 

31,047

 

31,293

 

30,848

 

 

See accompanying notes to consolidated condensed financial statements.

 

4



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (unaudited)

(in thousands)

 

 

Nine Months Ended November 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net cash provided by operating activities:

 

 

 

 

 

Net income

 

$

68,923

 

$

55,153

 

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

 

 

 

 

 

Depreciation and amortization

 

12,415

 

11,436

 

Provision for doubtful receivables

 

69

 

577

 

Share-based compensation

 

1,547

 

1,264

 

Intangible asset impairment charges

 

501

 

900

 

Loss on the sale of property and equipment

 

50

 

33

 

Realized and unrealized gain on investments

 

-    

 

(421

)

Deferred income taxes and tax credits

 

(324

)

2,427

 

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

 

 

 

 

 

Receivables

 

(34,172

)

(41,860

)

Inventories

 

(23,404

)

40,023

 

Prepaid expenses

 

(1,460

)

(1,329

)

Other assets

 

(765

)

(397

)

Accounts payable

 

(901

)

3,789

 

Accrued expenses and other current liabilities

 

13,214

 

24,837

 

Accrued income taxes

 

(2,094

)

1,497

 

Net cash provided by operating activities

 

33,599

 

97,929

 

 

 

 

 

 

 

Net cash used in investing activities:

 

 

 

 

 

Capital, license, trademark, and other intangible expenditures

 

(3,032

)

(3,303

)

Proceeds from the sale of property and equipment

 

63

 

44

 

Proceeds from sale of investments

 

300

 

1,141

 

Payments to acquire businesses

 

(69,000

)

(60,000

)

Net cash used in investing activities

 

(71,669

)

(62,118

)

 

 

 

 

 

 

Net cash used in financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(3,000

)

(78,000

)

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

 

3,284

 

6,059

 

Payment of tax obligations resulting from cashless option exercise

 

-   

 

(7,166

)

Payments for repurchases of common stock

 

(1,799

)

(419

)

Net cash used in financing activities

 

(1,515

)

(79,526

)

Net decrease in cash and cash equivalents

 

(39,585

)

(43,715

)

Cash and cash equivalents, beginning balance

 

110,208

 

102,675

 

Cash and cash equivalents, ending balance

 

$

70,623

 

$

58,960

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

6,208

 

$

8,673

 

Income taxes paid, net of refunds

 

$

9,389

 

$

(2,194

)

Value of common stock received as exercise price of options

 

$

-

 

$

23,261

 

 

See accompanying notes to consolidated condensed financial statements.

 

5



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

November 30, 2010

 

Note 1 - Basis of Presentation

 

In our opinion, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of November 30, 2010 and February 28, 2010, and the results of our consolidated operations for the three- and nine-month periods ended November 30, 2010 and 2009. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2010, and our other reports on file with the Securities and Exchange Commission (“SEC”).  In some cases, we have provided additional information for prior periods in the accompanying notes to consolidated condensed financial statements to conform to the current period’s presentation.  In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us” or “our” refer to Helen of Troy Limited and its subsidiaries.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.”

 

Product and service names mentioned in this report are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions.  The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right.  All trademarks, trade names, service marks and logos referenced herein belong to their respective companies.

 

Note 2 – New Accounting Pronouncements

 

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

 

Note 3 – Litigation

 

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

 

Note 4 – Earnings per Share

 

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

 

6



 

The effect of dilutive securities was approximately 652,600 and 653,900 shares of common stock for the three- and nine-month periods ended November 30, 2010, respectively, and 690,600 and 737,400 shares of common stock for the three- and nine-month periods ended November 30, 2009, respectively.   Options for common stock that were antidilutive totaled approximately 527,700 and 620,500 for the three- and nine-month periods ended November 30, 2010, respectively, and 1,203,400 and 1,521,400 for the three- and nine-month periods ended November 30, 2009, respectively.

 

Note 5 – Comprehensive Income

 

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

 

COMPONENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

Three Months Ended November 30,

 

Nine Months Ended November 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

27,063

 

$

24,733

 

$

68,923

 

$

55,153

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

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

 

860

 

(828

)

118

 

355

 

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

 

(412

)

66

 

17

 

(801

)

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

 

(4

)

(59

)

(7

)

311

 

Comprehensive income, net of tax

 

$

27,507

 

$

23,912

 

$

69,051

 

$

55,018

 

 

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

 

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

(in thousands)

 

 

November 30,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

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

 

$

(7,816

)

$

(7,934

)

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

 

609

 

592

 

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

 

(1,239

)

(1,232

)

Total accumulated other comprehensive loss

 

$

(8,446

)

$

(8,574

)

 

(1)

The change in unrealized loss on interest rate swap cash flow hedges is recorded net of tax expense (benefits) of $0.44 and $0.06 million for the three- and nine-month periods ended November 30, 2010, respectively, and ($0.43) and $0.18 million for the three- and nine-month periods ended November 30, 2009, respectively. The unrealized holding loss on interest rate swap cash flow hedges included in accumulated other comprehensive loss includes net deferred tax benefits of $4.03 and $4.09 million at November 30, 2010 and February 28, 2010, respectively.

 

 

(2)

The change in unrealized gain (loss) on foreign currency cash flow and ordinary hedges is recorded net of tax expense (benefits) of ($0.21) and $0.02 million for the three- and nine-month periods ended November 30, 2010, respectively, and $0.03 and ($0.34) million for the three- and nine-month periods ended November 30, 2009, respectively. The unrealized holding gain on foreign currency cash flow hedges included in accumulated other comprehensive loss, includes net deferred tax expense of $0.26 and $0.24 million at November 30, 2010 and February 28, 2010, respectively.

 

 

(3)

The change in temporary impairment loss on auction rate securities is recorded net of tax expense (benefits) of $0.00 for both the three- and nine-month periods ended November 30, 2010, and ($0.03) and $0.16 million for the three- and nine-month periods ended November 30, 2009, respectively. The temporary impairment loss on auction rate securities included in accumulated other comprehensive loss, includes net deferred tax benefits of ($0.64) and ($0.63) million at November 30, 2010 and February 28, 2010, respectively.

 

7



 

Note 6 – Segment Information

 

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

 

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

 

THREE MONTHS ENDED NOVEMBER 30, 2010 AND 2009

(in thousands)

 

 

Personal

 

 

 

 

 

November 30, 2010

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

146,506

 

$

58,495

 

$

205,001

 

Operating income before impairment

 

18,816

 

12,724

 

31,540

 

Asset impairment charges

 

-    

 

-    

 

-    

 

Operating income

 

18,816

 

12,724

 

31,540

 

Capital, license, trademark and other intangible expenditures

 

299

 

734

 

1,033

 

Depreciation and amortization

 

2,674

 

1,435

 

4,109

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

 

 

November 30, 2009

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

134,206

 

$

55,193

 

$

189,399

 

Operating income before impairment

 

16,591

 

13,273

 

29,864

 

Asset impairment charges

 

-    

 

-    

 

-    

 

Operating income

 

16,591

 

13,273

 

29,864

 

Capital, license, trademark and other intangible expenditures

 

982

 

740

 

1,722

 

Depreciation and amortization

 

2,131

 

1,372

 

3,503

 

 

NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009

(in thousands)

 

 

Personal

 

 

 

 

 

November 30, 2010

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

377,853

 

$

162,124

 

$

539,977

 

Operating income before impairment

 

47,142

 

35,286

 

82,428

 

Asset impairment charges

 

501

 

-    

 

501

 

Operating income

 

46,641

 

35,286

 

81,927

 

Capital, license, trademark and other intangible expenditures

 

1,220

 

1,812

 

3,032

 

Depreciation and amortization

 

7,904

 

4,511

 

12,415

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

 

 

November 30, 2009

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

347,018

 

$

148,447

 

$

495,465

 

Operating income before impairment

 

36,503

 

33,192

 

69,695

 

Asset impairment charges

 

900

 

-    

 

900

 

Operating income

 

35,603

 

33,192

 

68,795

 

Capital, license, trademark and other intangible expenditures

 

1,264

 

2,039

 

3,303

 

Depreciation and amortization

 

7,329

 

4,107

 

11,436

 

 

8



 

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

 

IDENTIFIABLE ASSETS AT NOVEMBER 30, 2010 AND FEBRUARY 28, 2010

(in thousands)

 

 

Personal

 

 

 

 

 

 

 

Care

 

Housewares

 

Total

 

 

 

 

 

 

 

 

 

November 30, 2010

 

$

558,058

 

$

365,376

 

$

923,434

 

February 28, 2010

 

483,106

 

351,627

 

834,733

 

 

Note 7 – Property and Equipment

 

A summary of property and equipment is as follows:

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

Estimated

 

 

 

 

 

 

 

Useful Lives

 

November 30,

 

February 28,

 

 

 

(Years)

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Land

 

-  

 

 

$

9,073

 

$

9,073

 

Building and improvements

 

10 - 40

 

 

65,059

 

65,117

 

Computer and other equipment

 

3 - 10

 

 

46,529

 

46,088

 

Tools, dies and molds

 

1 - 3

 

 

11,489

 

9,573

 

Transportation equipment

 

3 - 5

 

 

153

 

240

 

Furniture and fixtures

 

5 - 15

 

 

8,601

 

8,532

 

Construction in process

 

-  

 

 

1,487

 

1,954

 

Property and equipment, gross

 

 

 

 

142,391

 

140,577

 

Less accumulated depreciation

 

 

 

 

(63,400

)

(58,464

)

Property and equipment, net

 

 

 

 

$

78,991

 

$

82,113

 

 

Depreciation expense was $1.97 and $6.07 million for the three- and nine-month periods ended November 30, 2010, respectively, and $1.95 and $6.89 million for the three- and nine-month periods ended November 30, 2009, respectively.

 

We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2019.  Certain leases contain escalation clauses and renewal or purchase options.  Rent expense related to our operating leases was $0.60 and $1.62 million for the three- and nine-month periods ended November 30, 2010, respectively, and $0.56 and $1.71 million for the three- and nine-month periods ended November 30, 2009, respectively.

 

9


 

 


 

Note 8 – Intangible Assets

 

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

 

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

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2010

 

February 28, 2010

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Description / Life

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

$

81,901

 

$

(46,490

)

$

-

 

$

35,411

 

 

 

$

66,296

 

$

(46,490

)

$

-

 

$

19,806

 

Trademarks - indefinite

 

 

76,203

 

 

 

-

 

76,203

 

 

 

53,054

 

-

 

-

 

53,054

 

Trademarks - finite

 

 

338

 

-

 

(249

)

89

 

 

 

338

 

-

 

(245

)

93

 

Licenses - indefinite

 

 

10,300

 

-

 

-

 

10,300

 

 

 

10,300

 

-

 

-

 

10,300

 

Licenses - finite

 

 

19,564

 

-

 

(15,314

)

4,250

 

 

 

24,196

 

-

 

(19,495

)

4,701

 

Other intangibles - finite

 

 

49,401

 

-

 

(7,560

)

41,841

 

 

 

26,286

 

-

 

(4,049

)

22,237

 

Total Personal Care

 

 

237,707

 

(46,490

)

(23,123

)

168,094

 

 

 

180,470

 

(46,490

)

(23,789

)

110,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

166,131

 

-

 

-

 

166,131

 

 

 

166,131

 

-

 

-

 

166,131

 

Trademarks - indefinite

 

 

75,554

 

-

 

-

 

75,554

 

 

 

75,554

 

-

 

-

 

75,554

 

Other intangibles - finite

 

 

19,786

 

-

 

(9,606

)

10,180

 

 

 

20,845

 

-

 

(9,660

)

11,185

 

Total Housewares

 

 

261,471

 

-

 

(9,606

)

251,865

 

 

 

262,530

 

-

 

(9,660

)

252,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

499,178

 

$

(46,490

)

$

(32,729

)

$

419,959

 

 

 

$

443,000

 

$

(46,490

)

$

(33,449

)

$

363,061

 

 

Intangible asset activity for the nine month period ended November 30, 2010 was as follows:

 

·                  Personal Care segment: During the three month period ended May 31, 2010, we recorded $63.13 million of intangible assets, net of certain acquisition adjustments, in connection with our acquisition of the Pert Plus and Sure products business (as discussed further in Note 9), and a non-cash impairment charge of $0.50 million against the carrying value of an indefinite-lived trademark.  During the three- and nine-month periods ended November 30, 2010, we recorded $0.00 and $0.24 million, respectively, in acquisition adjustment reductions related to the Pert Plus and Sure products business. In addition, during nine month period ended November 30, 2010, we recorded adjustments to remove certain fully amortized license agreements and other intangibles with a combined gross carrying value of $5.39 million.

 

·                  Housewares segment:  During the three- and nine-month periods ended November 30, 2010, we recorded adjustments to remove certain fully amortized patents having a gross carrying value of $0.05 and $0.91 million, respectively. During the three- and nine-month periods ended November 30, 2010, we recorded

 

10



 

adjustments to remove certain fully amortized other intangibles with a gross carrying value of $0.00 and  $0.59 million, respectively.  We also recorded new patent development costs of $0.15 and $0.45 million for the three- and nine-month periods ended November 30, 2010, respectively.

 

The following table summarizes the amortization expense attributable to intangible assets for the three- and nine-month periods ended November 30, 2010 and 2009, as well as our estimated amortization expense for the fiscal years ending the last day of each February 2011 through 2016.

 

AMORTIZATION OF INTANGIBLE ASSETS

 

(in thousands)

 

 

 

Aggregate Amortization Expense

For the three months ended

 

 

 

November 30, 2010

 

$

2,086

 

November 30, 2009

 

$

1,496

 

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the nine months ended

 

 

 

November 30, 2010

 

$

6,177

 

November 30, 2009

 

$

4,281

 

 

 

 

 

Estimated Amortization Expense

 

 

 

For the fiscal years ended

 

 

 

February 2011

 

$

8,195

 

February 2012

 

$

8,053

 

February 2013

 

$

8,020

 

February 2014

 

$

7,555

 

February 2015

 

$

7,479

 

February 2016

 

$

7,295

 

 

11



 

NOTE 9 - Acquisitions

 

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

 

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

 

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

 

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

 

(in thousands)

 

 

 

Receivables

 

$

8,589

 

Inventory

 

4,887

 

Prepaid expenses

 

392

 

Tools, dies and molds

 

730

 

Goodwill

 

15,845

 

Trademarks

 

23,650

 

Patent rights

 

2,600

 

Customer list

 

21,275

 

Total assets acquired

 

77,968

 

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

 

(8,968

)

Net assets acquired

 

$

69,000

 

 

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

 

12



 

The impact of the Pert Plus and Sure acquisition on the Company’s consolidated condensed statements of income from the acquisition date through the three- and nine-month periods ended November 30, 2010 was as follows:

 

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

March 31, 2010 (Acquisition Date) through November 30, 2010

(in thousands, except per share data)

 

 

 

 

Periods Ended November 30, 2010

 

 

 

 

Three Months

 

Nine Months

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

$

17,593

 

$

48,422

 

Net income

 

 

3,469

 

9,504

 

 

 

 

 

 

 

 

Earning per share impact

 

 

 

 

 

 

Basic

 

 

$

0.11

 

$

0.31

 

Diluted

 

 

$

0.11

 

$

0.30

 

 

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

 

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

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

(in thousands, except per share data)

 

 

Three Months Ended November 30,

 

Nine Months Ended November 30,

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

 

$

205,001

 

$

206,061

 

 

 

$

545,608

 

$

549,400

 

Net income

 

 

27,063

 

28,252

 

 

 

70,020

 

66,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning per share impact

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.88

 

$

0.93

 

 

 

$

2.29

 

$

2.21

 

Diluted

 

 

$

0.86

 

$

0.91

 

 

 

$

2.24

 

$

2.15

 

 

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

 

INFUSIUM 23 - BRAND ASSETS ACQUIRED ON MARCH 31, 2009

 

(in thousands)

 

 

 

Goodwill

 

$

19,700

 

Trademarks

 

18,700

 

Patent rights

 

600

 

Customer list

 

21,000

 

Total assets acquired

 

$

60,000

 

 

13



 

Note 10 – Short Term Debt

 

In June 2004, we entered into a Revolving Line of Credit Agreement (the “2004 RCA”) with Bank of America, N.A. that provides for a total revolving commitment of up to $50 million.  Borrowings under the 2004 RCA accrued interest at a “Base Rate” plus a margin of 0.25 to 0.75 percent based on the Leverage Ratio (as defined in the 2004 RCA) at the time of borrowing.  The base rate is equal to the highest of the Federal Funds Rate (as defined in the 2004 RCA) plus 0.50 percent, Bank of America’s prime rate, or the one month LIBOR rate plus 1 percent.  Alternatively, if we elected, borrowings accrued interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 1.25 to 1.75 percent based upon the Leverage Ratio at the time of the borrowing. We incured loan commitment fees at a rate of 0.20 percent per annum on the unused balance of the 2004 RCA and letter of credit fees at a rate of 1.25 percent per annum on the face value of any letter of credit. Outstanding letters of credit reduced the borrowing availability dollar for dollar.  As of November 30, 2010, there were no revolving loans and $0.20 million of open letters of credit outstanding against this facility.

 

The 2004 RCA contained certain covenants and formulas that limited our outstanding indebtedness from all sources (less unrestricted cash on hand in excess of $15 million) to no more than 3.0 times the latest twelve months’ trailing EBITDA. The 2004 RCA was unconditionally guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited and certain subsidiaries.  As with our other debt agreements, the 2004 RCA restricted us, among other things, from incurring liens on any of our properties, except under certain conditions, and limited our ability to repurchase shares of our common stock.  As of November 30, 2010, we were in compliance with the terms of the 2004 RCA and our other debt agreements.

 

On December 31, 2010, we terminated the 2004 RCA and, in connection with our acquisition of Kaz, Inc. (“Kaz”), we entered into a new Revolving Line of Credit Agreement (the “2010 RCA”) with Bank of America, N.A.  We also entered into a Term Loan Credit Agreement with Bank of America, N.A. on December 30, 2010.  For further information about these subsequent events, see Note 18.

 

Note 11 – Accrued Expenses and Current Liabilities

 

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

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

 

 

November 30,

 

February 28,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Accrued defectives, discounts and allowances

 

$

26,579

 

$

20,758

 

Accrued compensation

 

16,802

 

17,888

 

Accrued advertising

 

12,322

 

6,862

 

Accrued interest

 

1,337

 

1,339

 

Accrued royalties

 

4,716

 

3,612

 

Accrued professional fees

 

1,486

 

730

 

Accrued benefits and payroll taxes

 

1,696

 

1,170

 

Accrued freight

 

2,545

 

1,398

 

Accrued property, sales and other taxes

 

3,959

 

879

 

Derivative liabilities, current

 

4,222

 

4,951

 

Other

 

6,404

 

7,702

 

Total accrued expenses and other current liabilities

 

$

82,068

 

$

67,289

 

 

14



 

Note 12 – Income Taxes

 

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

 

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

 

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

 

Note 13 – Long-Term Debt

 

A summary of long-term debt is as follows:

 

LONG-TERM DEBT

(dollars in thousands)

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

Interest

 

Interest

 

 

 

November 30,

 

February 28,

 

 

 

Borrowed

 

Rates

 

Matures

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

07/97

 

7.24%

 

07/12

 

$

6,000

 

$

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

06/04

 

5.89%

 

06/11

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

06/04

 

6.01%

 

06/14

 

75,000

 

75,000

 

Total long-term debt

 

 

 

 

 

 

 

131,000

 

134,000

 

Less current maturities of long-term debt

 

 

 

 

 

 

 

(53,000

)

(3,000

)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

$

78,000

 

$

131,000

 

 

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

 

All of our long-term debt is unconditionally guaranteed by the parent company, Helen of Troy Limited and/or certain subsidiaries on a joint and several basis.  Our debt agreements require the maintenance of certain maximum debt leverage and interest coverage ratios, specify minimum consolidated net worth levels and contain other customary covenants. Additionally, among other things, our debt agreements restrict us from incurring liens

 

15



 

on any of our properties, except under certain conditions, and limit our ability to repurchase our common stock.  As of November 30, 2010, we were in compliance with the terms of these agreements.

 

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

 

INTEREST EXPENSE

(in thousands)

 

 

Three Months Ended November 30,

 

Nine Months Ended November 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Interest and commitment fees

 

$

534

 

$

601  

 

$

1,704

 

$

2,917

 

Deferred finance costs

 

57

 

61  

 

171

 

272

 

Interest rate swap settlements, net

 

1,490

 

1,484  

 

4,502

 

5,003

 

Total interest expense

 

$

2,081

 

$

2,146  

 

$

6,377

 

$

8,192

 

 

16


 


 

Note 14 – Fair Value

 

The following tables present the fair value hierarchy of our financial assets and liabilities carried at fair value or measured for disclosure purposes on a recurring basis as of November 30, 2010 and February 28, 2010:

 

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

(in thousands)

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets

 

Observable

 

Unobservable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Inputs

 

Description

 

November 30, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

15,852

 

$

15,852

 

$

-    

 

$

-    

 

Commercial paper

 

8,640

 

8,640

 

-    

 

-    

 

Auction rate securities

 

20,223

 

-    

 

-    

 

20,223

 

Foreign currency contracts

 

755

 

-    

 

755

 

-    

 

Total assets

 

$

45,470

 

$

24,492

 

$

755

 

$

20,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

6,412

 

$

-    

 

$

6,412

 

$

-    

 

Long-term debt - floating rate (1)

 

125,000

 

-    

 

125,000

 

-    

 

Interest rate swaps

 

11,843

 

-    

 

11,843

 

-    

 

Total liabilities

 

$

143,255

 

$

-    

 

$

143,255

 

$

-    

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets

 

Observable

 

Unobservable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Inputs

 

Description

 

February 28, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

14,099

 

$

14,099

 

$

-    

 

$

-    

 

Commercial paper

 

88,822

 

88,822

 

-    

 

-    

 

Auction rate securities

 

20,534

 

-    

 

-    

 

20,534

 

Foreign currency contracts

 

795

 

-    

 

795

 

-    

 

Total assets

 

$

124,250

 

$

102,921

 

$

795

 

$

20,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

9,600

 

$

-    

 

$

9,600

 

$

-    

 

Long-term debt - floating rate (1)

 

125,000

 

-    

 

125,000

 

-    

 

Interest rate swaps

 

12,021

 

-    

 

12,021

 

-    

 

Total liabilities

 

$

146,621

 

$

-    

 

$

146,621

 

$

-    

 

 

 

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

 

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

 

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

 

17



 

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of debt requires the use of a discount rate based upon current market rates of interest for debt with comparable remaining terms.  Such comparable rates are considered significant other observable market inputs. The fair market value of the fixed rate debt at November 30, 2010 was computed using a discounted cash flow analysis and discount rate of 1.85 percent.  All other long-term debt has floating interest rates and its book value approximates its fair value as of the reporting date.

 

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

 

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

 

The table below presents a reconciliation of our ARS measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three- and nine-month periods ended November 30, 2010:

 

FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS (Level 3)

(in thousands)

 

 

 

Periods Ended November 30, 2010

 

 

 

Three Months

 

Nine Months

 

 

 

 

 

 

 

Balance at beginning of period

 

$

20,330

 

$

20,534

 

Total gains (losses):

 

 

 

 

 

Included in other comprehensive income - unrealized

 

(7

)

(11

)

Sales at par

 

(100

)

(300

)

Balance at end of period

 

$

20,223

 

$

20,223

 

 

 

 

 

 

 

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

 

 

 

$

(1,239

)

 

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

 

Note 15 – Financial Instruments and Risk Management

 

Foreign currency risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the three- and nine-month periods ended November 30, 2010, approximately 16 and 13 percent, respectively, of our net sales revenue were in foreign currencies. During the three- and nine-month periods ended November 30, 2009, approximately 16 and 15 percent, respectively, of our net sales revenue were in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Chilean Pesos, Peruvian Soles and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable,

 

18



 

deferred tax assets and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses are recognized in SG&A. For the three- and nine-month periods ended November 30, 2010, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of $0.40 and $0.49 million, respectively, in SG&A and ($0.05) and $0.09 million, respectively, in income tax expense. For the three- and nine-month periods ended November 30, 2009, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of $0.14 and $3.43 million, respectively, in SG&A and ($0.02) and $0.10 million, respectively, in income tax expense.

 

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

 

Venezuela has recently experienced currency instability driven by a highly inflationary economy, government restrictions on cash transfers out of the country and a recent devaluation.  Our method of foreign currency translation has always required us to remeasure foreign monetary assets at the current exchange rates with all exchange gains or losses recognized in our income statement.  The exchange rate we use to remeasure Venezuelan activity is currently the official exchange rate of 4.30 Bolivares Fuertes to $1.00.  At November 30, 2010, the Company included in its consolidated condensed balance sheet $3.94 million in total assets and $3.27 million in net assets from its Venezuelan operations.  Net assets are primarily working capital.  It is unclear to us whether the current restrictions on transfers of cash out of Venezuela is other than temporary; however, we believe it appropriate to classify these assets and liabilities as current items in our consolidated condensed balance sheets since they support current operations within the country.

 

Interest rate risk – Interest on our long-term debt outstanding as of November 30, 2010 is both floating and fixed. Fixed rates are in place on $6 million of Senior Notes at 7.24 percent and floating rates are in place on $125 million of Senior Notes, which reset as described in Note 13, and have been effectively converted to fixed rate debt using interest rate swaps, as described below.

 

We manage our floating rate debt using interest rate swaps (the “swaps”). As of November 30, 2010, we had two swaps that converted an aggregate notional principal of $125 million from floating interest rate payments under our 7- and 10-year Senior Notes to fixed interest rate payments at 5.89 and 6.01 percent, respectively. In the swap transactions, we maintain two contracts to pay fixed rates of interest on an aggregate notional principal amount of $125 million at rates of 5.04 and 5.11 percent on our 7- and 10-year Senior Notes, respectively, while simultaneously receiving floating rate interest payments set at 0.29 percent as of November 30, 2010 on the same notional amounts. The fixed rate side of the swap will not change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap fully offset the change in any period of the underlying debt’s floating rate payments. These swaps are used to reduce the Company’s risk of increased interest costs; however, when interest rates drop significantly below the swap rates, we lose the benefit that our floating rate debt would provide, if not managed with swaps. The swaps are considered highly effective.

 

19



 

The following tables summarize the fair values of our various derivative instruments at November 30, 2010 and February 28, 2010:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS IN THE CONSOLIDATED BALANCE SHEETS

(in thousands)

November 30, 2010

Designated as hedging instruments

 

Hedge Type

 

Final
Settlement
Date

 

Notional
Amount

 

Derivative
Assets,
Current

 

Derivative
Assets,
Noncurrent

 

Accrued
Expenses
and Other
Current
Liabilities

 

Derivative
Liabilities,
Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2012

 

£

10,700

 

$

355

 

$

156

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2011

 

$

8,000

 

80

 

43

 

-

 

-

 

Currency contracts - sell Euros

 

Cash flow

 

2/2012

 

7,000

 

121

 

-

 

-

 

-

 

Subtotal

 

 

 

 

 

 

 

556

 

199

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,222

 

7,621

 

Total fair value

 

 

 

 

 

 

 

$

556

 

$

199

 

$

4,222

 

$

7,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2010

Designated as hedging instruments

 

Hedge Type

 

Final
Settlement
Date

 

Notional
Amount

 

Derivative
Assets,
Current

 

Derivative
Assets,
Noncurrent

 

Accrued
Expenses
and Other
Current
Liabilities

 

Derivative
Liabilities,
Noncurrent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - sell Pounds

 

Cash flow

 

2/2011

 

£

5,000

 

$

651

 

$

-

 

$

-

 

$

-

 

Currency contracts - sell Canadian

 

Cash flow

 

12/2010

 

$

6,000

 

144

 

-

 

-

 

-

 

Subtotal

 

 

 

 

 

 

 

795

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Cash flow

 

6/2014

 

$

125,000

 

-

 

-

 

4,951

 

7,070

 

Total fair value

 

 

 

 

 

 

 

$

795

 

$

-   

 

$

4,951

 

$

7,070

 

 

The pre-tax effect of derivative instruments for the three- and nine-month periods ended November 30, 2010 and 2009 is as follows:

 

PRE TAX EFFECT OF DERIVATIVE INSTRUMENTS

(in thousands)

 

 

Three Months Ended November 30,

 

 

 

Gain \ (Loss)
Recognized in OCI
(effective portion)

 

Gain \ (Loss) Reclassified
from Accumulated Other
Comprehensive Loss into Income

 

Gain \ (Loss) Recognized
as Income (1)

 

 

 

2010

 

2009

 

Location

 

2010

 

2009

 

Location

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency contracts - ordinary and