XNAS:RDEN Elizabeth Arden Inc Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

For the fiscal year ended June 30, 2012

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 1-6370

 

 

Elizabeth Arden, Inc.

(Exact name of registrant as specified in its charter)

 

Florida   59-0914138

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2400 SW 145th Avenue, Miramar, Florida   33027
(Address of principal executive offices)   (Zip Code)

(954) 364-6900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Security

 

Name of Exchange on Which Registered

Elizabeth Arden Common Stock, $.01 par value per share   Nasdaq Global Select Market

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ¨

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 definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    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 Act).    Yes  ¨    No  x

The aggregate market value of voting Common Stock held by non-affiliates of the registrant was approximately $787 million based on the closing price of the Common Stock on the NASDAQ Global Select Market of $37.35 per share on December 31, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, based on the number of shares outstanding on that date less the number of shares held by the registrant’s directors, executive officers and holders of at least 10% of the outstanding shares of Common Stock.

As of August 10, 2012, the registrant had 29,436,521 shares of Common Stock outstanding.

 

 

Documents Incorporated by Reference

Portions of the Registrant’s definitive proxy statement relating to its 2012 Annual Meeting of Shareholders, to be filed no later than 120 days after the end of the Registrant’s fiscal year ended June 30, 2012, are hereby incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

ELIZABETH ARDEN, INC.

TABLE OF CONTENTS

 

          Page

Part I

  

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   12

Item 1B.

  

Unresolved Staff Comments

   19

Item 2.

  

Properties

   19

Item 3.

  

Legal Proceedings

   19

Item 4.

  

Mine Safety Disclosures

   20

Part II

  

Item 5.

  

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   20

Item 6.

  

Selected Financial Data

   22

Item 7.

  

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

   24

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   42

Item 8.

  

Financial Statements and Supplementary Data

   43

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   79

Item 9A.

  

Controls and Procedures

   79

Item 9B.

  

Other Information

   79

Part III

  

Item 10.

  

Directors, Executive Officers and Corporate Governance

   80

Item 11.

  

Executive Compensation

   80

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   80

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   80

Item 14.

  

Principal Accounting Fees and Services

   80

Part IV

  

Item 15.

  

Exhibits, Financial Statement Schedules

   81

Signatures

   84

 

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PART I

 

ITEM 1. BUSINESS

General

Elizabeth Arden, Inc. is a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our extensive product portfolio includes the following:

 

Elizabeth Arden Brand    The Elizabeth Arden skin care brands: Visible Difference, Ceramide, Prevage, and Eight Hour Cream, Elizabeth Arden branded lipstick, foundation and other color cosmetics products, and the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, and Elizabeth Arden green tea
Celebrity Fragrances    The fragrance brands of Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift, Justin Bieber, Nicki Minaj and Usher
Lifestyle Fragrances    Curve, Giorgio Beverly Hills, PS Fine Cologne and White Shoulders
Designer Fragrances    Juicy Couture, Alfred Sung, BCBGMAXAZRIA, Ed Hardy, Geoffrey Beene, Halston, John Varvatos, Kate Spade New York, Lucky, Rocawear and True Religion

In addition to our owned and licensed fragrance brands, we distribute approximately 250 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

We sell our prestige beauty products to retailers and other outlets in the United States and internationally, including;

 

   

U.S. department stores and specialty stores such as Macy’s, Dillard’s, Ulta, Belk, Sephora, Saks, Bloomingdales and Nordstrom;

 

   

U.S. mass retailers such as Wal-Mart, Target, Kohl’s, Walgreens, CVS, and Marmaxx; and

 

   

International retailers such as Boots, Debenhams, Superdrug Stores, The Perfume Shop, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas and various travel retail outlets such as Nuance, Heinemann and World Duty Free.

In the United States, we sell our Elizabeth Arden skin care and cosmetics products primarily in prestige department stores and our fragrances in department stores and mass retailers. We also sell our Elizabeth Arden fragrances, skin care and cosmetics products and other fragrance lines in approximately 120 countries worldwide through perfumeries, boutiques, department stores and travel retail outlets, such as duty free shops and airport boutiques, as well as through our Elizabeth Arden branded retail outlet stores and our website.

At June 30, 2012, our operations were organized into the following two operating segments, which also comprise our reportable segments:

 

   

North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including our Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes our direct to consumer business, which is composed of our Elizabeth Arden branded retail outlet stores and global e-commerce business. This segment also sells our Elizabeth Arden products through the Red Door beauty salons, which are owned and operated by an unrelated third party that licenses the Elizabeth Arden and Red Door trademarks from us for use in its salons.

 

   

International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, in approximately 120 countries outside of North America to perfumeries, boutiques, department stores, travel retail outlets and distributors.

 

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In light of the repositioning of the Elizabeth Arden brand and our early October 2012 target for completing the initial roll-out of the repositioning, commencing with the first quarter of fiscal 2013, we will disclose financial information relating to the following product categories: the Elizabeth Arden Brand (skin care, cosmetics and fragrances) and Celebrity, Lifestyle, Designer and Other Fragrances, in addition to our current segment reporting.

Financial information relating to our reportable segments is included in Note 18 to the Notes to Consolidated Financial Statements.

Our net sales to customers in the United States and in foreign countries (in U.S. dollars) and net sales as a percentage of consolidated net sales for the years ended June 30, 2012, 2011 and 2010, are listed in the following chart:

 

     Year Ended June 30,  
     2012     2011     2010  
(Amounts in millions)    Sales      %     Sales      %     Sales      %  

United States

   $ 718.9         58   $ 701.6         60   $ 670.3         61

Foreign

     519.4         42     473.9         40     433.5         39
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,238.3         100   $ 1,175.5         100   $ 1,103.8         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our largest foreign countries in terms of net sales for the years ended June 30, 2012, 2011 and 2010, are listed in the following chart:

 

     Year Ended June 30,  
(Amounts in millions)    2012      2011      2010  

United Kingdom

   $ 71.7       $ 69.9       $ 70.3   

Canada

     45.1         40.0         33.9   

Australia

     40.2         40.0         38.2   

South Africa

     25.5         24.5         21.1   

Spain

     17.7         19.3         19.3   

China

     14.6         17.7         20.4   

The financial results of our international operations are subject to volatility due to fluctuations in foreign currency exchange rates, inflation, disruptions in travel and changes in political and economic conditions in the countries in which we operate. The value of our international assets is also affected by fluctuations in foreign currency exchange rates. For information on the breakdown of our long-lived assets in the United States and internationally, and risks associated with our international operations, see Note 18 to the Notes to Consolidated Financial Statements.

Our principal executive offices are located at 2400 S.W. 145th Avenue, Miramar, Florida 33027, and our telephone number is (954) 364-6900. We maintain a website with the address www.elizabetharden.com. We are not including information contained on our website as part of, nor incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with or furnish such material to the Securities and Exchange Commission.

Information relating to corporate governance at Elizabeth Arden, Inc., including our Corporate Governance Guidelines and Principles, Code of Ethics for Directors and Executive and Finance Officers, Code of Business Conduct and charters for our Lead Independent Director, the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, is available on our website under the section “Corporate-Investor Relations - Corporate Governance.” We will provide the foregoing information without charge upon written request to Secretary, Elizabeth Arden, Inc., 2400 S.W. 145th Avenue, Miramar, FL 33027.

Business Strategy

Our business strategy is currently focused on two primary initiatives: the global repositioning of the Elizabeth Arden brand and expanding the market penetration of our prestige fragrance portfolio in international markets, especially in the large European fragrance market. We also intend to continue to expand the prestige fragrance category at mass retail customers in North America. We expect these initiatives to contribute to increases in net sales, operating margins and earnings as well as working capital efficiency and return on invested capital. We believe that our focus on organic growth opportunities for our existing brands, new licensing opportunities and acquisitions, and new product innovation will assist us in achieving these goals.

 

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We believe the Elizabeth Arden brand is one of the most widely recognized beauty brands in the world. Over the last 18 months, we have been engaged in a repositioning of the Elizabeth Arden brand that emphasizes the following critical attributes of the Elizabeth Arden brand: (i) the progressive and innovative spirit of Elizabeth Arden herself, (ii) the brand’s New York City roots, and (iii) the brand’s Red Door Spa heritage. We recently commenced the roll-out of this comprehensive brand repositioning, which is designed to honor the heritage of the brand while modernizing the brand’s presentation. The brand repositioning includes improved product formulation, package redesign and counter redesign as well as SKU rationalization. We began shipping the new product assortment to retailers in June 2012 and expect to replace certain high-priority retail counters with the new counters by early October 2012. The new counter design is intended to bring key aspects of the Elizabeth Arden and Red Door Spa brand equities to the retail environment to create a more uniform, modern and engaging shopping experience. The rollout will continue throughout fiscal year 2013 and beyond. As we proceed with the Elizabeth Arden brand repositioning, we also intend to continue to invest behind and grow this brand on a global basis by continuing to (i) improve market share in existing developed markets, (ii) expand in high-growth markets, such as Asia, and in developing markets, and (iii) innovate in skin care and color cosmetic products based on new technologies.

During fiscal 2012, we also continued to implement our key initiative to expand our market share for fragrances in Western Europe. We believe the Western European fragrance market offers opportunities for us to expand the sales of our fragrance portfolio. We also believe many of our fragrance brands, including our Elizabeth Arden fragrances and the Juicy Couture, Britney Spears, and John Varvatos fragrance brands, as well as certain of our recently acquired fragrance brands such as Justin Bieber and Ed Hardy, resonate well with retailers and consumers in those markets. A significant part of our focus during fiscal 2012 was in the German and UK markets. In fiscal 2013 we will continue to work towards developing strong partnerships with leading retailers in those countries and focus on markets in some of the other European countries, as well as our travel retail and distributor markets.

During fiscal 2012, we again increased our already sizeable market share in the prestige fragrance category with mass retailers in North America. We continue to work closely with our mass retail customers and nationally recognized merchandising and advertising companies to develop and implement a variety of marketing and product merchandising initiatives intended to improve the shopping experience for mass retail fragrance shoppers and expand this category at these retailers.

During fiscal 2012, we also improved our gross margins by 190 basis points over fiscal 2011. The gross margin was impacted by $4.9 million, or 40 basis points, of inventory-related costs primarily associated with our May and June 2012 acquisitions. See “Recent License Agreements and Acquisitions” and Note 1, under Item 6, “Selected Financial Data” for further information on acquisitions. Moving into fiscal 2013, we expect our gross margins to improve an additional 85 to 110 basis points over our fiscal 2012 gross margins. We also expect our gross margin in fiscal 2013 will be impacted by approximately 130 basis points for costs associated with the Elizabeth Arden brand repositioning and the 2012 acquisitions, which represents a year over year anticipated net impact on our gross margin of 90 basis points related to these costs. We continue to focus on (i) expanding gross margins through increased focus on product mix, improved pricing and reduced sales dilution, (ii) improving our sales and operations planning processes and our supply chain and logistics efficiency and, (iii) leveraging our overhead structure by increasing sales of our International segment.

Recent License Agreements and Acquisitions

During fiscal 2012, we amended our long-term license agreement with Liz Claiborne, Inc. and certain of its affiliates to acquire all of the U.S. and international trademarks for the Curve fragrance brands, as well as trademarks for certain other smaller fragrance brands. The amendment established a lower effective royalty rate for the remaining licensed fragrance brands, including Juicy Couture and Lucky Brand fragrances, reduced the future minimum guaranteed royalties for the term of the license, and required a pre-payment of royalties for the remainder of calendar 2011.

In May 2012, we acquired the global licenses and certain assets, including inventory, related to the Ed Hardy, True Religion and BCBGMAXAZRIA fragrance brands from New Wave Fragrances, LLC. Prior to the acquisition, we had been acting as a distributor of the Ed Hardy, True Religion and BCBGMAXAZRIA fragrances to certain mid-tier and mass retailers in North America. Originally introduced in 2008 and inspired by the tattoo art of Don Ed Hardy, the Ed Hardy fragrance portfolio includes the Love & Luck, Hearts & Daggers and Ed Hardy Born Wild men’s and women’s fragrances. The True Religion fragrance launched in U.S. department stores in October 2008 and has now expanded to a portfolio of brands, including Drifter and Hippie Chic, and the BCBGMAXAZRIA women’s fragrance recently launched in the fall of 2011 in U.S. department stores.

 

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In June 2012, we also acquired the global licenses and certain assets related to the Justin Bieber and Nicki Minaj fragrance brands, including the inventory of the Justin Bieber fragrances, from Give Back Brands LLC. Someday, the first fragrance from internationally acclaimed recording artist Justin Bieber, launched in Spring 2011 and became the number one women’s fragrance launch of 2011 in U.S. department stores, according to the NPD Group. The second fragrance in this brand franchise, Justin Bieber’s Girlfriend, is launching in U.S. department stores in the summer of 2012. The first fragrance from Nicki Minaj is scheduled to launch in U.S. department stores in the fall of 2012.

For further information on the acquisitions, please see Note 11 to the Notes to Consolidated Financial Statements.

Products

Our net sales of products and net sales of products as a percentage of consolidated net sales for the years ended June 30, 2012, 2011 and 2010, are listed in the following chart:

 

     Year Ended June 30,  
     2012     2011     2010  
(Amounts in millions)    Sales      %     Sales      %     Sales      %  

Fragrance

   $ 941.9         76   $ 900.3         76   $ 854.0         77

Skin Care

     226.4         18     207.1         18     183.0         17

Cosmetics

     70.0         6     68.1         6     66.8         6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,238.3         100   $ 1,175.5         100   $ 1,103.8         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Fragrance. We offer a wide variety of fragrance products for both men and women, including perfume, colognes, eau de toilettes, eau de parfums, body sprays and gift sets. Our fragrances are classified into the Elizabeth Arden branded fragrances, celebrity branded fragrances, designer branded fragrances, and lifestyle fragrances. Each fragrance is sold in a variety of sizes and packaging assortments. In addition, we sell bath and body products that are based on the particular fragrance to complement the fragrance lines, such as soaps, deodorants, body lotions, gels, creams and dusting powders. We sell fragrance products worldwide, primarily to department stores, mass retailers, perfumeries, boutiques, distributors and travel retail outlets. We tailor the size and packaging of the fragrance to suit the particular target customer.

Skin Care. Our skin care lines are sold under the Elizabeth Arden name and include products such as moisturizers, creams, lotions and cleansers. Our core Elizabeth Arden branded products include the Visible Difference, Ceramide, Prevage, and Eight Hour Cream lines. In connection with our Elizabeth Arden brand repositioning, we have introduced a complete line of essential skin care products under the Visible Difference brand, which serves as our entry price point line for the Elizabeth Arden skin care products. Our Ceramide skin care line targets women who are 40 and over. Prevage is our premium cosmeceutical skin care line. Our Eight Hour Cream franchise has a strong international following. We sell skin care products worldwide, primarily in prestige department and specialty stores, perfumeries and travel retail outlets.

Cosmetics. We offer a variety of cosmetics under the Elizabeth Arden name, including foundations, lipsticks, mascaras, eye shadows and powders. We offer these products in a wide array of shades and colors. The largest component of our cosmetics business is foundations, which we market in conjunction with our skin care products. As part of the Elizabeth Arden brand repositioning, our entire line of cosmetics has been repackaged to emphasize the modernization and luxury of the brand. We sell our cosmetics internationally and in the United States, primarily in prestige department and specialty stores, perfumeries and travel retail outlets.

Trademarks, Licenses, Patents and Other Intellectual Properties

We own or have rights to use the trademarks and other intellectual properties necessary for the manufacturing, marketing, distribution and sale of numerous fragrance, cosmetic and skin care brands, including Elizabeth Arden’s Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden Visible Difference, and Prevage among others. These trademarks are registered or have pending applications in the United States and in certain of the countries in which we sell these product lines. We consider the protection of our trademarks to be important to our business.

 

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We are the exclusive worldwide trademark licensee for a number of fragrance brands including:

 

   

the Britney Spears fragrances curious Britney Spears, fantasy Britney Spears, midnight fantasy Britney Spears, Britney Spears believe, radiance Britney Spears and cosmic radiance Britney Spears;

 

   

the Elizabeth Taylor fragrances White Diamond, Elizabeth Taylor’s Passion and Violet Eyes Elizabeth Taylor;

 

   

the Mariah Carey fragrances M by Mariah Carey, Luscious Pink, Forever, Lollipop Bling and Lollipop Splash;

 

   

the Usher fragrances He, She, UR for Men, UR for Women and Usher VIP;

 

   

the Lucky fragrances;

 

   

the Juicy Couture fragrances Juicy Couture, Viva la Juicy, Couture Couture, and Peace, Love & Juicy Couture;

 

   

the Giorgio fragrances Giorgio Beverly Hills and Giorgio Red;

 

   

the Taylor Swift fragrance Wonderstruck;

 

   

the Justin Bieber fragrances Someday and Justin Bieber’s Girlfriend;

 

   

the Ed Hardy fragrances Ed Hardy, Ed Hardy Hearts & Daggers and Ed Hardy Love & Luck;

 

   

the John Varvatos fragrances John Varvatos, John Varvatos Vintage, John Varvatos Artisan and John Varvatos Star USA; and

 

   

the designer fragrance brands of Alfred Sung, BCBGMAXAZRIA, Geoffrey Beene, Kate Spade New York and True Religion,

The Elizabeth Taylor license agreement terminates in October 2022 and is renewable by us, at our sole option, for unlimited 20-year periods. The Britney Spears license terminates in December 2014 and is renewable at our option for another five-year term if certain sales targets are achieved. The license agreement with Liz Claiborne Inc. and its affiliates relating to the Liz Claiborne and Juicy Couture fragrances terminates in December 2017 and is renewable by us for two additional five-year terms, provided specified conditions, including certain sales targets, are met. Our other license agreements have terms with expirations ranging from 2012 to 2031, and, typically, have renewal terms dependent on sales targets being achieved. Many of our license agreements are subject to our obligation to make required minimum royalty payments, minimum advertising and promotional expenditures and/or, in some cases, meet minimum sales requirements.

We also have the right under various exclusive distributor and license agreements and other arrangements to distribute other fragrances in various territories and to use the trademarks of third parties in connection with the sale of these products.

Certain of our skin care and cosmetic products, including the Prevage skin care line, incorporate patented or patent-pending formulations. In addition, several of our packaging methods, packages, components and products are covered by design patents, patent applications and copyrights. Substantially all of our trademarks and patents are held by us or by one of our wholly-owned United States subsidiaries.

Sales and Distribution

We sell our prestige beauty products to retailers in the United States, including department stores such as Macy’s, Dillard’s, Saks, Belk, Bloomingdales and Nordstrom; specialty stores such as Ulta and Sephora; and mass retailers such as Wal-Mart, Target, Kohl’s, Walgreens, CVS and Marmaxx; and to international retailers such as Boots, Debenhams, Superdrug Stores, The Perfume Shop, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas and various travel retail outlets such as Nuance, Heinemann and World Duty Free. We also sell products to independent fragrance, cosmetic, gift and other stores. We currently sell our skin care and cosmetics products in North America primarily in prestige department and specialty stores. We also sell our fragrances, skin care and cosmetic products in approximately 120 other countries worldwide primarily through department stores, perfumeries, pharmacies, specialty retailers, and other retail shops and “duty free” and travel retail locations. In certain countries, we maintain a dedicated sales force that solicits orders and provides customer service. In other countries and jurisdictions, we sell our products through local distributors or sales representatives under contractual arrangements. We manage our operations outside of North America from our offices in Geneva, Switzerland.

 

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We also sell our Elizabeth Arden products in a number of outlet stores throughout the United States in which we also sell several of our other products. Our owned products are also marketed and sold through our e-commerce site at www.elizabetharden.com. In addition, our Elizabeth Arden products are sold in Red Door beauty salons, which are owned and operated by an unrelated third party. In addition to the sales price of our products sold to the operator of these salons, we receive a royalty based on the net sales from each of the salons for the use of the “Elizabeth Arden” and “Red Door” trademarks.

Our sales personnel are organized by geographic market and by customer account. In addition, in North America, we have sales personnel who routinely visit prestige retailers to assist in the merchandising, layout and stocking of selling areas. For many of our mass retailers in the United States and Canada, we sell basic products in customized packaging designed to deter theft and permit the products to be sold in open displays. Our fulfillment capabilities enable us to reliably process, assemble and ship small orders, as well as large orders, on a timely basis. In the United States and Canada, we use this ability to assist our customers in their retail distribution by shipping in multiple formats including “cross dock shipping” where we pack by store and ship to the customer’s distribution center, bulk shipment directly to distribution centers and direct-to-store shipment.

As is customary in the beauty industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of prestige beauty products, our expertise in marketing and new product introduction, and our ability to provide value-added services, including our category management services, to U.S. mass retailers.

Our ten largest customers accounted for approximately 36% of net sales for the year ended June 30, 2012. The only customer that accounted for more than 10% of our net sales during that period was Wal-Mart (including Sam’s Club), which accounted for approximately 13% of our consolidated net sales and approximately 20% of our North America segment net sales. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The industry practice for businesses that market beauty products has been to grant certain retailers (primarily North American prestige department stores and specialty beauty stores), subject to our authorization and approval, the right to either return merchandise or to receive a markdown allowance for certain products. We establish estimated return reserves and markdown allowances at the time of sale based upon our level of sales, historical and projected experience with product returns and markdowns in each of our business segments and with respect to each of our product types, current economic trends and changes in customer demand and customer mix. Our return reserves and markdown allowances are reviewed and updated as needed during the year, and additions to these reserves and allowances may be required. Additions to these reserves and allowances may have a negative impact on our financial results.

Marketing

Our marketing approach is focused on generating strong demand across our key brands. We emphasize competitive positioning for each brand and ensure that our brand positioning is carried through all consumer touch points. We employ traditional consumer reach vehicles, such as television and magazine print advertising, and are increasingly leveraging new media such as social networking, mobile, and digital applications so that we are able to engage with our consumers through their preferred technologies. As part of the Elizabeth Arden brand repositioning, our communications have been designed to reflect a consistent, equity-building, modern point of view to drive new relevance among women.

We have developed global growth strategies for our key brands that we believe are designed to deliver sales, margin, and market share improvements. Our Elizabeth Arden brand repositioning efforts are focused on modernizing the brand and leveraging our unique Red Door Spa heritage to generate both organic and innovation-driven growth. We believe that our newly repackaged and reformulated Elizabeth Arden brand products, including our new line of Visible Difference skin care essentials, will help us to achieve organic growth of the brand. We also believe that innovation is critical in the beauty category, and we intend to focus our innovation resources on what we believe are the most significant opportunities for growth, while also emphasizing profitability.

We believe that our marketing function is structured to meet the changing needs of the global beauty marketplace. We maintain a global marketing group in New York, which is accountable for global strategic planning and the development needs of most of our brands. We also maintain regional marketing teams responsible for translating and customizing global marketing strategies to the needs of the local markets. We believe this organizational structure supports our growth strategies and is consistent with best practices in the industry. We also work with the Red Door Spa organization to co-leverage its unique association with the Elizabeth Arden brand.

 

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Our marketing programs are also integrated with significant cooperative advertising programs that we plan and execute with our retailers, often linked with new product innovation and promotions. In our department store and perfumery accounts, we periodically promote our brands with “gift with purchase” and “purchase with purchase” programs. At in-store counters, sales representatives offer personal demonstrations to market individual products. We also engage in extensive sampling programs.

During fiscal 2012, we introduced several new products across the Elizabeth Arden skincare, fragrance, and color categories, as well as for several of our fragrance brands, including Britney Spears, Juicy Couture, Curve, Rocawear and John Varvatos. We also debuted the first fragrance under our license agreement with Taylor Swift. In fiscal 2013, we plan to launch the new Visible Difference entry level skin care regimen, Prevage Anti-Aging + Intensive Repair Daily Serum, several new Ceramide skin care products, and a new Red Door fragrance, Red Door Aura. We also plan to launch several fragrances, including our second fragrance for Taylor Swift, Justin Beiber’s Girlfriend, the first fragrance for Nicki Minaj, and new fragrances for Britney Spears, Juicy Couture, Lucky and John Varvatos.

Seasonality

Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2012, approximately 59% of our net sales were made during the first half of our fiscal year. Due to product innovations and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

Manufacturing, Supply Chain and Logistics

We use third-party suppliers and contract manufacturers in the United States and Europe to obtain substantially all of our raw materials, components and packaging products and to manufacture substantially all of our finished products relating to our owned and licensed brands. Our fragrance and skin care products have primarily been manufactured by Cosmetic Essence LLC (CEI), an unrelated third party, in plants located in New Jersey and Roanoke, Virginia, though we also use other third parties in the United States to manufacture our fragrance and cosmetic products. In fiscal 2012, we shifted the manufacturing of many of our skin care products to additional third parties. Third parties in Europe also manufacture certain of our fragrance and cosmetic products, and we also have a small manufacturing facility in South Africa primarily to manufacture local requirements of our products.

We primarily use a “turnkey” manufacturing model with the majority of our contract manufacturers in the United States and Europe, including CEI. Under the “turnkey” manufacturing model, our contract manufacturers assume administrative responsibility for planning and purchasing raw materials and components, while we continue to direct strategic sourcing and pricing with important raw materials and components vendors. Any supply chain disruptions may adversely affect our business, prospects, results of operations, financial condition or cash flows.

As is customary in our industry, historically we have not had long-term or exclusive agreements with contract manufacturers of our owned and licensed brands or with fragrance manufacturers or suppliers of our distributed brands and have generally made purchases through purchase orders. We do, however, enter into supply agreements for finished goods with our most significant “turnkey” manufacturers of our owned and licensed brands. We believe that we have good relationships with manufacturers of our owned and licensed brands and that there are alternative sources should one or more of these manufacturers become unavailable. We receive our distributed brands in finished goods form directly from fragrance manufacturers, as well as from other sources. Sales of fragrance brands that we distribute on a non-exclusive basis accounted for approximately 13% of our net sales for fiscal 2012. The loss of, or a significant adverse change in our relationship with, any of our key manufacturers for our owned and licensed brands, such as CEI, or suppliers of our distributed fragrance brands, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

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Our fulfillment operations for the United States and certain other areas of the world are conducted out of a leased distribution facility in Roanoke, Virginia. The 400,000 square-foot Roanoke facility accommodates our distribution activities and houses a large portion of our inventory. We also lease 274,000 square feet in a warehouse facility in Salem, Virginia, primarily dedicated to assembly of our promotional gift sets. Our fulfillment operations for Europe are conducted under a logistics services agreement by CEPL, an unrelated third party, at CEPL’s facility in Beville, France. The CEPL agreement expires in June 2013. While we insure our inventory and the Roanoke facility, the loss of any of these facilities or the inventory stored in those facilities, would require us to find replacement facilities or inventory and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Government Regulation

We and our products are subject to regulation by the Food and Drug Administration, the Federal Trade Commission and state regulatory authorities in the United States, as well as by various other federal, local and international regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the ingredients, manufacturing, labeling, packaging and marketing of our products. We believe that we are in substantial compliance with such regulations, as well as with applicable federal, state, local and international rules and regulations governing the discharge of materials hazardous to the environment. Changes in such regulations, or in the manner in which such regulations are interpreted, applied, or enforced, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Management Information Systems

Our primary information technology systems discussed below provide a complete portfolio of business systems, business intelligence systems, and information technology infrastructure services to support our global operations:

 

   

Logistics and supply chain systems, including purchasing, materials management, manufacturing, inventory management, order management, customer service, pricing, demand planning, warehouse management and shipping;

 

   

Financial and administrative systems, including general ledger, payables, receivables, personnel, payroll, tax, treasury and asset management;

 

   

Electronic data interchange systems to enable electronic exchange of order, status, invoice, and financial information with our customers, financial service providers and our partners within the extended supply chain;

 

   

Business intelligence and business analysis systems to enable management’s informational needs as they conduct business operations and perform business decision making; and

 

   

Information technology infrastructure services to enable seamless integration of our global business operations through Wide Area Networks (WAN), personal computing technologies, electronic mail, and service agreements providing outsourced computing operations.

These management information systems and infrastructure provide on-line business process support for our global business operations. Further, many of these capabilities have been extended into the operations of certain of our U.S. customers and third party service providers to enhance these arrangements, with examples such as vendor managed inventory, third party distribution, third party manufacturing, inventory replenishment, customer billing, retail sales analysis, product availability, pricing information and transportation management.

We outsource substantially all of our data center operations to IBM, a leading global information services and technology provider. Substantially all of our data center operations are located in a facility in Raleigh, North Carolina. IBM also provides us with certain backup capabilities to enhance the reliability of our management information systems, which are designed to continue to operate if our primary computer systems should fail. We use service level agreements and operating metrics to help us monitor and assess the performance of our outsourced data center operations. We also have business interruption insurance to cover a portion of lost income or additional expenses associated with disruptions to our business, including our management information systems, resulting from certain casualties. Our business, results of operations, financial condition or cash flow may, however, be adversely affected if our outsourced data center operations facilities are damaged or otherwise fail and/or our backup capabilities do not or cannot perform as intended.

 

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Competition

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. Competition in the beauty industry is based on brand strength, pricing and assortment of products, in store presence and visibility, innovation, perceived value, product availability, order fulfillment, service to the customer, promotional activities, advertising, special events, new product introductions, e-commerce and mobile commerce initiatives, and other activities.

We believe that we compete primarily on the basis of brand recognition, quality, product efficacy, price, and our emphasis on providing value-added customer services, including category management services, to certain retailers. There are products that are better-known and more popular than the products manufactured or supplied by us. Many of our competitors are substantially larger and more diversified, and have substantially greater financial and marketing resources than we do, as well as greater name recognition and the ability to develop and market products similar to, and competitive with, those manufactured by us.

Employees

As of August 10, 2012, we had approximately 2,357 full-time employees and approximately 432 part-time employees in the United States and 17 foreign countries. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is satisfactory.

Executive Officers of the Company

The following sets forth the names and ages of each of our executive officers as of August 10, 2012 and the positions they hold:

 

Name

   Age   

Position with the Company

E. Scott Beattie

   53    Chairman, President and Chief Executive Officer

Stephen J. Smith

   52    Executive Vice President and Chief Financial Officer

Joel B. Ronkin

   44    Executive Vice President, General Manager - North America

Pierre Pirard

   44    Executive Vice President - Product Innovation and Global Supply Chain

Kathy Widmer

   50    Executive Vice President and Chief Marketing Officer

Oscar E. Marina

   53    Executive Vice President, General Counsel and Secretary

L. Hoy Heise

   66    Executive Vice President and Chief Information Officer

Dirk Trappmann

   51    Executive Vice President, General Manager - International

Each of our executive officers holds office for such term as may be determined by our board of directors. Set forth below is a brief description of the business experience of each of our executive officers.

E. Scott Beattie has served as Chairman of our Board of Directors since April 2000, as our Chief Executive Officer since March 1998, and as one of our directors since January 1995. Mr. Beattie also has served as our President since August 2006, a position he also held from April 1997 to March 2003. In addition, Mr. Beattie served as our Chief Operating Officer from April 1997 to March 1998, and as Vice Chairman of the Board of Directors from November 1995 to April 1997. Mr. Beattie is also Chairman of the board of directors of the Personal Care Products Council, the U.S. trade association for the global cosmetic and personal care products industry, a member of the advisory board of the Ivey Business School, and a member of the board of directors and the audit and finance committee of the board of directors of PENCIL, a not-for-profit organization that benefits New York City public schools.

Stephen J. Smith has served as our Executive Vice President and Chief Financial Officer since May 2001. Previously, Mr. Smith was with PricewaterhouseCoopers LLP, an international professional services firm, as partner from October 1993 until May 2001, and as manager from July 1987 until October 1993.

Joel B. Ronkin has served as our Executive Vice President, General Manager- North America since July 2010, as our Executive Vice President, General Manager - North America Fragrances from July 2006 to July 2010, as our Executive Vice President and Chief Administrative Officer from April 2004 to June 2006, as our Senior Vice President and Chief Administrative Officer from February 2001 through March 2004, and as our Vice President, Associate General Counsel and Assistant Secretary from March 1999 through January 2001. From June 1997 through March 1999, Mr. Ronkin served as the Vice President, Secretary and General Counsel of National Auto Finance Company, Inc., an automobile finance company. From May 1992 to June 1997, Mr. Ronkin was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, Florida.

 

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Pierre Pirard has served as our Executive Vice President, Product Innovation and Global Supply Chain since February 2010. From November 2007 until February 2010, he served as our Senior Vice President, Global Supply Chain. Prior to joining us, Mr. Pirard spent 15 years at Johnson & Johnson where he held numerous positions, including serving as Regional Director, External Manufacturing North America - Consumer Sector, from 2005 until 2007; as Regional Director - Supply Chain Planning North America - Consumer Sector from 2001 to 2005; and in various positions in the finance, project management, supply and logistics groups for Johnson & Johnson Canada from 1992 to 2000.

Kathy Widmer has served as our Executive Vice President and Chief Marketing Officer since November 2009. Prior to joining us, Ms. Widmer was with Johnson & Johnson for 21 years where she held numerous positions, including, most recently, serving as Vice President, Marketing, McNeil Consumer Healthcare from May 2008 until November 2009. Prior to May 2008, Ms. Widmer served as Franchise Director and Product Director for various Johnson and Johnson consumer products, including Tylenol, Motrin, Reach Oral Care, and Pepcid from August 1996 until April 2008.

Oscar E. Marina has served as our Executive Vice President, General Counsel and Secretary since April 2004, as our Senior Vice President, General Counsel and Secretary from March 2000 to March 2004, and as our Vice President, General Counsel and Secretary from March 1996 to March 2000. From October 1988 to March 1996, Mr. Marina was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, Florida, becoming a partner of the firm in January 1995.

L. Hoy Heise has served as our Executive Vice President and Chief Information Officer since November 2007, as our Executive Vice President, Chief Information Officer and Operations Planning from March 2006 to November 2007, and as our Senior Vice President and Chief Information Officer from May 2004 to February 2006. From February 2003 to April 2004, Mr. Heise was the founder and principal of his own technology consulting firm. From June 1999 until May 2001, Mr. Heise was Senior Vice President of Gartner, an information technology research firm. Prior to that time, Mr. Heise worked in various management and consulting capacities for Renaissance Worldwide, a global provider of business process improvement and information technology consulting services.

Dirk Trappman has served as our Executive Vice President, General Manager- International since October 2010. Prior to joining us, Mr. Trappmann was with La Prairie Group, where he held the position of President and Chief Executive Officer for over five years. Before his position at La Prairie Group, Mr. Trappmann spent thirteen years with Beiersdorf AG in numerous management positions, including Managing Director Thailand/Indochina and International Marketing Director. Mr. Trappmann currently serves on the board of directors of Cosmetics Europe, the European cosmetic trade association.

 

ITEM 1A. RISK FACTORS

The risk factors in this section describe the major risks to our business, prospects, results of operations, financial condition and cash flows, and should be considered carefully. In addition, these factors constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and could cause our actual results to differ materially from those projected in any forward-looking statements (as defined in such act) made in this Annual Report on Form 10-K. Investors should not place undue reliance on any such forward-looking statements. Any statements that are not historical facts and that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,” “believes” and “projects”) may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.

Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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We may be adversely affected by factors affecting our customers’ businesses.

Factors that adversely impact our customers’ businesses may also have an adverse effect on our business, prospects, results of operations, financial condition or cash flows. These factors may include:

 

   

any reduction in consumer traffic and demand as a result of economic downturns like domestic and global recessions;

 

   

any credit risks associated with the financial condition of our customers;

 

   

the effect of consolidation or weakness in the retail industry, including the closure of customer doors and the uncertainty resulting therefrom; and

 

   

inventory reduction initiatives and other factors affecting customer buying patterns, including any reduction in retail space commitment to fragrances and cosmetics and retailer practices used to control inventory shrinkage.

Fluctuations in foreign exchange rates could adversely affect our results of operations and cash flows.

We sell our products in approximately 120 countries around the world. During each of the years ended June 30, 2012 and 2011, we derived approximately 42% and 40%, respectively of our net sales from our international operations. We conduct our international operations in a variety of different countries and derive our sales in various currencies including the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar, as well as the U.S. dollar. Most of our skin care and cosmetic products are produced in third-party manufacturing facilities located in the U.S. Our operations may be subject to volatility because of currency changes, inflation changes and changes in political and economic conditions in the countries in which we operate. With respect to international operations, our sales, cost of goods sold and expenses are typically denominated in a combination of local currency and the U.S. dollar. Our results of operations are reported in U.S. dollars. Fluctuations in currency rates can affect our reported sales, margins, operating costs and the anticipated settlement of our foreign denominated receivables and payables. A weakening of the foreign currencies in which we generate sales relative to the currencies in which our costs are denominated, which is primarily the U.S. dollar, could adversely affect our business, prospects, results of operations, financial condition or cash flows. Our competitors may or may not be subject to the same fluctuations in currency rates, and our competitive position could be affected by these changes.

We do not have contracts with customers or with suppliers of our distributed brands, so if we cannot maintain and develop relationships with such customers and suppliers our business, prospects, results of operations, financial condition or cash flows may be materially adversely affected.

We do not have long-term or exclusive contracts with any of our customers and generally do not have long-term or exclusive contracts with our suppliers of distributed brands. Our ten largest customers accounted for approximately 36% of our net sales in the year ended June 30, 2012. Our only customer who accounted for more than 10% of our net sales in the year ended June 30, 2012 was Wal-Mart (including Sam’s Club), who accounted for approximately 13% of our consolidated net sales and approximately 20% of our North America segment net sales. In addition, our suppliers of distributed brands, which represented approximately 13% of our net sales for fiscal 2012, generally can, at any time, elect to supply products to our customers directly or through another distributor. Our suppliers of distributed brands may also choose to reduce or eliminate the volume of their products distributed by us. The loss of any of our key suppliers or customers, or a change in our relationship with any one of them, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We depend on various licenses for a significant portion of our sales, and the loss of one or more licenses or agreements could have a material adverse effect on us.

Our rights to market and sell certain of our prestige fragrance brands are derived from licenses from unaffiliated third parties and our business is dependent upon the continuation and renewal of such licenses on terms favorable to us. Each license is for a specific term and may have optional renewal terms. In addition, such licenses may be subject to us making required minimum royalty payments, minimum advertising and promotional expenditures and meeting minimum sales requirements. Just as the loss of a license or other significant agreement may have a material adverse effect on us, a renewal on less favorable terms could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

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We rely on third-party manufacturers and component suppliers for substantially all of our owned and licensed products.

We do not own or operate any significant manufacturing facilities. We use third-party manufacturers and component suppliers to manufacture substantially all of our owned and licensed products. Over the past few years, we have reduced the number of third-party manufacturers and component and materials suppliers that we use, and have implemented a “turnkey” manufacturing process for substantially all of our products in which we now rely on our third-party manufacturers for certain supply chain functions that we previously handled ourselves, such as component and materials planning, purchasing and warehousing. Our business, prospects, results of operations, financial condition or cash flows could be materially adversely affected if we experience any supply chain disruptions caused by our implementation of this “turnkey” manufacturing process or other supply chain projects, or if our manufacturers or component suppliers were to experience problems with product quality, credit or liquidity issues, or disruptions or delays in the manufacturing process or delivery of the finished products or the raw materials or components used to make such products.

The loss of or disruption in our distribution facilities may have a material adverse effect on our business.

We currently have one distribution facility and one promotional set assembly facility in the United States and use a third-party fulfillment center in France primarily for European distribution. These facilities house a large portion of our inventory. Although we insure our inventory, any loss, damage or disruption of these facilities, or loss or damage of the inventory stored in them, could adversely affect our business, prospects, results of operations, financial condition or cash flows.

Our business is subject to regulation in the United States and internationally.

The manufacturing, distribution, formulation, packaging and advertising of our products and those we distribute for others are subject to numerous federal, state and foreign governmental regulations. The number of laws and regulations that are being enacted or proposed by state, federal and international governments and governmental authorities are increasing. Compliance with these regulations is difficult and expensive and may require reformulation, repackaging, relabeling or discontinuation of certain of our products. If we fail to adhere, or are alleged to have failed to adhere, to any applicable federal, state or foreign laws or regulations, or if such laws or regulations negatively affect sales of our products, our business, prospects, results of operation, financial condition or cash flows may be adversely affected. In addition, our future results could be adversely affected by changes in applicable federal, state and foreign laws and regulations, or the interpretation or enforcement thereof, including those relating to products or ingredients, product liability, trade rules and customs regulations, intellectual property, consumer laws, privacy laws, as well as accounting standards and taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretations).

Adverse U.S. or international economic conditions could negatively impact our business, prospects, results of operations, financial condition or cash flows.

We believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income. Adverse U.S. or international economic conditions, such as global recessions, including the current economic environment in Europe, or periods of inflation or high energy prices can contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and declining consumer confidence and demand, each of which poses risks to our business. A decrease in consumer spending and/or in retailer and consumer confidence and demand for our products could significantly negatively impact our net sales and profitability, including our operating margins and return on invested capital. Such economic conditions could cause some of our customers or suppliers to experience cash flow and/or credit problems and impair their financial condition, which could disrupt our business and adversely affect product orders, payment patterns and default rates and increase our bad debt expense. Adverse economic conditions could also adversely affect our access to the capital necessary for our business and our ability to remain in compliance with the financial covenant in our revolving credit facility that applies only in the event that we do not have the requisite average borrowing base capacity as set forth in our credit facility. If the recent adverse U.S. and global economic conditions persist or deteriorate further, our business, prospects, results of operations, financial condition or cash flows could be negatively impacted.

We may be adversely affected by domestic and international events that impact consumer confidence and demand.

Sudden disruptions in business conditions due to events such as terrorist attacks, diseases or natural disasters may have a short-term, or sometimes long-term, adverse impact on consumer confidence and spending. In addition, any reductions in travel or increases in restrictions on travelers’ ability to transport our products on airplanes due to general economic downturns, diseases, increased security levels, acts of war or terrorism could result in a material decline in the net sales and profitability of our travel retail business.

 

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The beauty industry is highly competitive and if we cannot effectively compete our business and results of operations will suffer.

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. Competition in the beauty industry is based on brand strength, pricing and assortment of products, in-store presence and visibility, innovation, perceived value, product availability and order fulfillment, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce and mobile commerce initiatives and other activities. The trend toward consolidation in the retail trade has resulted in us becoming increasingly dependent on key retailers, including large-format retailers, who have increased their bargaining strength. This trend has also resulted in an increased risk related to the concentration of our customers. We compete primarily with global prestige beauty companies and multinational consumer product companies, some of whom have greater resources than we have and brands with greater name recognition and consumer loyalty than our brands. Our success depends on our products’ appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change, and on our ability to anticipate and respond in a timely and cost-effective manner to market trends through product innovations, product line extensions and marketing and promotional activities. This issue is compounded by the rapidly increasing use and proliferation of social and digital media by consumers, and the speed with which information and opinions are shared. We may incur expenses in connection with product innovation and development, marketing and advertising that are not subsequently supported by a sufficient level of sales, which could negatively affect our results of operations. These competitive factors, as well as new product risks, could have an adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our business strategy depends upon our ability to increase sales of the Elizabeth Arden brand and our prestige fragrance portfolio, as well as our ability to acquire or license additional brands or secure additional distribution arrangements and obtain the required financing for these agreements and arrangements.

Our business strategy contemplates the continued growth of our portfolio of owned, licensed and distributed brands. Increasing sales of the Elizabeth Arden brand and our prestige fragrance portfolio may require investments that may result in short-term costs without any current revenue. In addition, our future expansion through acquisitions, new product licenses or new product distribution arrangements, if any, will depend upon our ability to identify suitable brands to acquire, license or distribute and our ability to obtain the required financing for these acquisitions, licenses or distribution arrangements, and thus depends on the capital resources and working capital available to us. We may not be able to identify, negotiate, finance or consummate such acquisitions, licenses or arrangements, or the associated working capital requirements, on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business.

The success of our business depends, in part, on the demand for celebrity and designer fragrance products.

We have license agreements to manufacture, market and distribute a number of celebrity and designer fragrance products, including those of Elizabeth Taylor, Britney Spears, Taylor Swift, Justin Bieber, Juicy Couture, John Varvatos, Ed Hardy and True Religion. In fiscal 2012, we derived approximately 38% of our net sales from celebrity and designer fragrance brands. The demand for these products is, to some extent, dependent on the appeal to consumers of the particular celebrity or designer and the celebrity’s or designer’s reputation. To the extent that the celebrity/designer fragrance category or a particular celebrity or designer ceases to be appealing to consumers or a celebrity’s reputation is adversely affected, sales of the related products and the value of the brands can decrease materially. In addition, under certain circumstances, lower net sales may shorten the duration of the applicable license agreement.

We may not be able to successfully and cost-effectively integrate acquired businesses or new brands.

Acquisitions entail numerous integration risks and impose costs on us that could materially and adversely affect our business, prospects, results of operations, financial condition or cash flows, including:

 

   

difficulties in assimilating acquired operations, products or brands, including disruptions to our operations or the unavailability of key employees from acquired businesses;

 

   

diversion of management’s attention from our core business;

 

   

adverse effects on existing business relationships with suppliers and customers;

 

   

incurrence or assumption of additional debt and liabilities, as well as the potential for increased claims and litigation; and

 

   

incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets.

 

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Our business could be adversely affected if we are unable to successfully protect our intellectual property rights.

The market for our products depends to a significant extent upon the value associated with the trademarks and patents that we own or license. We own, or have licenses or other rights to use, the material trademarks and patents used in connection with the ingredients, packaging, marketing and distribution of our major owned and licensed products both in the U.S. and in other countries where such products are principally sold.

Although most of our brand names are registered in the U.S. and in certain foreign countries in which we operate, we may not be successful in asserting trademark protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. The costs required to protect our trademarks and patents may be substantial. We also cannot assure that the owners of the trademarks that we license can or will successfully maintain their intellectual property rights.

If other parties infringe on our intellectual property rights or the intellectual property rights that we license, the value of our brands in the marketplace may be diluted. In addition, any infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. We may infringe on others’ intellectual property rights, which may result in a reduction in sales or profitability and a commitment of our time and resources to defend through litigation or otherwise. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and could materially adversely affect our business, prospects, results of operations, financial condition or cash flows.

If our intangible assets, such as trademarks, patents and goodwill, become impaired, we may be required to record a significant non-cash charge to earnings which would negatively impact our results of operations.

Exclusive brand licenses, trademarks and intangibles comprise a material portion of our total consolidated assets. Completed acquisitions, like the recent acquisitions of the licenses for the Ed Hardy, True Religion, BCBGMAXAZRIA, Justin Bieber and Nicki Minaj fragrance brands, typically result in an increase in other intangibles on our balance sheet. Under accounting principles generally accepted in the United States, we review our intangible assets, including our trademarks, patents, licenses and goodwill, for impairment annually, or more frequently if events or changes in circumstances indicate the carrying value of our intangible assets may not be fully recoverable. The carrying value of our intangible assets may not be recoverable due to factors such as a decline in our stock price and market capitalization, reduced estimates of future cash flows, including those associated with the specific brands to which intangibles relate, or slower growth rates in our industry. Estimates of future cash flows are based on a long-term financial outlook of our operations and the specific brands to which the intangible assets relate. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates and the recorded value of the intangibles. For example, a significant sustained decline in our stock price and market capitalization may result in impairment of certain of our intangible assets, including goodwill, and a significant charge to earnings in our financial statements during the period in which an impairment is determined to exist. Any such impairment charge could materially reduce our results of operations.

We are subject to risks related to our international operations.

We operate on a global basis, with sales in approximately 120 countries. Approximately 42% of our fiscal 2012 net sales were generated outside of the United States. Our international operations could be adversely affected by:

 

   

import and export license requirements;

 

   

trade restrictions;

 

   

changes in tariffs and taxes;

 

   

restrictions on repatriating foreign profits back to the United States;

 

   

changes in, or our unfamiliarity with, foreign laws and regulations, including those related to product registration, ingredients and labeling, including changes in the interpretation or enforcement of such laws and regulations;

 

   

difficulties in staffing and managing international operations; and

 

   

changes in social, political, legal, economic and other conditions.

 

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Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. From time to time, tax proposals are introduced or considered by the United States Congress or the legislative bodies in foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our other tax liabilities. Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions, and tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense. As a result, the ultimate resolution of these tax audits, changes in tax laws or tax rates, and the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.

Our quarterly results of operations fluctuate due to seasonality and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.

We generate a significant portion of our net income in the first half of our fiscal year as a result of higher sales in anticipation of the holiday season. Similarly, our working capital needs are greater during the first half of the fiscal year. We may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including new product innovations and launches, the size and timing of customer orders and additions or losses of brand distribution rights. If we were to experience a significant shortfall in sales or internally generated funds, we may not have sufficient liquidity to fund our business.

Our level of debt and debt service obligations, and the restrictive covenants in our revolving credit facility and our indenture for our 7 3/8% senior notes, may reduce our operating and financial flexibility and could adversely affect our business and growth prospects.

At June 30, 2012, we had total debt of approximately $339 million which includes $250 million in aggregate principal amount outstanding of our 7 3/8% senior notes and $89 million outstanding under our revolving bank credit facility, both of which have requirements that may limit our operating and financial flexibility. Our indebtedness could adversely impact our business, prospects, results of operations, financial condition or cash flows by increasing our vulnerability to general adverse economic and industry conditions and restricting our ability to consummate acquisitions or fund working capital, capital expenditures and other general corporate requirements.

Specifically, our revolving credit facility and our indenture for our 7 3/8% senior notes limit or otherwise affect our ability to, among other things:

 

   

incur additional debt;

 

   

pay dividends or make other restricted payments;

 

   

create or permit certain liens, other than customary and ordinary liens;

 

   

sell assets other than in the ordinary course of our business;

 

   

invest in other entities or businesses; and

 

   

consolidate or merge with or into other companies or sell all or substantially all of our assets.

 

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These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. Our revolving credit facility also requires us to maintain specified amounts of borrowing capacity or maintain a debt service coverage ratio. Our ability to meet these conditions and our ability to service our debt obligations will depend upon our future operating performance, which can be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. If our actual results deviate significantly from our projections, we may not be able to service our debt or remain in compliance with the conditions contained in our revolving credit facility, and we would not be allowed to borrow under the revolving credit facility. If we were not able to borrow under our revolving credit facility, we would be required to develop an alternative source of liquidity. We cannot assure you that we could obtain replacement financing on favorable terms or at all.

A default under our revolving credit facility could also result in a default under our indenture for our 7 3/8% senior notes. Upon the occurrence of an event of default under our indenture, all amounts outstanding under our other indebtedness may be declared to be immediately due and payable. If we were unable to repay amounts due on our revolving credit facility, the lenders would have the right to proceed against the collateral granted to them to secure that debt.

Our success depends, in part, on the quality, efficacy and safety of our products.

Our success depends, in part, on the quality, efficacy and safety of our products. If our products are found to be defective or unsafe, or if they otherwise fail to meet customer or consumer standards, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our success depends upon the retention and availability of key personnel and the succession of senior management.

Our success largely depends on the performance of our management team and other key personnel. Our future operations could be harmed if we are unable to attract and retain talented, highly qualified senior executives and other key personnel. In addition, if we are unable to effectively provide for the succession of senior management, including our chief executive officer, our business, prospects, results of operations, financial condition or cash flows may be materially adversely affected.

The market price of our common stock may fluctuate as a result of a variety of factors.

The market price of our common stock could fluctuate significantly in response to various factors, many of which are beyond our control, including:

 

   

volatility in the financial markets;

 

   

actual or anticipated variations in our quarterly or annual financial results;

 

   

announcements or significant developments with respect to beauty products or the beauty industry in general;

 

   

general economic and political conditions;

 

   

governmental policies and regulations; and

 

   

financial analyst and rating agency actions.

Our global information systems are subject to outages, hacking and other risks and the failure to adequately maintain the security of our electronic and confidential information could materially adversely affect our financial condition and results of operations.

We have information systems that support our business processes, including supply chain, marketing, sales, order processing, distribution, finance and intracompany communications throughout the world. All of our global information systems are susceptible to outages due to fire, floods, tornadoes, hurricanes, power loss, telecommunications failures, security breaches and similar events. Despite the implementation of network security measures, our systems may also be vulnerable to computer viruses, “hacking” and similar disruptions from unauthorized tampering. Our business, prospects, results of operations, financial condition or cash flows may be adversely affected by the occurrence of these or other events that could disrupt or damage our information systems, and/or any failure to properly maintain or upgrade our information systems.

 

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In addition, as part of our normal business activities, we collect and store certain confidential information, including personal information with respect to customers and employees. In addition, the success of our e-commerce operations depends on the secure transmission of confidential and personal data over public networks, including the use of cashless payments. Any failure on the part of us or our vendors to properly maintain the security of our confidential data and our employees’ and customers’ personal information could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs and other competitive disadvantages, and could accordingly have a material adverse impact on our business, financial condition and results of operations.

We outsource certain functions, making us dependent on the entities and facilities performing those functions.

We are continually looking for opportunities to secure essential business services in a more cost-effective manner, without impacting the quality of the service rendered. In some cases, this requires the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. These include certain information systems functions such as information technology operations, certain human resource functions such as payroll processing and employee benefit plan administration, and our European logistics management. We believe that we conduct appropriate due diligence before entering into agreements with the outsourcing entity, and we use service level agreements and operating metrics to monitor and assess performance. We believe the failure of one or more entities to properly provide the expected services without disruption, provide them on a timely basis or to provide them at the prices we expect may have a material adverse effect on our results of operations or financial condition. In addition, substantially all of our data center operations are located in a facility in Raleigh, North Carolina, and any loss of or damage to the facility could have a material adverse effect on our business, results of operations, prospects, financial condition or cash flows.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

United States. Our corporate headquarters are located in Miramar, Florida, where we lease approximately 32,000 square feet of general office space under a lease that expires in June 2016. Our U.S. fulfillment operations are conducted in our Roanoke, Virginia distribution facility that consists of approximately 400,000 square feet and is leased through September 2023. We also lease (i) a 76,000-square foot warehouse in Roanoke to coordinate returns processing that is leased through December 2015, and (ii) a 274,000-square foot warehouse in Salem, Virginia that is leased through March 2016. From time to time, we also lease additional temporary warehouse facilities to handle inventory overflow. We lease 50,000 square feet of general office space for our supply chain, information systems and finance operations in Stamford, Connecticut under a lease that expires October 2021. We lease approximately 49,500 square feet of general offices primarily for our marketing operations in New York City under a lease that expires in October 2017. We also lease small offices in Bentonville, Arkansas and Minneapolis, Minnesota, and have retail outlet stores that are located in Florida, New York, Texas, and Georgia for which we lease approximately 1,000 to 2,000 square feet, depending on the location.

International. Our international operations are headquartered in offices in Geneva, Switzerland that are leased through 2017. We also lease sales offices in Australia, Canada, China, Denmark, France, Italy, Korea, New Zealand, Puerto Rico, Singapore, South Africa, Spain, Taiwan, and the United Kingdom. We own a small manufacturing and distribution facility in South Africa primarily to manufacture and distribute local requirements of our products.

We believe that additional office, warehouse and retail space suitable for our needs is reasonably available in the markets in which we operate.

 

ITEM 3. LEGAL PROCEEDINGS

We are a party to a number of legal actions, proceedings, claims and disputes, arising in the ordinary course of business, including those with current and former customers over amounts owed. While any action, proceeding or claim contains an element of uncertainty and it is possible that our cash flows and results of operations in a particular quarter or year could be materially affected by the impact of such actions, proceedings, claims and disputes, based on current facts and circumstances our management believes that the outcome of such actions, proceedings, claims and disputes will not have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Our common stock, $.01 par value per share, has been traded on the NASDAQ Global Select Market under the symbol “RDEN” since January 25, 2001. The following table sets forth the high and low sales prices for our common stock, as reported by NASDAQ for each of our fiscal quarters from July 1, 2010 through June 30, 2012.

 

Quarter Ended

   High      Low  

6/30/12

   $ 40.19       $ 32.73   

3/31/12

   $ 39.96       $ 30.96   

12/31/11

   $ 37.94       $ 28.03   

9/30/11

   $ 34.62       $ 25.86   

6/30/11

   $ 31.84       $ 26.50   

3/31/11

   $ 31.00       $ 22.93   

12/31/10

   $ 24.00       $ 18.88   

9/30/10

   $ 20.00       $ 13.69   

Holders. As of August 8, 2012, there were 351 record holders of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividends. We have not declared any cash dividends on our common stock since we became a beauty products company in 1995, and we currently have no plans to declare dividends on our common stock in the foreseeable future. Any future determination by our board of directors to pay dividends on our common stock will be made only after considering our financial condition, results of operations, capital requirements and other relevant factors. Additionally, our revolving credit facility and the indenture relating to our 7 3/8% senior notes due 2021 restrict our ability to pay cash dividends based upon our ability to satisfy certain financial covenants, including having a certain amount of borrowing capacity and satisfying a fixed charge coverage ratio after the payment of the dividends. See Notes 8 and 9 to the Notes to Consolidated Financial Statements.

Performance Graph. The following performance graph data and table compare the cumulative total shareholder returns, including the reinvestment of dividends, on our common stock with the Russell 2000 Index and a market-weighted index of publicly traded peer companies for the five fiscal years from July 1, 2007 through June 30, 2012.

The publicly traded companies in our peer group are The Estee Lauder Companies Inc., International Flavors and Fragrances, Inc., Inter Parfums, Inc., Physicians Formula Holdings, Inc., and Revlon, Inc. We believe that our peer group is a good representation of beauty companies with similar market capitalizations, channels of distribution and/or products as our company. The graph and table assume that $100 was invested on June 30, 2007 in each of the Russell 2000 Index, the peer group, and our common stock, and that all dividends were reinvested.

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* $100 invested on 6/30/07 in stock or index, including reinvestment of dividends.

Fiscal year ending June 30.

 

     Fiscal Year Ended  
     June 30,  
     2008      2009      2010      2011      2012  

Elizabeth Arden, Inc.

     62.57         35.99         59.85         119.66         159.98   

Russell 2000 Index

     83.81         62.84         76.35         104.91         102.73   

Peer Group

     87.96         65.50         04.68         184.66         180.24   

 

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ITEM 6. SELECTED FINANCIAL DATA

We derived the following selected financial data from our audited consolidated financial statements. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this annual report.

 

     Year Ended June 30,  
(Amounts in thousands, except per share data)    2012     2011     2010     2009     2008  

Selected Statement of Operations Data

          

Net sales

   $ 1,238,273      $ 1,175,500      $ 1,103,777      $ 1,070,225      $ 1,141,075   

Gross profit

     609,031 (1)      556,277        495,974        433,155 (7)      461,873 (9) 

Income from operations

     95,271 (1)      77,575 (3)      44,793 (5)      10,335 (7)      49,030 (9) 

Debt extinguishment charges

     —          6,468        82        —          —     

Net income (loss)

     57,419        40,989        19,533        (6,163     19,901   

Selected Per Share Data

          

Earnings (loss) per common share

          

Basic

   $ 1.97 (2)    $ 1.47 (4)    $ 0.70 (6)    $ (0.22 )(8)    $ 0.71 (10) 

Diluted

   $ 1.91 (2)    $ 1.41 (4)    $ 0.68 (6)    $ (0.22 )(8)    $ 0.68 (10) 

Weighted average number of common shares

          

Basic

     29,115        27,843        28,017        27,971        27,981   

Diluted

     30,111        29,008        28,789        27,971        29,303   

Other Data

          

EBITDA(11)

   $ 129,325      $ 100,942      $ 73,170      $ 36,493      $ 73,798   

Net cash provided by operating activities

     58,524        97,746        113,959        36,986        8,037   

Net cash used in investing activities

     (153,224     (39,472     (35,721     (31,663     (28,588

Net cash provided by (used in) financing activities

     96,760        (28,519     (74,337     (7,529     16,791   
     Year Ended June 30,  
     2012     2011     2010     2009     2008  

Selected Balance Sheet Data

          

Cash

   $ 59,080      $ 58,850      $ 26,881      $ 23,102      $ 26,396   

Inventories

     291,987        246,514        271,058        318,535        408,563   

Working capital

     345,818        388,897        306,524        286,611        306,735   

Total assets

     1,066,754        854,837        843,471        884,075        970,734   

Short-term debt

     89,200        —          59,000        115,000        119,000   

Long-term debt, including current period

     250,000        250,000        218,699        223,911        224,957   

Shareholders’ equity

     481,727        417,765        352,617        336,778        336,601   

 

(1) For the year ended June 30, 2012, gross profit and income from operations include (i) $4.5 million of inventory–related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisitions from those companies, and (ii) $0.4 million for product discontinuation charges. Income from operations also includes (i) $1.4 million in license termination costs, and (ii) $0.8 million in transaction costs associated with the New Wave LLC and Give Back Brands LLC acquisitions.
(2) For the year ended June 30, 2012, inventory-related costs, product discontinuation charges, license termination costs and transaction costs for the acquisitions reduced both basic and fully diluted earnings per share by $0.17 and $0.16, respectively.
(3) For the year ended June 30, 2011, income from operations includes (i) $0.3 million of restructuring expenses related to our Global Efficiency Re-engineering initiative (the “Initiative”), and (ii) $0.3 million of expenses related to implementation of our Oracle accounting and order processing systems.
(4) For the year ended June 30, 2011, debt extinguishment charges, restructuring expenses related to our Initiative and Oracle accounting and order processing systems implementation costs reduced both basic and fully diluted earnings per share by $0.15.
(5) For the year ended June 30, 2010, income from operations includes (i) $3.9 million of expenses related to implementation of our Oracle accounting and order processing systems, (ii) $1.9 million of restructuring expenses related to our Initiative, and (iii) $1.5 million of restructuring expenses that are not related to our Initiative.
(6) For the year ended June 30, 2010, Oracle accounting and order processing systems implementation costs, restructuring expenses and debt extinguishment charges reduced basic and fully diluted earnings per share by $0.20 and $0.19, respectively.

 

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(7) For the year ended June 30, 2009, gross profit and income from operations include costs related to the global licensing agreement with Liz Claiborne of $18.9 million (which did not require the use of cash in the current period) for the Liz Claiborne inventory purchased by us at a higher cost prior to the effective date of the license agreement and $4.4 million ($1.0 million in gross profit) of Liz Claiborne transition expenses. In addition, income from operations includes (i) $3.4 million of expenses related to implementation of our Oracle accounting and order processing systems, (ii) $3.5 million of restructuring expenses related to our Initiative, and (iii) $1.1 million of restructuring expenses that are not related to our Initiative.
(8) For the year ended June 30, 2009, Liz Claiborne related expenses, Oracle accounting and order processing systems implementation costs and restructuring expenses reduced basic and fully diluted earnings per share by $0.70 and $0.69, respectively.
(9) For the year ended June 30, 2008, gross profit and income from operations include approximately $15.0 million in costs related to the global licensing agreement with Liz Claiborne including product discontinuation charges. In addition, income from operations includes an additional $12.0 million in Liz Claiborne related costs and $3.0 million of restructuring expenses, including $0.7 million related to our Initiative.
(10) For the year ended June 30, 2008, Liz Claiborne related costs, including product discontinuation charges, and restructuring expenses reduced basic and fully diluted earnings per share by $0.65 and $0.63, respectively.
(11) EBITDA is defined as net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense. EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance or to net cash provided by operating, investing and financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company’s operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. This information has been disclosed here to permit a more complete comparative analysis of our operating performance and debt servicing ability relative to other companies. EBITDA may not, however, be comparable in all instances to other similar types of measures.

In addition, EBITDA has limitations as an analytical tool, including the fact that:

 

   

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

 

   

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

   

it does not reflect any cash income taxes that we may be required to pay; and

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

The following is a reconciliation of net income (loss) as determined in accordance with generally accepted accounting principles, to EBITDA:

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011     2010     2009     2008  

Net income (loss)

   $ 57,419      $ 40,989      $ 19,533      $ (6,163   $ 19,901   

Provision for (benefit from) income taxes

     16,093        8,637        3,293        (8,316     1,534   

Interest expense

     21,759        21,481        21,885        24,814        27,595   

Depreciation related to cost of goods sold

     5,257        5,089        5,040        4,416        4,245   

Depreciation and amortization

     28,797        24,746        23,419        21,742        20,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 129,325 (a)    $ 100,942 (b)      73,170 (c)    $ 36,493 (d)    $ 73,798 (e) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes $4.5 million of inventory–related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisitions from those companies and $0.8 million in transaction costs associated with such acquisitions, $0.4 million for product discontinuation charges, and $1.4 million in license termination costs.
(b) Includes $6.5 million of debt extinguishment charges, $0.3 million of restructuring charges related to the Initiative and $0.3 million related to the implementation of our Oracle accounting and order processing systems.
(c) Includes $3.9 million related to the implementation of our Oracle accounting and order processing systems, $3.4 million of restructuring charges and $0.1 million of debt extinguishment charges.
(d) Includes $23.3 million of costs related to the global licensing agreement with Liz Claiborne ($18.9 million of which did not require the use of cash in the current period), $4.6 million of restructuring charges and $3.4 million related to the implementation of our Oracle accounting and order processing systems.
(e) Includes $27.0 million of costs related to the global licensing agreement with Liz Claiborne and $3.0 million of restructuring charges.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes which appear elsewhere in this document.

Overview

We are a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our extensive product portfolio includes the following:

 

Elizabeth Arden Brand    The Elizabeth Arden skin care brands: Visible Difference, Ceramide, Prevage, and Eight Hour Cream, Elizabeth Arden branded lipstick, foundation and other color cosmetics products, and the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, and Elizabeth Arden green tea
Celebrity Fragrances    The fragrance brands of Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift, Justin Bieber, Nicki Minaj and Usher
Lifestyle Fragrances    Curve, Giorgio Beverly Hills, PS Fine Cologne and White Shoulders
Designer Fragrances    Juicy Couture, Alfred Sung, BCBGMAXAZRIA, Ed Hardy, Geoffrey Beene, Halston, John Varvatos, Kate Spade New York, Lucky, Rocawear and True Religion

In addition to our owned and licensed fragrance brands, we distribute approximately 250 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements. In August 2011, we amended our long-term license agreement with Liz Claiborne, Inc. and certain of its affiliates and acquired all of the U.S. and international trademarks for the Curve fragrance brands as well as trademarks for certain other smaller fragrance brands. The amendment established a lower effective royalty rate for the remaining licensed fragrance brands, including Juicy Couture and Lucky Brand fragrances, reduced the future minimum guaranteed royalties for the term of the license, and required a pre-payment of royalties for the remainder of calendar 2011. We paid Liz Claiborne, Inc. and its affiliates $58.4 million in cash in connection with this transaction. We capitalized $43.9 million of the $58.4 million cash paid as exclusive brand trademarks and the balance was recorded as a prepaid asset associated with the settlement of royalties for the remainder of calendar year 2011 and the buy-down of future royalties.

In May 2012, we acquired the global licenses and certain related assets, including inventory, for the Ed Hardy, True Religion and BCBGMAXAZRIA fragrance brands from New Wave Fragrances, LLC. Prior to the acquisition, we had been acting as a distributor of the Ed Hardy, True Religion and BCBGMAXAZRIA fragrances to certain mid-tier and mass retailers in the North America. Originally introduced in 2008 and inspired by the tattoo art of Don Ed Hardy, the Ed Hardy fragrance portfolio includes the Love & Luck, Hearts & Daggers and Ed Hardy Born Wild men’s and women’s fragrances. The True Religion fragrance brand launched in U.S. department stores in October 2008 and has now expanded to a portfolio of brands, including Drifter and Hippie Chic, and the BCBGMAXAZRIA women’s fragrance recently launched in the fall of 2011 in U.S. department stores. The total cost of the acquisition was $60.1 million, including amounts paid for inventory of $19.8 million, of which $58.1 million has been paid in cash and up to an additional $2 million may be due on January 31, 2013, subject to certain post-closing adjustments. This transaction was accounted for as a business combination. See Note 11 to the Notes to Consolidated Financial Statements for further information on the acquisition and allocation of the purchase price.

In June 2012, we also acquired the global licenses and certain assets related to the Justin Bieber and Nicki Minaj fragrance brands, including inventory of the Justin Bieber fragrances, from Give Back Brands LLC. Someday, the first fragrance from internationally acclaimed recording artist Justin Bieber, launched in Spring 2011 and became the number one women’s fragrance launch of 2011 in U.S. department stores, according to NPD. The second fragrance in this brand franchise, Justin Bieber’s Girlfriend, is launching in U.S. department stores in the summer of 2012. The first fragrance from Nicki Minaj is scheduled to launch in U.S. department stores in the fall of 2012. In connection with the acquisition, we paid Give Back Brands LLC $26.5 million, including $3.4 million for inventory. In addition, we have issued to Give Back Brands LLC a subordinated note in the principal amount of $28 million, payable upon the achievement of specified net sales targets for the acquired brands over the three-year period from July 1, 2012 through June 30, 2015. This transaction was accounted for as a business combination. See Note 11 to the Notes to Consolidated Financial Statements for further information on the acquisition and allocation of the purchase price.

 

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In fiscal 2013, we expect to incur pre-tax transition and other expenses related to the New Wave Fragrances LLC and Give Back Brands LLC acquisitions of $11.7 million, of which $6.4 million will not require the use of cash. Such expenses are expected to be incurred substantially in the first fiscal quarter ending September 30, 2012. These expenses primarily result from inventory purchased by us at a higher cost prior to the 2012 acquisitions, and other non-recurring expenses.

For ease of reference in this Form 10-K, the acquisitions from New Wave Fragrances LLC and Give Back Brands LLC are referred to herein on a collective basis as the 2012 acquisitions.

During fiscal 2012, we introduced several new products across the Elizabeth Arden skincare, fragrance, and color cosmetic categories, as well as for several of our fragrance brands, including Britney Spears, Juicy Couture, Curve, Rocawear and John Varvatos. We also debuted the first fragrance under our license agreement with Taylor Swift.

Our business strategy is currently focused on two important initiatives: the global repositioning of the Elizabeth Arden brand and expanding the market penetration of our prestige fragrance portfolio in international markets, especially in the large European fragrance market. We also intend to continue to increase net sales, operating margins and earnings by continuing to expand the prestige fragrance category at mass retail customers in North America and continuing to expand operating margins, working capital efficiency and return on invested capital. We believe that our focus on organic growth opportunities for our existing brands, new licensing opportunities and acquisitions, and new product innovation will assist us in achieving these goals.

We recently commenced the roll-out of a comprehensive brand repositioning for the Elizabeth Arden brand, which is designed to honor the heritage of the brand while modernizing the brand’s presentation and increasing its relevance among target consumers. The brand repositioning includes improved product formulation, package redesign and counter redesign as well as SKU rationalization. The initial roll-out will be to a limited number of retail doors and is targeted for completion by early October 2012. We began shipping the new product assortment to retailers in June 2012 and expect to replace high-priority retail counters with the new counters by early October 2012. The new counter design is intended to bring key aspects of the Elizabeth Arden and Red Door Spa brand equities to the retail environment to create a more uniform, modern and engaging shopping experience. The rollout will continue throughout fiscal year 2013 and beyond. Based on the results of the initial roll-out and plans for a more broad-based global roll-out, we may incur costs, expenses and capital expenditures in future periods that could be material to those periods. The specific facts and circumstances of the global roll-out will impact the timing and amount of any such costs, expenses and capital expenditures. In fiscal 2013, we expect to incur pre-tax non-recurring charges of approximately $8 million associated with the Elizabeth Arden brand repositioning resulting from product assortment changes.

In fiscal 2013, we plan to launch the new Visible Difference entry level skin care regimen as part of the repositioning of the Elizabeth Arden brands, Prevage Anti-Aging + Intensive Repair Daily Serum, several new Ceramide skin care products, and a new Red Door fragrance, Red Door Aura. We also plan to launch several fragrances, including our second fragrance for Taylor Swift, a new fragrance for Justin Beiber’s, Girlfriend, the first fragrance for Nicki Minaj, and new fragrances for Britney Spears, Juicy Couture, Lucky and John Varvatos.

During fiscal 2012, we also improved our gross margins by 190 basis points over fiscal 2011. The gross margin was impacted by $4.9 million, or 40 basis points, of inventory-related costs primarily associated with our May and June 2012 acquisitions. See “Recent License Agreements and Acquisitions” and Note 1, under Item 6, “Selected Financial Data” for further information on acquisitions. Moving into fiscal 2013, we expect our gross margins to improve an additional 85 to 110 basis points over our fiscal 2012 gross margins. We also expect our gross margin in fiscal 2013 will be impacted by approximately 130 basis points for costs associated with the Elizabeth Arden brand repositioning and the 2012 acquisitions, which represents a year over year anticipated net impact on our gross margin of 90 basis points related to these costs. We continue to focus on (i) expanding gross margins through increased focus on product mix, improved pricing and reduced sales dilution, (ii) improving our sales and operations planning processes and our supply chain and logistics efficiency and, (iii) leveraging our overhead structure by increasing sales of our International segment.

We manage our business by evaluating net sales, gross margins, EBITDA (as defined in Note 11 under Item 6 “Selected Financial Data”), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable, operating cash flow and return on invested capital). We encounter a variety of challenges that may affect our business and should be considered as described in Item 1A “Risk Factors” and in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Information and Factors That May Affect Future Results.”

 

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Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated financial statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Actual results could differ from those estimates. If these changes result in a material impact to the consolidated financial statements, their impact is disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and/or in the “Notes to the Consolidated Financial Statements.” The disclosures below also note situations in which it is reasonably likely that future financial results could be affected by changes in these estimates and assumptions. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of management.

Our most critical accounting policies and estimates are described in detail below. See Note 1 to the Notes to Consolidated Financial Statements - “General Information and Summary of Significant Accounting Policies,” for a discussion of these and other accounting policies.

Accounting for Acquisitions and Intangible Assets. Under the accounting for business combinations, consideration paid in an acquisition is allocated to the underlying assets and liabilities, based on their respective estimated fair values. The excess of the consideration paid at the acquisition date over the fair values of the identifiable assets acquired or liabilities assumed is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ, and the useful life of property, plant, and equipment acquired will differ substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, net income in a given period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. One area that requires more judgment is determining the fair value and useful lives of intangible assets. Because the fair value and the estimated useful life of an intangible asset is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. For example, if we discontinue or experience a decline in the profitability of one or more of our brands, the value of the intangible assets associated with those brands or their useful lives may decline, or, certain intangible assets such as the Elizabeth Arden brand trademarks, may no longer be classified as an indefinite-lived asset, which could result in additional charges to net income.

Our intangible assets consist of exclusive brand licenses, trademarks, patents and other intellectual property, customer relationships and lists, non-compete agreements and goodwill. The value of these assets is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We have determined that the Elizabeth Arden trademarks have indefinite useful lives as cash flows from the use of the trademarks are expected to be generated indefinitely. Goodwill and intangible assets with indefinite lives such as our Elizabeth Arden trademarks, are not amortized, but rather assessed for impairment at least annually. We typically perform our annual impairment assessment during the fourth quarter of our fiscal year or more frequently if events or changes in circumstances indicate the carrying value of goodwill may not fully be recoverable. During the quarter ended June 30, 2012, we adopted the updated guidance to Topic 350, Intangibles- Goodwill and Other, issued by Financial Accounting Standards Board (“FASB”), which simplifies how an entity assesses goodwill for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment assessment. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Should a goodwill impairment assessment be necessary, there is a two step process for impairment assessing of goodwill. The first step used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment by comparing the estimated fair value of the goodwill and intangible assets to their respective carrying values. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value. See Note 1 to the Notes to Consolidated Financial Statements.

 

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During the quarter ended June 30, 2012, we completed our annual impairment assessment of the Elizabeth Arden trademarks, with the assistance of a third party valuation firm. In assessing the fair value of these trademarks, we considered the income approach. Under the income approach, the fair value is based on the present value of estimated future cash flows. The analysis and assessments of these assets and goodwill indicated that no impairment adjustment was required as the estimated fair value exceeded the recorded carrying value. A hypothetical 10% decrease to the fair value of our Elizabeth Arden trademarks or a hypothetical 1% increase in the discount rate used to estimate fair value would not result in an impairment of our Elizabeth Arden trademarks. During the quarter ended June 30, 2012, we also completed our annual impairment assessment of goodwill using the qualitative assessment under the updated guidance to Topic 350. The analysis indicated that no impairment adjustment was required. A hypothetical 10% decrease in the fair value of our North America reporting unit would not result in an impairment of our goodwill.

Due to the ongoing uncertainty in capital market conditions, we will continue to monitor and evaluate the expected future cash flows of our reporting units and the long-term trends of our market capitalization for the purposes of assessing the carrying value of our goodwill and indefinite-lived Elizabeth Arden trademarks, other trademarks and intangible assets. If market and economic conditions deteriorate, this could increase the likelihood of future material non-cash impairment charges to our results of operations related to our goodwill, indefinite-lived Elizabeth Arden trademarks, or other trademarks and intangible assets.

Depreciation and Amortization. Depreciation and amortization is provided over the estimated useful lives of the assets using the straight line method. Periodically, we review the lives assigned to our long-lived assets and adjust the lives, as circumstances dictate. Because estimated useful life is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. For example, if we experience significant declines in net sales in certain channels of distribution, it could affect the estimated useful life of certain of our long-lived assets, such as counters or trade fixtures, which could result in additional charges to net income.

Long-Lived Assets. We review for the impairment of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. An impairment loss is recognized to the extent the carrying amount of the asset exceeds its estimated fair value. Because the fair value is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. The same circumstances that could affect the estimated useful life of a long-lived asset, as discussed above, could cause us to change our estimate of the fair value of that asset, which could result in additional charges to net income. We did not record any adjustments to our long-lived assets in fiscal 2012, 2011 and 2010. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Revenue Recognition. Sales are recognized when title and risk of loss transfers to the customer, the sales price is fixed or determinable and collectability of the resulting receivable is probable. Sales are recorded net of estimated returns, markdowns and other allowances. The provision for sales returns and markdowns represents management’s estimate of future returns and markdowns based on historical experience and considering current external factors and market conditions.

Allowances for Sales Returns and Markdowns. As is customary in the prestige beauty business, we grant certain of our customers (primarily North American prestige department stores and specialty beauty stores), subject to our authorization and approval, the right to either return product for credit against amounts previously billed or to receive a markdown allowance. Upon sale to such customers, we record a provision for product returns and markdowns estimated based on our level of sales, historical and projected experience with product returns and markdowns in each of our business segments and with respect to each of our product types, current economic trends and changes in customer demand and customer mix. We make detailed estimates at the segment, product and customer level, which are then aggregated to arrive at a consolidated provision for product returns and markdowns and are reviewed periodically as facts and circumstances warrant. Such provisions and markdown allowances are recorded as a reduction of net sales. Because there is considerable judgment used in evaluating the allowance for returns and markdowns, it is reasonably likely that actual experience will differ from our estimates. If, for example, customer demand for our products is lower than estimated or a proportionately greater amount of sales is made to prestige department stores and/or specialty beauty stores, additional provisions for returns or markdowns may be required resulting in a charge to income in the period in which the determination was made. Similarly, if customer demand for our products is higher than estimated, a reduction of our provision for returns or markdowns may be required resulting in an increase to income in the period in which the determination was made. As a percentage of gross sales, our expense for returns and markdowns was 7.3%, 8.3% and 9.2% for the fiscal years ending June 30, 2012, 2011 and 2010, respectively. A hypothetical 5% change in the value of our allowance for sales returns and markdowns as of June 30, 2012 would result in a $0.9 million change to net income.

 

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Allowances for Doubtful Accounts Receivable. We maintain allowances for doubtful accounts to cover uncollectible accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a customer-by-customer review for large accounts. It is reasonably likely that actual experience will differ from our estimates, which may result in an increase or decrease in the allowance for doubtful accounts. If, for example, the financial condition of our customers deteriorates resulting in an impairment of their ability to pay, additional allowances may be required, resulting in a charge to income in the period in which the determination was made. A hypothetical 5% change in the value of our allowance for doubtful accounts receivable as of June 30, 2012 would result in a $0.2 million change to net income.

Provisions for Inventory Obsolescence. We record a provision for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, forecasted demand, the estimated market value, the shelf life of the inventory and our historical experience. Because of the subjective nature of this estimate, it is reasonably likely that circumstances may cause the estimate to change. If, for example, demand for our products declines, or if we decide to discontinue certain products, we may need to increase our provision for inventory obsolescence which would result in additional charges to net income. A hypothetical 5% change in the value of our provision for inventory obsolescence as of June 30, 2012 would result in a $0.9 million change to net income.

Hedge Contracts. We have designated each qualifying foreign currency contract we have entered into as a cash flow hedge. Unrealized gains or losses, net of taxes, associated with these contracts are included in accumulated other comprehensive income on the balance sheet. Gains and losses will only be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring.

Share-Based Compensation. All share-based payments to employees, including the grants of employee stock options, are recognized in the consolidated financial statements based on their fair values, but only to the extent that vesting is considered probable. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The fair value of stock options is determined using the Black-Scholes option-pricing model. The fair value of restricted stock and restricted stock unit awards is based on the closing price of our common stock on the date of grant. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions are based on or determined from external data and other assumptions may be derived from our historical experience with share-based arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.

We rely on our historical experience and post-vested termination activity to provide data for estimating our expected term for use in determining the fair value of our stock options. We currently estimate our stock volatility by considering our historical stock volatility experience and other key factors. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. We estimate forfeitures using our historical experience. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change. If, for example, actual forfeitures are lower than our estimate, additional charges to net income may be required.

Income Taxes and Valuation Reserves. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider projected future taxable income and ongoing tax planning strategies in assessing a potential valuation allowance. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset would likely be charged or credited to net income in the period in which such determination was made.

We recognize in our consolidated financial statements the impact of a tax position if it is more likely than not that such position will be sustained on audit based on its technical merits. While we believe that our assessments of whether our tax positions are more likely than not to be sustained are reasonable, each assessment is subjective and requires the use of significant judgments. As a result, one or more of such assessments may prove ultimately to be incorrect, which could result in a change to net income. See Note 12 to the Notes to Consolidated Financial Statements.

 

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Foreign Currency Contracts

We operate in several foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of our foreign subsidiaries’ revenues to fluctuations in currency rates using foreign currency forward contracts. We also enter into cash flow hedges for a portion of our forecasted inventory purchases to reduce the exposure of our Canadian and Australian subsidiaries’ cost of sales to such fluctuations, as well as cash flow hedges for a portion of our subsidiaries’ forecasted Swiss franc operating costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. We do not enter into derivative financial contracts for speculative or trading purposes.

Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, to the extent such contracts are effective, and are recognized in net sales or cost of sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the fiscal years ended June 30, 2012, 2011 or 2010 relating to foreign currency contracts used to hedge forecasted revenues or forecasted inventory purchases resulting from hedge ineffectiveness.

When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce exposure of our foreign subsidiaries’ balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire.

The table below summarizes the effect of the pre-tax (loss) gain from our settled foreign currency contracts on the specified line items in our consolidated statements of income for the years ended June 30, 2012, 2011 and 2010.

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011     2010  

Net Sales

   $ 391      $ (975   $ 766   

Cost of Sales

     (1,284     (2,199     (662

Selling, general and administrative

     451        (3,209     1,336   
  

 

 

   

 

 

   

 

 

 

Total pre-tax (loss) gain

   $ (442   $ (6,383   $ 1,440   
  

 

 

   

 

 

   

 

 

 

 

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RESULTS OF OPERATIONS

The following table compares our historical results of operations, including as a percentage of net sales, on a consolidated basis, for the years ended June 30, 2012, 2011 and 2010. (Amounts in thousands, other than percentages. Percentages may not add due to rounding):

 

     Year Ended June 30,  
     2012     2011     2010  

Net sales

   $ 1,238,273         100.0   $ 1,175,500         100.0   $ 1,103,777         100.0

Cost of sales

     623,985         50.4        614,134         52.3        602,763         54.6   

Depreciation related to cost of goods sold

     5,257         0.4        5,089         0.4        5,040         0.5   

Gross profit

     609,031         49.2        556,277         47.3        495,974         44.9   

Selling, general and administrative expenses

     484,963         39.2        453,956         38.6        427,762         38.7   

Depreciation and amortization

     28,797         2.3        24,746         2.1        23,419         2.1   

Income from operations

     95,271         7.7        77,575         6.6        44,793         4.1   

Interest expense

     21,759         1.8        21,481         1.8        21,885         2.0   

Debt extinguishment charges

     —           —          6,468         0.6        82         —     

Income before income taxes

     73,512         5.9        49,626         4.2        22,826         2.1   

Provision for income taxes

     16,093         1.3        8,637         0.7        3,293         0.3   

Net income

     57,419         4.6        40,989         3.5        19,533         1.8   
     Year Ended June 30,  
     2012     2011     2010  

Other data:

               

EBITDA and EBITDA margin(1)

   $ 129,325         10.4   $ 100,942         8.6   $ 73,170         6.6

 

(1) For a definition of EBITDA and a reconciliation of net income to EBITDA, see Note 11 under Item 6 “Selected Financial Data.” EBITDA margin represents EBITDA divided by net sales.

At June 30, 2012, our operations were organized into the following two operating segments, which also comprise our reportable segments:

 

   

North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including our Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes our direct to consumer business, which is composed of our Elizabeth Arden branded retail outlet stores and global e-commerce business. This segment also sells our Elizabeth Arden products through the Red Door beauty salons, which are owned and operated by an unrelated third party that licenses the Elizabeth Arden and Red Door trademarks from us for use in its salons.

 

   

International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, in approximately 120 countries outside of North America to perfumeries, boutiques, department stores, travel retail outlets and distributors.

In light of the repositioning of the Elizabeth Arden brand and our target for completing the initial roll-out of the repositioning by the early October 2012, commencing with the first quarter of fiscal 2013, we will disclose financial information relating to the following product categories: the Elizabeth Arden Brand (skin care, cosmetics and fragrances) and Celebrity, Lifestyle, Designer and Other Fragrances, in addition to our current segment reporting.

Segment profit excludes depreciation and amortization, interest expense, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit to consolidated income before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) costs related to our Global Efficiency Re-engineering Initiative (which we refer to as the “Initiative”), which was substantially completed in fiscal 2011, (iii) restructuring costs for corporate operations, and (iv) acquisition-related costs. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. We do not have any intersegment sales.

 

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The following table is a comparative summary of our net sales and segment profit by operating segment for the years ended June 30, 2012, 2011 and 2010, and reflects the basis of presentation described in Note 1 - “General Information & Summary of Significant Accounting Policies” and Note 18 - “Segment Data and Related Information” to the Notes to Consolidated Financial Statements for all periods presented.

 

(Amounts in thousands)    Year Ended June 30,  
     2012     2011     2010  

Segment Net Sales:

      

North America

   $ 778,407      $ 756,731      $ 719,330   

International

     459,866        418,769        384,447   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,238,273      $ 1,175,500      $ 1,103,777   
  

 

 

   

 

 

   

 

 

 

Segment Profit:

      

North America

   $ 128,692      $ 104,013      $ 92,741   

International

     13,316        6,420        551   

Less:

      

Depreciation and Amortization

     34,054        29,835        28,459   

Interest expense, net

     21,759        21,481        21,885   

Consolidation and Elimination Adjustments

     5,575        1,854        13,509 (3) 

Unallocated Corporate Expenses

     7,108 (1)      7,637 (2)      6,613 (4) 
  

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

   $ 73,512      $ 49,626      $ 22,826   
  

 

 

   

 

 

   

 

 

 

 

(1) Amounts shown for the year ended June 30, 2012 include $4.5 million of inventory–related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisitions from those companies, and $0.8 million in transaction costs associated with such acquisitions, $0.4 million for product discontinuation charges, and $1.4 million of license termination costs.
(2) Amounts shown for the year ended June 30, 2011 include (i) $6.5 million of debt extinguishment charges, (ii) $0.5 million of restructuring expenses for corporate operations, not related to the Initiative, (iii) $0.3 million of restructuring expenses related to the Initiative, and (iv) $0.3 million of expenses related to the implementation of an Oracle accounting and order processing system.
(3) Amounts for the year ended June 30, 2010, include $5.5 million related to a lower than normal price charged to the North America segment with respect to certain sales of inventory by that segment that were undertaken at the direction of corporate, rather than segment, management.
(4) Amounts for the year ended June 30, 2010, include (i) $3.9 million of expenses related to the implementation of an Oracle accounting and order processing system, (ii) $1.9 million of restructuring expenses related to the Initiative, (iii) $0.7 million of restructuring expenses not related to the Initiative, and (iv) $0.1 million of debt extinguishment costs.

Year Ended June 30, 2012 Compared to Year Ended June 30, 2011

Net Sales. Net sales increased by 5.3% or $62.8 million for the year ended June 30, 2012, compared to the year ended June 30, 2011. The impact of foreign currency translation was not material. Net sales for Elizabeth Arden branded products increased by $29.7 million due to higher sales in all product categories, primarily led by higher sales of skin care products. Net sales of licensed and other owned fragrance brands increased by $5.1 million primarily due to the launches of the Taylor Swift fragrance Wonderstruck and the John Varvatos fragrance Star USA, as well as higher sales of Viva La Juicy and Curve fragrances. Partially offsetting these increases were lower sales of Mariah Carey, Britney Spears and Usher fragrances, as well as lower sales of other Juicy Couture fragrances due in part to the prior year launch of Peace, Love & Juicy Couture. Net sales of distributed brands sold under licenses recently acquired in the 2012 Acquisitions and net sales of other distributed brands increased by $17.0 million and $10.7 million, respectively, as compared to the prior year. Pricing changes had an immaterial effect on net sales.

 

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North America

Net sales increased by 2.9% or $21.7 million. The impact of foreign currency translation was not material. Net sales of Elizabeth Arden branded products were flat. Net sales of licensed and other owned fragrance brands decreased by $5.3 million due to lower sales of Juicy Couture, Mariah Carey, Usher and Britney Spears fragrances. Partially offsetting these decreases were higher sales from the launch of the Taylor Swift fragrance Wonderstruck as well as higher sales of Curve and the John Varvatos fragrance Star USA. Net sales of distributed brands sold under licenses recently acquired in the 2012 Acquisitions and net sales of other distributed brands increased by $16.7 million and $10.2 million, respectively, as compared to the prior year. Higher sales to department store customers led our North America results.

International

Net sales increased by 9.8% or $41.1 million. The impact of foreign currency translation was not material. Net sales of Elizabeth Arden branded products increased by $29.8 million due to higher sales in all product categories, primarily led by higher sales of skin care products. Net sales of licensed and other owned fragrance brands increased by $10.4 million primarily due to higher sales of Viva La Juicy and John Varvatos fragrances, and the launch of the Taylor Swift fragrance Wonderstruck in select markets primarily in Australia and New Zealand. Our international results were led by higher sales of $21.3 million in Europe and $12.0 million in travel retail and distributor markets.

Gross Margin. For the years ended June 30, 2012 and 2011, gross margins were 49.2% and 47.3%, respectively. Gross margin in the current year period benefited from a higher proportion of sales of Elizabeth Arden products, primarily skin care products which have higher gross margins, as well as improved operating efficiencies, including lower freight and distribution costs. Partially offsetting these benefits were $4.9 million, or 40 basis points, of inventory–related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisitions.

SG&A. Selling, general and administrative expenses increased 6.8%, or $31.0 million, for the year ended June 30, 2012, compared to the year ended June 30, 2011. The increase was due to higher marketing and sales expenses of $24.4 million and higher general and administrative expenses of $6.6 million. The increase in marketing and sales expenses was primarily due to higher advertising, sales promotion, and direct selling and development expenses of $24.3 million. The increase in general and administrative expenses was principally due to (i) higher payroll related costs, net of lower incentive compensation, of $2.2 million, and (ii) the unfavorable impact of foreign currency translation of certain of our affiliates’ balance sheets as the current year included losses of $4.2 million compared to losses of $0.9 million in the prior year. For the year ended June 30, 2012, general and administrative expenses also included a total of $2.2 million of license termination costs and transaction costs for the 2012 Acquisitions. For the year ended June 30, 2011, total restructuring and Initiative-related one-time costs totaled $1.4 million.

Segment Profit

North America

Segment profit increased 23.7% or $24.7 million. The increase in segment profit was due to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses as further described above.

International

Segment profit increased 107.4% or $6.9 million. The increase in segment profit was due to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses as further described above.

Depreciation and Amortization Expense. Depreciation and amortization expense increased by 16.3% or $4.1 million, for the year ended June 30, 2012, compared to the year ended June 30, 2011, primarily due to higher amortization expense related to the amended licensing agreement with Liz Claiborne, Inc. and the 2012 Acquisitions, as well as higher depreciation for leasehold improvements and IT equipment.

Interest Expense. Interest expense, net of interest income, increased 1.3%, or $0.3 million, for the year ended June 30, 2012, compared to the year ended June 30, 2011. The increase was primarily due to higher long-term debt in the current year as a result of the higher aggregate principal amount of our 7 3/8% senior notes issued in January 2011, as compared to the 7 3/4% senior subordinated notes that were outstanding during the first half of the prior year. See Notes 8 and 9 to the Notes to Consolidated Financial Statements.

 

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Debt Extinguishment Charges. For the year ended June 30, 2011, we recorded $6.5 million in debt extinguishment charges related to the purchase and redemption of our previously outstanding 7 3/4% senior subordinated notes and the amendment of our revolving bank credit facility. See Notes 8 and 9 to the Notes to Consolidated Financial Statements.

Provision for Income Taxes. The pre-tax income from our domestic and international operations consisted of the following for the years ended June 30, 2012 and 2011:

 

(Amounts in thousands)    Year Ended  
     June 30,
2012
    June 30,
2011
 

Domestic pre-tax income

   $ 16,964      $ 5,887   

Foreign pre-tax income

     56,548        43,739   
  

 

 

   

 

 

 

Total income before income taxes

   $ 73,512      $ 49,626   
  

 

 

   

 

 

 

Effective tax rate

     21.9     17.4
  

 

 

   

 

 

 

The increase in the effective tax rate in the current year period as compared to the prior year period was mainly due to (i) higher earnings contributions from our domestic operations in the current year as compared to the prior year, and (ii) a shift in the ratio of earnings contributions between jurisdictions that have different tax rates. Our domestic operations are tax-effected at a higher rate than our foreign operations. The impact of discrete tax adjustments in the current year, were not material to the effective tax rate. The prior year effective tax rate included a net tax benefit of $1.4 million, of which (i) $0.9 million related to the closure of foreign tax audits and was recorded in the fourth quarter, (ii) $0.3 million related to the reversal of valuation allowances associated with net operating losses previously recorded by certain international subsidiaries that became realizable, and (iii) $0.2 million related to tax benefits due to changes in estimates for certain entities. Also included in the prior year effective tax rates was a tax benefit of $0.6 million related to research and development and foreign tax credits. See Note 12 to the Notes to Consolidated Financial Statements.

A substantial portion of our consolidated taxable income is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income. As a result, any material shift in the relative proportion of our consolidated taxable income that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate.

Net Income. Net income for the year ended June 30, 2012, was $57.4 million compared to $41.0 million for the year ended June 30, 2011. The increase in net income was primarily the result of higher net income from operations, partially offset by a higher effective tax rate in the current year period.

EBITDA. EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) of $129.3 million for the year ended June 30, 2012, includes $7.1 million of costs comprised of (i) $4.5 million of inventory–related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the asset acquisitions from those companies, (ii) $0.8 million in transaction costs associated with such acquisitions. (iii) $0.4 million for product discontinuation charges, and (iv) $1.4 million of license termination costs. EBITDA for the year ended June 30, 2011 was $100.9 million and included $6.5 million in debt extinguishment charges and restructuring and Initiative-related one-time costs of $0.6 million. The increase in EBITDA in the current year of approximately $28.4 million compared to the prior year was primarily the result of higher income from operations as discussed above. For a discussion of EBITDA and a reconciliation of net income to EBITDA for the years ended June 30, 2012 and 2011, see Note 11 under Item 6, “Selected Financial Data.”

 

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Year Ended June 30, 2011 Compared to Year Ended June 30, 2010

Net Sales. Net sales increased by 6.5% or $71.7 million for the year ended June 30, 2011, compared to the year ended June 30, 2010. Excluding the favorable impact of foreign currency translation, net sales increased by 5.9% or $64.9 million. Net sales of Elizabeth Arden branded products increased by $32.8 million, led primarily by higher sales of skin care products and fragrances. Net sales of licensed and other owned products increased by $37.5 million, primarily due to higher sales of (i) the Juicy Couture fragrances, (ii) the recently licensed fragrance brands of John Varvatos and Kate Spade, and (iii) Britney Spears fragrances due to the launch of radiance Britney Spears. Partially offsetting these net sales increases were lower sales of Rocawear, Usher and Alberta Ferretti fragrances. Sales of distributed brands were $3.4 million higher than the prior year. Pricing changes had an immaterial effect on net sales.

North America

Net sales increased by 5.2% or $37.4 million. Excluding the favorable impact of foreign currency translation, net sales increased by 4.9% or $35.2 million. Net sales of Elizabeth Arden branded products increased by $18.4 million as higher sales of skin care and color cosmetic products were slightly offset by lower sales of fragrances. Net sales of licensed and other owned products increased by $15.0 million primarily due to higher sales of Juicy Couture fragrances and the recently licensed fragrance brands of John Varvatos and Kate Spade, partially offset by lower sales of Britney Spears and Rocawear fragrances. Sales of distributed brands increased by $3.5 million over the prior year. Net sales to mass retail customers increased by $36.9 million.

International

Net sales increased by 8.9% or $34.3 million. Excluding the favorable impact of foreign currency translation, net sales increased by 7.7 % or $29.7 million. Net sales of Elizabeth Arden branded products increased by $14.4 million, led by higher sales of fragrances and skin care products. Net sales of licensed and other owned products also increased by $22.5 million, primarily due to higher sales of (i) the Juicy Couture fragrances, due primarily to the launch of Peace Love & Juicy Couture, and (ii) Britney Spears fragrances, due primarily to the launch of radiance Britney Spears, and (iii) the recently licensed John Varvatos fragrances, slightly offset by lower sales of Alberta Ferretti fragrances. Our results were led by higher net sales of $20.8 million for travel retail and distributor markets and higher net sales of $7.3 million in Europe, primarily in the United Kingdom.

Gross Margin. For the years ended June 30, 2011 and 2010, gross margins were 47.3% and 44.9%, respectively. Gross margin in the current year period benefited from a higher proportion of basic sales of Elizabeth Arden products and licensed brands, which reflect higher gross margins as compared to distributed brands and promotional product sales, as well as improved operating efficiencies due to the Initiative.

SG&A. Selling, general and administrative expenses increased 6.1%, or $26.2 million, for the year ended June 30, 2011, compared to the year ended June 30, 2010. The increase was due to higher marketing and sales expenses of $15.9 million and higher general and administrative expenses of $10.3 million. The increase in marketing and sales expenses was primarily due to (i) higher media expenses of $7.4 million, (ii) higher marketing and sales overhead expenses of $5.2 million, and (iii) higher royalty expenses of $3.4 million due to higher sales of licensed brands. The increase in general and administrative expenses was principally due to higher payroll and incentive compensation costs of $15.0 million, and higher professional services costs, partially offset by lower restructuring expenses and Initiative-related one-time costs and $3.1 million of higher losses in the prior year period related to the impact of foreign currency translation of our affiliates’ balance sheets. For the year ended June 30, 2011, total restructuring and Initiative-related one-time costs totaled $1.4 million as compared to $7.3 million for the year ended June 30, 2010.

Segment Profit

North America

Segment profit increased 12.2% or $11.3 million. The increase in segment profit was due to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses as further described above.

International

Segment profit increased 1,065.2% or $5.9 million. The increase in segment profit was due to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses as further described above.

 

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Interest Expense. Interest expense, net of interest income, decreased 1.8%, or $0.4 million, for the year ended June 30, 2011, compared to the year ended June 30, 2010. The decrease was due to lower average borrowings under our revolving bank credit facility, partially offset by higher long-term debt during the second half of fiscal 2011 as a result of the higher aggregate principal amount of our 7 3/8% senior notes issued in January 2011, as compared to the 7 3/4% senior subordinated notes that were outstanding during the prior year period. See Note 8 and Note 9 to the Notes to Consolidated Financial Statements.

Debt Extinguishment Charges. For the year ended June 30, 2011, we recorded $6.5 million in debt extinguishment charges related to the purchase and redemption of our previously outstanding 7 3/4% senior subordinated notes and the amendment of our revolving bank credit facility. See Note 8 and Note 9 to the Notes to Consolidated Financial Statements. For the year ended June 30, 2010, we recorded $0.1 million in debt extinguishment charges related to the repurchase of $5.0 million of our 7 3/4% senior subordinated notes.

Provision for Income Taxes. The pre-tax income from our domestic and international operations consisted of the following for the years ended June 30, 2011 and 2010:

 

(Amounts in thousands)    Year Ended  
     June 30,
2011
    June 30,
2010
 

Domestic pre-tax income

   $ 5,887      $ 222   

Foreign pre-tax income

     43,739        22,604   
  

 

 

   

 

 

 

Total income before income taxes

   $ 49,626      $ 22,826   
  

 

 

   

 

 

 

Effective tax rate

     17.4     14.4
  

 

 

   

 

 

 

The increase in the effective tax rate in the current year period as compared to the prior year period was mainly due to (i) higher earnings contributions from our domestic operations in the current year period as compared to the prior year, and (ii) a shift in the ratio of earnings contributions between jurisdictions that have different tax rates. Our domestic operations are tax-effected at a higher rate than our foreign operations. The current year effective tax rate included a net tax benefit of $1.4 million, of which (i) $0.9 million related to the closure of foreign tax audits and was recorded in the fourth quarter, (ii) $0.3 million related to the reversal of valuation allowances associated with net operating losses previously recorded by certain international subsidiaries that became realizable, and (iii) $0.2 million related to tax benefits due to changes in estimates for certain entities. The prior year effective tax rate included a net tax benefit of $1.1 million, of which (i) $0.8 million related to the expiration of the statute of limitations for certain unrecognized tax benefits, (ii) $0.5 million related to the reversal of valuation allowances associated with net operating losses previously recorded by certain international subsidiaries that became realizable, and (iii) $0.4 million related to tax benefits due to changes in estimates for certain entities that was partially offset by increased taxes of $0.6 million resulting from changes in statutory tax rates. Also included in the current and prior year effective tax rates were tax benefits of $0.6 million related to research and development and foreign tax credits. See Note 12 to the Notes to Consolidated Financial Statements.

A substantial portion of our consolidated taxable income is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income. As a result, any material shift in the relative proportion of our consolidated taxable income that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate.

Net Income. Net income for the year ended June 30, 2011, was $41.0 million compared to $19.5 million for the year ended June 30, 2010. The increase in net income was the result of higher net income from operations, partially offset by the $6.5 million in debt extinguishment charges and a higher effective tax rate in the current year period.

EBITDA. EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) of $100.9 million for the year ended June 30, 2011 included $6.5 million in debt extinguishment charges and restructuring and Initiative-related one-time costs of $0.6 million. EBITDA for the year ended June 30, 2010, was $73.2 million and included total restructuring and Initiative-related one-time costs of $7.3 million. The increase in EBITDA in the current year compared to the prior year of approximately $27.8 million was the result of higher income from operations. For a discussion of EBITDA and a reconciliation of net income to EBITDA for the years ended June 30, 2011 and 2010, see Note 11 under Item 6, “Selected Financial Data.”

 

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Seasonality

Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2012, approximately 59% of our net sales were made during the first half of our fiscal year. Due to product innovation and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

Liquidity and Capital Resources

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011     2010  

Net cash provided by operating activities

   $ 58,524      $ 97,746      $ 113,959   

Net cash used in investing activities

     (153,224     (39,472     (35,721

Net cash provided by (used in) financing activities

     96,760        (28,519     (74,337

Net increase in cash and cash equivalents

     230        31,969        3,779   

Operating Activities

Cash provided by our operating activities is driven by net income adjusted for non-cash expenses and debt extinguishment charges, and changes in working capital. The following chart illustrates our net cash provided by operating activities during the years ended June 30, 2012, 2011 and 2010:

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011      2010  

Net income including adjustments to reconcile to net cash provided by operating activities

   $ 105,071      $ 85,645       $ 52,308   

Net change in assets and liabilities, net of acquisitions (“working capital changes”)

     (46,547     12,101         61,651   
  

 

 

   

 

 

    

 

 

 

Net cash provided by operations

   $ 58,524      $ 97,746       $ 113,959   
  

 

 

   

 

 

    

 

 

 

For the year ended June 30, 2012, net cash provided by operating activities was $58.5 million, as compared to $97.7 million for the year ended June 30, 2011. Net income adjusted for non-cash items increased by $19.4 million as compared to the prior year. Working capital changes utilized cash of $46.5 million in the current year as compared to providing cash of $12.1 million in the prior year. The increase in cash utilized by working capital changes primarily related to (i) a larger increase in accounts receivable due to the increase in and timing of sales in the fourth quarter, (ii) higher inventory purchases in the current year primarily due to the brand repositioning for Elizabeth Arden, (iii) royalty prepayments and other payments to licensors and suppliers in connection with the 2012 Acquisitions and the amended license agreement with Liz Claiborne, and (iv) higher cash payments and lower accruals in the current year as compared to prior year incentive compensation payments and accruals. These increases were partially offset by higher accounts payable, primarily due to the timing of payments to vendors and inventory purchases.

For the year ended June 30, 2011, net cash provided by operating activities was $97.7 million, as compared to $114.0 million for the year ended June 30, 2010. Net income adjusted for non-cash items and debt extinguishment charges increased by $33.3 million as compared to the prior year. Working capital changes provided cash of $12.1 million in the current year period as compared to $61.7 million in the prior year. This decrease in cash provided by working capital changes primarily related to (i) inventory as the prior year period included significant reductions in inventory levels, and (ii) continued reductions in accounts payable.

 

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Investing Activities

The following chart illustrates our net cash used in investing activities during the years ended June 30, 2012, 2011 and 2010:

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011     2010  

Additions to property and equipment

   $ (24,088   $ (25,608   $ (35,388

Acquisition of businesses, intangible and other assets

     (129,136     (13,864     (333
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (153,224   $ (39,472   $ (35,721
  

 

 

   

 

 

   

 

 

 

For the year ended June 30, 2012, net cash used in investing activities of $153.2 million was composed of $24.1 million of capital expenditures and $129.1 million related to the acquisition of businesses, intangibles and other assets. The acquisition of businesses, intangibles and other assets was primarily composed of (i) $43.9 million for the acquisition of trademarks for the Curve fragrance brands and certain other smaller fragrance brands from the amendment of the license agreement with Liz Claiborne, (ii) $58.1 million for the acquisition of intangible assets, inventory and other assets from New Wave LLC and (iii) $26.5 for the acquisition of intangible assets, inventory and other assets from Give Back Brands LLC. During the year ended June 30, 2012, we also paid an aggregate of $0.6 million for the license agreements for a cosmetic formula and patent. Upon the achievement of certain sales targets, we will be required to pay an additional $0.5 million and will acquire the formula under one of the agreements. For the year ended June 30, 2011, net cash used in investing activities of $39.5 million was composed of (i) $25.6 million of capital expenditures primarily for in-store counters and displays, leasehold improvements and computer hardware and software, and (ii) $13.9 million of payments related to the acquisition of the Prevage trademarks and related patents and the global license agreement with John Varvatos Apparel Corp. for the manufacture, distribution and marketing of John Varvatos fragrances.

We currently expect to incur approximately $40 million in capital expenditures in the year ending June 30, 2013, primarily for in-store counters and displays related to the Elizabeth Arden brand repositioning, tools and dies for new fragrance launches, as well as leasehold improvements and computer hardware and software.

Financing Activities

The following chart illustrates our net cash provided by (used in) financing activities during the years ended June 30, 2012, 2011 and 2010:

 

     Year Ended June 30,  
(Amounts in thousands)    2012      2011     2010  

Proceeds from (payments on) short-term debt

   $ 89,200       $ (59,000   $ (56,000

Proceeds from (payments on) long-term debt

     —           243,996        (545

Repurchase of senior subordinated notes

     —           (223,332     (5,000

Repurchase of common stock

     —           (13,758     (13,779

Proceeds from the exercise of stock options

     5,570         20,432        1,591   

All other financing activities

     1,990         3,143        (604
  

 

 

    

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   $ 96,760       $ (28,519   $ (74,337
  

 

 

    

 

 

   

 

 

 

On January 21, 2011, the Company issued $250 million aggregate principal amount of 7 3/8% senior notes due March 2021. Concurrently with the offering of the 7 3/8% senior notes, the Company commenced a cash tender offer and consent solicitation for any and all of its $220 million of outstanding 7 3/4% senior subordinated notes due January 2014. All of the outstanding 7 3/4% senior subordinated notes were either purchased or redeemed during the third quarter of fiscal 2011. See Note 9 to the Notes to Consolidated Financial Statements for further information.

For the year ended June 30, 2012, net cash provided by financing activities was $96.8 million, as compared to net cash used in financing activities of $28.5 million for the year ended June 30, 2011. For the year ended June 30, 2012, borrowings under our credit facility increased by $89.2 million primarily to fund the 2012 Acquisitions. There were no borrowings outstanding under our credit facility at June 30, 2011. Proceeds from the exercise of stock options were $5.6 million for the fiscal year ended June 30, 2012 period compared to $20.4 million for the prior year. There were no repurchases of common stock during the fiscal year ended June 30, 2012, and repurchases of common stock in the prior year were $13.8 million.

 

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For the year ended June 30, 2011, net cash used in financing activities was $28.5 million, as compared to net cash used in financing activities of $74.3 million for the year ended June 30, 2010. The decrease in net cash used in financing activities resulted primarily from the refinancing of our senior notes in January 2011, including using the proceeds to pay down borrowings under our credit facility. For the year ended June 30, 2011, borrowings under our credit facility decreased by $59.0 million. Proceeds from the exercise of stock options were $20.4 million for the year ended June 30, 2011 compared to $1.6 million for the prior year ended June 30, 2010. Repurchases of common stock for each of the years ended June 30, 2011 and 2010 were $13.8 million. The repurchases of common stock for the year ended June 30, 2011, included approximately $1.2 million for the settlement of shares that were repurchased at the end of fiscal 2010 under our repurchase program and approximately $3.4 million for shares withheld by us upon the March 2011 vesting of certain market-based restricted stock granted in 2005 to satisfy minimum statutory tax withholding obligations resulting from such vesting.

Interest paid during the year ended June 30, 2012, included $21.3 million of interest payments on the 7 3/8% senior notes due to the timing of interest payments following the issuance of such notes in January 2011 and $2.2 million of interest paid on the borrowings under our credit facility. Interest paid during the year ended June 30, 2011, included $16.0 million of interest payments on the 7 3/4% senior subordinated notes and $2.3 million of interest paid on the borrowings under our credit facility. Interest paid during the year ended June 30, 2010, included $17.5 million of interest payments on our previously outstanding 7 3/4% senior subordinated notes and $2.9 million of interest paid on the borrowings under our credit facility.

At June 30, 2012, we had approximately $59.1 million of cash, of which $53.7 million was held outside of the United States primarily in Switzerland, South Africa and Australia. The cash held outside the U.S. was needed to meet local working capital requirements and therefore considered permanently reinvested in the applicable local subsidiary.

Debt and Contractual Financial Obligations and Commitments. At June 30, 2012, our long-term debt and financial obligations and commitments by due dates were as follows:

 

            Payments Due by Period  
(Amounts in thousands)    Total      Less Than
1 Year
     1 - 3 Years      3 - 5 Years      More
Than 5
Years
 

Long-term debt, including current portion

   $ 250,000       $ —         $ —         $ —         $ 250,000   

Interest payments on long-term debt(1)

     161,331         18,438         36,876         36,876         69,141   

Operating lease obligations

     86,676         16,372         27,753         19,969         22,582   

Purchase obligations(2)

     446,166         301,811         77,508         57,823         9,024   

Other long-term obligations(3)

     31,376         4,960         26,416         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 975,549       $ 341,581       $ 168,553       $ 114,668       $ 350,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of interest at the rate of 7 3/8% per annum on the $250 million aggregate principal amount of 7 3/8% senior notes. See Note 9 to the Notes to Consolidated Financial Statements.
(2) Consists of obligations incurred in the ordinary course of business related to purchase commitments for finished goods, raw materials, components, advertising, promotional items, minimum royalty guarantees, insurance, services pursuant to legally binding obligations, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions.
(3) Includes: (i) the contingent consideration which may become payable to Give Back Brands LLC if certain sales targets are met, but (ii) excludes $4.9 million of gross unrecognized tax benefits that, if not realized, would result in cash payments. We cannot currently estimate when, or if, any of the gross unrecognized tax benefits, will be due. See Notes 11 and 12 to the Notes to Consolidated Financial Statements.

 

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Future Liquidity and Capital Needs. Our principal future uses of funds are for working capital requirements, including brand and product development and marketing expenses, new product launches, additional brand acquisitions or product licensing and distribution arrangements, capital expenditures and debt service. In addition, we may use funds to repurchase material amounts of our common stock and senior notes through open market purchases, privately negotiated transactions or otherwise, depending upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We have historically financed our working capital needs primarily through internally generated funds, our credit facility and external financing. We collect cash from our customers based on our sales to them and their respective payment terms.

We have a $300 million revolving bank credit facility with a syndicate of banks, for which JPMorgan Chase Bank is the administrative agent, which generally provides for borrowings on a revolving basis, with a sub-limit of $25 million for letters of credit. See Note 8 to the Notes to Consolidated Financial Statements. Under the terms of the credit facility, we may, at any time, increase the size of the credit facility up to $375 million without entering into a formal amendment requiring the consent of all of the banks, subject to our satisfaction of certain conditions. The credit facility was amended in June 2012 to allow for the contingent consideration that may become payable with respect to the acquisition of certain assets of Give Back Brands LLC and to allow for the term loan further discussed below. The credit facility expires in January 2016.

The credit facility is guaranteed by all of our U.S. subsidiaries and is collateralized by a first priority lien on all of our U.S. accounts receivable and inventory. Borrowings under the new credit facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of our inventory, as determined pursuant to the terms of the credit facility; provided, however, that from August 15 to October 31 of each year, our borrowing base may be temporarily increased by up to $25 million.

The credit facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declines to less than $25 million ($35 million from September 1 through January 31). Our average borrowing base capacity for each of the quarters during fiscal 2012 did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply during the year ended June 30, 2012. We were in compliance with all applicable covenants under the credit facility for the quarter and year ended June 30, 2012.

Under the terms of the credit facility, we may pay dividends or repurchase common stock if we maintain borrowing base capacity of at least $25 million from February 1 to August 31, and at least $35 million from September 1 to January 31, after making the applicable payment. The credit facility restricts us from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

Borrowings under the credit portion of the credit facility bear interest at a floating rate based on an “Applicable Margin” which is determined by reference to a debt service coverage ratio. At our option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate. The Applicable Margin charged on LIBOR loans ranges from 1.75% to 2.50% and ranges from 0.25% to 1.0% for base rate loans, except that the Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in our borrowing base is in effect, is 1.0% higher. We are required to pay an unused commitment fee ranging from 0.375% to 0.50% based on the quarterly average unused portion of the credit facility. The interest rates payable by us on our 7 3/8% senior notes and on borrowings under our revolving credit facility are not impacted by credit rating agency actions.

At June 30, 2012, the Applicable Margin was 1.75% for LIBOR loans and 0.25% for prime rate loans. The commitment fee on the unused portion of the credit facility at June 30, 2012 was 0.50%. For both the years ended June 30, 2012 and 2011, the weighted average annual interest rate on borrowings under our credit facility was 2.2%.

At June 30, 2012, we had $89.2 million in borrowings and $4.4 million in letters of credit outstanding under the credit facility. At June 30, 2012, based on eligible accounts receivable and inventory available as collateral, an additional $51.5 million could be borrowed under our credit facility. In connection with the 2012 Acquisitions and to take advantage of favorable interest rates and provide us with additional financial flexibility, on June 12, 2012, we entered into a second lien credit agreement with JPMorgan Chase Bank, N.A. providing us with the ability to borrow up to $30 million on or prior to July 2, 2012. On July 2, 2012 we borrowed $30 million under this term loan and used the proceeds to repay amounts under our credit facility. The term loan is collateralized by a second priority lien on all of our U.S. accounts receivable and inventories, and the interest on borrowings charged under the term loan is either LIBOR plus an applicable margin of 3.75% or the base rate specified in the term loan (which is comparable to prime rates) plus a margin of 2.75%. The term loan matures on July 2, 2014, but we have the option to prepay all or a portion of the term loan anytime on or after February 1, 2013, provided our borrowing availability under the credit facility is in excess of $35 million after giving effect to the applicable prepayment each day for the 30 day period ending on the date of the prepayment.

 

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At June 30, 2012, we had outstanding $250 million aggregate principal amount of 7 3/8% senior notes due March 2021. Interest on the 7 3/8% senior notes accrues at a rate of 7.375% per annum and is payable semi-annually on March 15 and September 15 of every year. The 7 3/8% senior notes rank pari passu in right of payment to indebtedness under our credit facility and any other senior debt, and will rank senior to any future subordinated indebtedness; provided, however, that the 7 3/8% senior notes are effectively subordinated to the credit facility and the term loan to the extent of the collateral securing the credit facility and term loan. The indenture applicable to the 7 3/8% senior notes generally permits us (subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness, pay dividends, purchase or redeem our common stock or redeem subordinated indebtedness. The indenture generally limits our ability to create liens, merge or transfer or sell assets. The indenture also provides that the holders of the 7 3/8% senior notes have the option to require us to repurchase their notes in the event of a change of control involving us (as defined in the indenture). The 7 3/8% senior notes initially will not be guaranteed by any of our subsidiaries but could become guaranteed in the future by any domestic subsidiary of ours that guarantees or incurs certain indebtedness in excess of $10 million.

Based upon our internal projections, we believe that existing cash and cash equivalents, internally generated funds and borrowings under our credit facility will be sufficient to cover debt service, working capital requirements and capital expenditures for the next twelve months, other than additional working capital requirements that may result from further expansion of our operations through acquisitions of additional brands or licensing or distribution arrangements. A deterioration in the economic and retail environment, however, could cause us to fail to satisfy the financial maintenance covenant under our credit facility that applies only in the event we do not have the requisite average borrowing base capacity as set forth under the credit facility. In such an event, we would not be allowed to borrow under the credit facility and may not have access to the capital necessary for our business. In addition, a default under our credit facility or term loan that causes acceleration of the debt under this facility could trigger a default under our outstanding 7 3/8% senior notes. In the event we are not able to borrow under either borrowing facility, we would be required to develop an alternative source of liquidity. There is no assurance that we could obtain replacement financing or what the terms of such financing, if available, would be.

We have discussions from time to time with manufacturers and owners of prestige fragrance brands regarding our possible acquisition of additional exclusive licensing and/or distribution rights. We currently have no material agreements or commitments with respect to any such acquisition, although we periodically execute routine agreements to maintain the confidentiality of information obtained during the course of discussions with such manufacturers and brand owners. There is no assurance that we will be able to negotiate successfully for any such future acquisitions or that we will be able to obtain acquisition financing or additional working capital financing on satisfactory terms for further expansion of our operations.

Repurchases of Common StockOn November 2, 2010, our board of directors authorized the repurchase of an additional $40 million of our common stock under the terms of an existing $80 million common stock repurchase program and extended the term of the stock repurchase program from November 30, 2010 to November 30, 2012. On August 7, 2012, our board of directors approved an extension of the stock repurchase program through November 30, 2014.

As of June 30, 2012, we had repurchased 4,029,201 shares of common stock on the open market under the stock repurchase program since its inception in November 2005, at an average price of $16.63 per share and at a cost of approximately $67.0 million, including sales commissions, leaving approximately $53.0 million available for additional repurchases under the program. For the fiscal year ended June 30, 2012, there were no share repurchases. See Note 13 to Notes to Consolidated Financial Statements.

Forward-Looking Information and Factors That May Affect Future Results

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses and/or cost savings, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially from our forward-looking statements is set forth below, and most of these factors are discussed in greater detail under Item 1A - “Risk Factors” of this Annual Report on Form 10-K:

 

   

factors affecting our relationships with our customers or our customers’ businesses, including the absence of contracts with customers, our customers’ financial condition, and changes in the retail, fragrance and cosmetic industries, such as the consolidation of retailers and the associated closing of retail doors as well as retailer inventory control practices, including, but not limited to, levels of inventory carried at point of sale and practices used to control inventory shrinkage;

 

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risks of international operations, including foreign currency fluctuations, hedging activities, economic and political consequences of terrorist attacks, disruptions in travel, unfavorable changes in U.S. or international laws or regulations, diseases and pandemics, and political instability in certain regions of the world;

 

   

our reliance on license agreements with third parties for the rights to sell many of our prestige fragrance brands;

 

   

our reliance on third-party manufacturers for substantially all of our owned and licensed products and our absence of contracts with suppliers of distributed brands and components for manufacturing of owned and licensed brands;

 

   

delays in shipments, inventory shortages and higher costs of production due to the loss of or disruption in our distribution facilities or at key third party manufacturing or fulfillment facilities that manufacture or provide logistic services for our products;

 

   

our ability to respond in a timely manner to changing consumer preferences and purchasing patterns and other international and domestic conditions and events that impact retailer and/or consumer confidence and demand, such as domestic or global recessions or economic uncertainty;

 

   

our ability to protect our intellectual property rights;

 

   

the success, or changes in the timing or scope, of our new product launches, advertising and merchandising programs;

 

   

the quality, safety and efficacy of our products;

 

   

the impact of competitive products and pricing;

 

   

our ability to (i) implement our growth strategy and acquire or license additional brands or secure additional distribution arrangements, (ii) successfully and cost-effectively integrate acquired businesses or new brands, and (iii) finance our growth strategy and our working capital requirements;

 

   

our level of indebtedness, our ability to realize sufficient cash flows from operations to meet our debt service obligations and working capital requirements, and restrictive covenants in our revolving credit facility, term loan and the indenture for our 7 3/8% senior notes;

 

   

changes in product mix to less profitable products;

 

   

the retention and availability of key personnel;

 

   

changes in the legal, regulatory and political environment that impact, or will impact, our business, including changes to customs or trade regulations, laws or regulations relating to ingredients or other chemicals or raw materials contained in products or packaging, or accounting standards or critical accounting estimates;

 

   

the success of our Elizabeth Arden brand repositioning efforts;

 

   

the impact of tax audits, including the ultimate outcome of the pending Internal Revenue Service examination of our U.S. federal tax returns for the fiscal years ended June 30, 2008 and June 30, 2009, changes in tax laws or tax rates, and our ability to utilize our deferred tax assets;

 

   

our ability to effectively implement, manage and maintain our global information systems and maintain the security of our confidential data and our employees’ and customers’ personal information;

 

   

our reliance on certain third parties for certain outsourced business services, including information technology operations, logistics management and employee benefit plan administration;

 

   

the potential for significant impairment charges relating to our trademarks, goodwill or other intangible assets that could result from a number of factors, including downward pressure on our stock price; and

 

   

other unanticipated risks and uncertainties.

We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of June 30, 2012, we had $89.2 million in borrowings and $4.4 million in letters of credit outstanding under our revolving credit facility. Borrowings under our revolving credit facility are seasonal, with peak borrowings typically in the months of September, October and November. Borrowings under the credit facility and our term loan are subject to variable rates and, accordingly, our earnings and cash flow will be affected by changes in interest rates. Based upon our average borrowings under our revolving credit facility during the year ended June 30, 2012, and assuming there had been a two percentage point (200 basis points) change in the average interest rate for these borrowings, it is estimated that our interest expense for the year ended June 30, 2012 would have increased or decreased by approximately $1.0 million. See Note 8 to the Notes to Consolidated Financial Statements.

Foreign Currency Risk

We sell our products in approximately 120 countries around the world. During the fiscal year ended June 30, 2012, we derived approximately 42% of our net sales from our international operations. We conduct our international operations in a variety of different countries and derive our sales in various currencies including the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar, as well as the U.S. dollar. Most of our skin care and cosmetic products are produced in third-party manufacturing facilities located in the U.S. Our operations may be subject to volatility because of currency changes, inflation and changes in political and economic conditions in the countries in which we operate. With respect to international operations, our sales, cost of goods sold and expenses are typically denominated in a combination of local currency and the U.S. dollar. Our results of operations are reported in U.S. dollars. Fluctuations in currency rates can affect our reported sales, margins, operating costs and the anticipated settlement of our foreign denominated receivables and payables. A weakening of the foreign currencies in which we generate sales relative to the currencies in which our costs are denominated, which is primarily the U.S. dollar, may adversely affect our ability to meet our obligations and could adversely affect our business, prospects, results of operations, financial condition or cash flows. Our competitors may or may not be subject to the same fluctuations in currency rates, and our competitive position could be affected by these changes.

As of June 30, 2012, our subsidiaries outside the United States held 35.0% of our total assets. The cumulative effect of translating balance sheet accounts from the functional currency of our subsidiaries into the U.S. dollar at current exchange rates is included in accumulated other comprehensive income in our consolidated balance sheets.

As of June 30, 2012, we had notional amounts of 13.1 million British pounds and 6.0 million Euros under open foreign currency contracts that expire between July 31, 2012 and May 31, 2013 to reduce the exposure of our foreign subsidiary revenues to fluctuations in currency rates. As of June 30, 2012, the Company had notional amounts under foreign currency contracts of (i) 10.7 million Canadian dollars and 12.1 million Australian dollars used to hedge forecasted cost of sales, and (ii) 18.2 million Swiss francs to hedge forecasted operating costs that expire between July 31, 2012 and May 31, 2013.

We have designated each qualifying foreign currency contract as a cash flow hedge. The gains and losses of these contracts will only be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. The realized loss, net of taxes, recognized during the year ended June 30, 2012 from settled contracts was approximately $0.5 million. At June 30, 2012, the unrealized gain, net of taxes, associated with these open contracts of approximately $0.2 million is included in accumulated other comprehensive income in our consolidated balance sheet. See Note 16 to the Notes to Consolidated Financial Statements.

When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce the exposure of our foreign subsidiaries’ balance sheets to fluctuations in foreign currency rates. As of June 30, 2012, there were no such foreign currency contracts outstanding. The realized gain, net of taxes, recognized during the year ended June 30, 2012, was $0.4 million.

We do not utilize foreign exchange contracts for trading or speculative purposes. There can be no assurance that our hedging operations or other exchange rate practices, if any, will eliminate or substantially reduce risks associated with fluctuating exchange rates.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Management

   44

Report of Independent Registered Public Accounting Firm

   45

Consolidated Balance Sheets as of June 30, 2012 and June 30, 2011

   46

Consolidated Statements of Income for the Years Ended June 30, 2012, 2011 and 2010

   47

Consolidated Statements of Shareholders’ Equity for the Years Ended June 30, 2012, 2011 and 2010

   48

Consolidated Statements of Cash Flows for the Years Ended June 30, 2012, 2011 and 2010

   51

Notes to Consolidated Financial Statements

   52

 

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Report of Management

Elizabeth Arden, Inc. and Subsidiaries

Report on Consolidated Financial Statements

We prepared and are responsible for the consolidated financial statements that appear in the Annual Report on Form 10-K for the year ended June 30, 2012 of Elizabeth Arden, Inc. (the “Company”). These consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America, and therefore, include amounts based on informed judgments and estimates. We also accept responsibility for the preparation of the other financial information that is included in the Company’s Annual Report on Form 10-K.

Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment using those criteria, management concluded that the Company maintained effective internal control over financial reporting as of June 30, 2012.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting for the year ended June 30, 2012, and has expressed an unqualified opinion in their report, which is included herein.

 

/s/ E. Scott Beattie

   

/s/ Stephen J. Smith

E. Scott Beattie

Chairman, President and Chief Executive Officer

   

Stephen J. Smith

Executive Vice President and Chief Financial Officer

August 10, 2012

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Elizabeth Arden, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Elizabeth Arden, Inc. and its subsidiaries at June 30, 2012 and June 30, 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

New York, New York

August 10, 2012

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except shares and par value)

 

     As of  
     June 30,
2012
    June 30,
2011
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 59,080      $ 58,850   

Accounts receivable, net

     188,141        165,622   

Inventories

     291,987        246,514   

Deferred income taxes

     40,706        37,683   

Prepaid expenses and other assets

     44,583        45,725   
  

 

 

   

 

 

 

Total current assets

     624,497        554,394   

Property and equipment, net

     89,438        82,762   

Exclusive brand licenses, trademarks and intangibles, net

     314,502        184,758   

Goodwill

     21,054        21,054   

Debt financing costs, net

     7,903        8,740   

Deferred income taxes

     1,866        2,521   

Other

     7,494        608   
  

 

 

   

 

 

 

Total assets

   $ 1,066,754      $ 854,837   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Short-term debt

   $ 89,200      $ —     

Accounts payable - trade

     77,961        47,951   

Other payables and accrued expenses

     111,518        117,546   
  

 

 

   

 

 

 

Total current liabilities

     278,679        165,497   
  

 

 

   

 

 

 

Long-term Liabilities

    

Long-term debt

     250,000        250,000   

Deferred income taxes and other liabilities

     56,348        21,575   
  

 

 

   

 

 

 

Total long-term liabilities

     306,348        271,575   
  

 

 

   

 

 

 

Total liabilities

     585,027        437,072   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 10)

    

Shareholders’ Equity

    

Common stock, $.01 par value, 50,000,000 shares authorized; 33,788,871 and 33,452,687 shares issued, respectively

     338        334   

Additional paid-in capital

     337,740        327,226   

Retained earnings

     217,354        159,935   

Treasury stock (4,353,200 shares at cost)

     (74,871     (74,871

Accumulated other comprehensive income

     1,166        5,141   
  

 

 

   

 

 

 

Total shareholders’ equity

     481,727        417,765   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,066,754      $ 854,837   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

 

     Year Ended June 30,  
     2012      2011      2010  

Net sales

   $ 1,238,273       $ 1,175,500       $ 1,103,777   

Cost of goods sold:

        

Cost of sales

     623,985         614,134         602,763   

Depreciation related to cost of goods sold

     5,257         5,089         5,040   
  

 

 

    

 

 

    

 

 

 

Total cost of goods sold

     629,242         619,223         607,803   
  

 

 

    

 

 

    

 

 

 

Gross profit

     609,031         556,277         495,974   

Operating expenses

        

Selling, general and administrative

     484,963         453,956         427,762   

Depreciation and amortization

     28,797         24,746         23,419   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     513,760         478,702         451,181   
  

 

 

    

 

 

    

 

 

 

Income from operations

     95,271         77,575         44,793   

Other expense

        

Interest expense

     21,759         21,481         21,885   

Debt extinguishment charges

     —           6,468         82   
  

 

 

    

 

 

    

 

 

 

Other expense, net

     21,759         27,949         21,967   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     73,512         49,626         22,826   

Provision for income taxes

     16,093         8,637         3,293   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 57,419       $ 40,989       $ 19,533   
  

 

 

    

 

 

    

 

 

 

Net income per common share:

        

Basic

   $ 1.97       $ 1.47       $ 0.70   
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 1.91       $ 1.41       $ 0.68   
  

 

 

    

 

 

    

 

 

 

Weighted average number of common shares:

        

Basic

     29,115         27,843         28,017   
  

 

 

    

 

 

    

 

 

 

Diluted

     30,111         29,008         28,789   
  

 

 

    

 

 

    

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

    Common Stock     Additional
Paid-in
    Retained     Treasury Stock     Accumulated
Other
Comprehensive
    Total
Shareholders’
 
    Shares     Amount     Capital     Earnings     Shares     Amount     Income     Equity  

Balance as of July 1, 2009

    31,445      $ 316      $ 285,847      $ 99,413        (2,728   $ (47,334   $ (1,464   $ 336,778   

Issuance of common stock upon exercise of options

    155        2        1,589        —          —          —          —          1,591   

Issuance of common stock for employee stock purchase plan

    149        1        1,322        —          —          —          —          1,323   

Issuance of restricted stock, net of forfeitures

    148        —          —          —          —          —          —          —     

Amortization of share-based awards

    —          —          4,771        —          —          —          —          4,771   

Repurchase of common stock

    —          —          —          —          (905     (14,969     —          (14,969

Excess tax benefit from share-based awards

    —          —          3,608        —          —          —          —          3,608   

Comprehensive Income:

               

Net Income

    —          —          —          19,533        —          —          —          19,533   
       

 

 

         

 

 

 

Foreign currency translation adjustments

    —          —          —          —          —          —          (397     (397
             

 

 

   

 

 

 

Disclosure of reclassification amounts, net of taxes

               

Unrealized hedging gain arising during the period

    —          —          —          —          —          —          650        650   

Less: reclassification adjustment for hedging gains included in net income

    —          —          —          —          —          —          (271     (271
             

 

 

   

 

 

 

Net unrealized cash flow hedging gain

    —          —          —          —          —          —          379        379   
             

 

 

   

 

 

 

Total comprehensive income (loss)

    —          —          —          19,533        —          —          (18     19,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2010

    31,897      $ 319      $ 297,137      $ 118,946        (3,633   $ (62,303   $ (1,482   $ 352,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

    Common Stock     Additional
Paid-in
    Retained     Treasury Stock     Accumulated
Other
Comprehensive
    Total
Shareholders’
 
    Shares     Amount     Capital     Earnings     Shares     Amount     Income     Equity  

Balance as of July 1, 2010

    31,897      $ 319      $ 297,137      $ 118,946        (3,633   $ (62,303   $ (1,482   $ 352,617   

Issuance of common stock upon exercise of options

    1,354        13        20,419        —          —          —          —          20,432   

Issuance of common stock for employee stock purchase plan

    107        1        1,753        —          —          —          —          1,754   

Issuance of restricted stock, net of forfeitures

    95        1        —          —          —          —          —          1   

Amortization of share-based awards

    —          —          4,904        —          —          —          —          4,904   

Repurchase of common stock

    —          —          —          —          (720     (12,568     —          (12,568

Excess tax benefit from share-based awards

    —          —          3,008        —          —          —          —          3,008   

Other

    —          —          5        —          —          —          —          5   

Comprehensive Income:

               

Net Income

    —          —          —          40,989        —          —          —          40,989   
       

 

 

         

 

 

 

Foreign currency translation adjustments

    —          —          —          —          —          —          8,388        8,388   
             

 

 

   

 

 

 

Disclosure of reclassification amounts, net of taxes

               

Unrealized hedging loss arising during the period

    —          —          —          —          —          —          (4,203     (4,203

Less: reclassification adjustment for hedging losses included in net income

    —          —          —          —          —          —          2,438        2,438   
             

 

 

   

 

 

 

Net unrealized cash flow hedging loss

    —          —          —          —          —          —          (1,765     (1,765
             

 

 

   

 

 

 

Total comprehensive income (loss)

    —          —          —          40,989        —          —          6,623        47,612   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

    33,453      $ 334      $ 327,226      $ 159,935        (4,353   $ (74,871   $ 5,141      $ 417,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

    Common Stock     Additional
Paid-in
    Retained     Treasury Stock     Accumulated
Other
Comprehensive
    Total
Shareholders’
 
    Shares     Amount     Capital     Earnings     Shares     Amount     Income     Equity  

Balance as of July 1, 2011

    33,453      $ 334      $ 327,226      $ 159,935        (4,353   $ (74,871   $ 5,141      $ 417,765   

Issuance of common stock upon exercise of options

    439        5        5,565        —          —          —          —          5,570   

Issuance of restricted stock and restricted stock units, net of forfeitures

    (177     (2     (2,098     —          —          —          —          (2,100

Issuance of common stock for employee stock purchase plan

    74        1        1,989                1,990   

Amortization of share-based awards

    —          —          5,057        —          —          —          —          5,057   

Excess tax benefit from share-based awards

    —          —          (39     —          —          —          —          (39

Other

    —          —          40        —          —          —          —          40   

Comprehensive Income:

               

Net Income

    —          —          —          57,419        —          —          —          57,419   
       

 

 

         

 

 

 

Foreign currency translation adjustments

    —          —          —          —          —          —          (5,551     (5,551
             

 

 

   

 

 

 

Disclosure of reclassification amounts, net of taxes

               

Unrealized hedging gain arising during the period

    —          —          —          —          —          —          2,111        2,111   

Less: reclassification adjustment for hedging losses included in net income

    —          —          —          —          —          —          535        535   
             

 

 

   

 

 

 

Net unrealized cash flow hedging gain

    —          —          —          —          —          —          1,576        1,576   
             

 

 

   

 

 

 

Total comprehensive income (loss)

    —          —          —          57,419        —          —          (3,975     53,444   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

    33,789      $ 338      $ 337,740      $ 217,354        (4,353   $ (74,871   $ 1,166      $ 481,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

     Year Ended June 30,  
     2012     2011     2010  

Operating activities:

      

Net income

   $ 57,419      $ 40,989      $ 19,533   

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

      

Depreciation and amortization

     34,054        29,835        28,459   

Amortization of senior note offering, credit facility and swap termination costs

     1,247        1,330        1,459   

Amortization of share-based awards

     5,057        4,904        4,771   

Debt extinguishment charges

     —          6,468        82   

Deferred income taxes

     7,294        2,119        (1,996

Change in assets and liabilities, net of acquisitions:

      

(Increase) decrease in accounts receivable

     (25,177     8,255        20,339   

(Increase) decrease in inventories

     (23,836     27,625        48,276   

(Increase) decrease in prepaid expenses and other assets

     (5,404     13,596        (12,373

Increase (decrease) in accounts payable

     17,899        (52,637     (18,931

(Decrease) increase in other payables and accrued expenses

     (9,624     14,118        25,919   

Other

     (405     1,144        (1,579
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     58,524        97,746        113,959   
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Additions to property and equipment

     (24,088     (25,608     (35,388

Acquisition of businesses, intangibles and other assets

     (129,136     (13,864     (333
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (153,224     (39,472     (35,721
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Proceeds from (payments on) short-term debt

     89,200        (59,000     (56,000

Proceeds from (payments on) long-term debt

     —          243,996        (545

Repurchase of senior subordinated notes

     —          (223,332     (5,000

Payments under capital lease obligations

     —          —          (1,927

Repurchase of common stock

     —          (13,758     (13,779

Proceeds from the exercise of stock options

     5,570        20,432        1,591   

Proceeds from the issuance of common stock under the employee stock purchase plan

     1,990        1,754        1,323   

Financing fees paid

     —          (2,345     —     

Excess tax benefit from share-based awards

     —          3,734        —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     96,760        (28,519     (74,337
  

 

 

   

 

 

   

 

 

 

Effects of exchange rate changes on cash and cash equivalents

     (1,830     2,214        (122

Net increase in cash and cash equivalents

     230        31,969        3,779   

Cash and cash equivalents at beginning of year

     58,850        26,881        23,102   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 59,080      $ 58,850      $ 26,881   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

      

Interest paid during the year

   $ 23,425      $ 18,333      $ 20,499   
  

 

 

   

 

 

   

 

 

 

Income taxes paid during the year

   $ 8,760      $ 6,157      $ 2,417   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Flow Information:

      

Additions to property and equipment (not included above)

   $ 5,371      $ 1,332      $ 2,632   
  

 

 

   

 

 

   

 

 

 

Acquisition of intangibles and other assets (not included above)

   $ 29,125      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Repurchase of common stock (not included above)

   $ —        $ —        $ 1,190   
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. General Information and Summary of Significant Accounting Policies

Organization and Business Activity. Elizabeth Arden, Inc. (the “Company” or “our”) is a global prestige beauty products company that sells fragrances, skin care and cosmetic products to retailers in the United States and approximately 120 countries internationally.

Basis of Consolidation. The consolidated financial statements include the accounts of the Company’s wholly-owned domestic and international subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Acquisitions. In May 2012, the Company acquired the global licenses and certain assets, including inventory, related to the Ed Hardy, True Religion and BCBGMAXAZRIA fragrance brands from New Wave Fragrances, LLC (“New Wave”). In June 2012, the Company also acquired the global licenses and certain assets, including inventory related to the Justin Bieber and Nicki Minaj fragrance brands from Give Back Brands LLC (“Give Back Brands”). See Note 11. For ease of reference in these Notes to Consolidated Financial Statements, the asset acquisitions from New Wave and Give Back Brands are referred to herein, on a collective basis, as the “2012 Acquisitions”.

Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include expected useful lives of brand licenses, trademarks, other intangible assets and property, plant and equipment, allowances for sales returns and markdowns, share-based compensation, fair value of long-lived assets, allowances for doubtful accounts receivable, provisions for inventory obsolescence, and income taxes and valuation reserves. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Revenue Recognition. Sales are recognized when title and the risk of loss transfers to the customer, the sale price is fixed or determinable and collectability of the resulting receivable is probable. Sales are recorded net of estimated returns, markdowns and other allowances, which are granted to certain of the Company’s customers and are subject to the Company’s authorization and approval. The provision for sales returns and markdowns represents management’s estimate of future returns and markdowns based on historical and projected experience and considering current external factors and market conditions. During the years ended June 30, 2012, 2011 and 2010, one customer accounted for an aggregate of 13%, 14% and 15%, respectively, of the Company’s net sales.

Foreign Currency Translation. All assets and liabilities of foreign subsidiaries and affiliates that do not utilize the U.S. dollar as their functional currency are translated at year-end rates of exchange, while sales and expenses are translated at weighted average rates of exchange. Unrealized translation gains or losses are reported as foreign currency translation adjustments through other accumulated comprehensive loss or income included in shareholders’ equity. Such adjustments resulted in net unrealized losses of $5.6 million for the year ended June 30, 2012, net unrealized gains of $8.4 million for the year ended June 30, 2011 and net unrealized losses of $0.4 million for the year ended June 30 2010. Gains or losses resulting from foreign currency transactions are recorded in the foreign subsidiaries’ statements of operations. Such net losses totaled $4.2 million, $0.9 million, $4.0 million, in the years ended June 30, 2012, 2011 and 2010, respectively.

Cash and Cash Equivalents. Cash and cash equivalents include cash and interest-bearing deposits at banks with an original maturity date of three months or less.

Allowances for Doubtful Accounts Receivable. The Company maintains allowances for doubtful accounts to cover uncollectible accounts receivable and evaluates its accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a customer-by-customer review for large accounts. If, for example, the financial condition of the Company’s customers deteriorates resulting in an impairment of their ability to pay, additional allowances may be required, resulting in a charge to income in the period in which the determination was made.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. See Note 5.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

 

Property and Equipment, and Depreciation. Property and equipment are stated at cost. Expenditures for major improvements and additions are recorded to the asset accounts, while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are charged to expense. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. When fixed assets are sold or otherwise disposed of, the accounts are relieved of the original cost of the assets and the related accumulated depreciation and any resulting profit or loss is credited or charged to income. See Note 6.

Exclusive Brand Licenses, Trademarks, and Intangibles. Exclusive of intangible assets that have indefinite useful lives and are not being amortized, the Company’s intangible assets are being amortized using the straight-line method over their estimated useful lives. See Note 7.

Indefinite-Lived and Long-Lived Assets. Goodwill and intangible assets with indefinite lives are not amortized, but rather assessed for impairment at least annually. An annual impairment assessment is performed during the Company’s fourth fiscal quarter or more frequently if events or changes in circumstances indicate the carrying value of goodwill and indefinite-lived intangible assets may not fully be recoverable. The Company adopted the updated guidance to Topic 350, Intangibles- Goodwill and Other, issued by the Financial Accounting Standards Board (“FASB”), for its annual impairment assessment that was performed during the fourth quarter of fiscal year 2012. The updated guidance simplifies how an entity assesses goodwill for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment assessment. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Adoption of the updated guidance did not have a material impact on the Company’s consolidated financial statements or disclosures. Should a goodwill impairment assessment be necessary, there is a two step process for impairment assessing of goodwill. The first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment by comparing the estimated fair value of the goodwill and intangible assets to their respective carrying values. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value. See Note 7.

Long-lived assets are reviewed for impairment upon the occurrence of specific triggering events. The impairment assessment is based on a comparison of the carrying value of such assets against the undiscounted future cash flows expected to be generated by such assets. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value. No such adjustments were recorded for the years ended June 30, 2012, 2011 and 2010. See Note 7.

Leases. The Company leases distribution equipment, office and computer equipment, and vehicles. The Company reviews all of its leases to determine whether they qualify as operating or capital leases. Leasehold improvements are capitalized and amortized over the lesser of the useful life of the asset or current lease term. The Company accounts for free rent periods and scheduled rent increases on a straight-line basis over the lease term. Landlord allowances and incentives are recorded as deferred rent and are amortized as a reduction to rent expense over the lease term.

Debt Issuance Costs. Debt issuance costs and transaction fees, which are associated with the issuance of senior notes, the revolving credit facility and term loan (see Note 8), are being amortized and charged to interest expense over the term of the related notes or the term of the credit facility or term loan. In any period in which the senior notes are redeemed, the unamortized debt issuance costs and transaction fees relating to the notes being redeemed are expensed. In addition, termination costs related to interest rate swaps are amortized to interest expense over the remaining life of the related notes. See Note 9.

Cost of Sales. Included in cost of sales are the cost of products sold, the cost of gift with purchase items provided to customers, royalty costs related to patented technology or formulations, warehousing, distribution and supply chain costs. The major components of warehousing, distribution and supply chain costs include salary and related benefit costs for employees in the warehousing, distribution and supply chain areas and facility related costs in these areas.

Selling, General and Administrative Costs. Included in selling, general and administrative expenses are advertising, creative development and promotion costs not paid directly to the Company’s customers, royalty costs related to trademarks, salary and related benefit costs of the Company’s employees in the finance, human resources, information technology, legal, sales and marketing areas, facility related costs of the Company’s administrative functions, and costs paid to consultants and third party providers for related services.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

 

Advertising and Promotional Costs. Advertising and promotional costs paid directly to customers for goods and services provided (primarily co-op advertising and certain direct selling costs) are expensed as incurred and are recorded as a reduction of sales. Advertising and promotional costs not paid directly to the Company’s customers are expensed as incurred and recorded as a component of cost of goods sold (in the case of free goods given to customers) or selling, general and administrative expenses. Advertising and promotional costs include promotions, direct selling, co-op advertising and media placement. Advertising and promotional costs for the years ended June 30, 2012, 2011 and 2010 were as follows:

 

     Year Ended June 30,  
(Amounts in millions)    2012      2011      2010  

Advertising and promotional costs

   $ 353.1       $ 332.8       $ 324.1   
  

 

 

    

 

 

    

 

 

 

Income Taxes. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities and certain other adjustments. The Company provides for deferred taxes under the liability method. Under such method, deferred taxes are adjusted for tax rate changes as they occur. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit, or, that future deductibility is uncertain.

The Company recognizes in its consolidated financial statements the impact of a tax position if it is more likely than not that such position will be sustained on audit based on its technical merits. While the Company believes that its assessments of whether its tax positions are more likely than not to be sustained are reasonable, each assessment is subjective and requires the use of significant judgments. As a result, one or more of such assessments may prove ultimately to be incorrect, which could result in a change to net income.

Hedge Contracts. The Company has designated each foreign currency contract entered into as of June 30, 2012, as a cash flow hedge. Unrealized gains or losses, net of taxes, associated with these contracts are included in accumulated other comprehensive income on the consolidated balance sheet. Gains and losses will only be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring.

Other Payables and Accrued Expenses. A summary of the Company’s other payables and accrued expenses as of June 30, 2012 and 2011, is as follows:

 

(Amounts in thousands)    June 30,
2012
     June 30,
2011
 

Accrued employee-related benefits

   $ 28,288       $ 34,379   

Accrued advertising, promotion and royalties

     27,774         33,718   

Accrued interest

     5,819         8,528   

Other accruals

     49,637         40,921   
  

 

 

    

 

 

 

Total other payables and accrued expenses

   $ 111,518       $ 117,546   
  

 

 

    

 

 

 

Accumulated Other Comprehensive Income (Loss)/Comprehensive Income. Accumulated other comprehensive income (loss) includes, in addition to net income or net loss, unrealized gains and losses excluded from the consolidated statements of operations and recorded directly into a separate section of shareholders’ equity on the consolidated balance sheet. These unrealized gains and losses are referred to as other comprehensive income (loss) items. The Company’s accumulated other comprehensive income (loss) shown on the consolidated balance sheets at June 30, 2012 and June 30, 2011, consists of foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized gains (losses), net of taxes, related to the Company’s foreign currency contracts, respectively.

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

 

The components of accumulated other comprehensive income (loss) as of June 30, 2012, 2011 and 2010, were as follows:

 

     Year Ended June 30,  
(Amounts in thousands)    2012      2011     2010  

Cumulative foreign currency translation adjustments

   $ 997       $ 6,548      $ (1,839

Unrealized hedging gain (loss), net of taxes

     169         (1,407     357   
  

 

 

    

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ 1,166       $ 5,141      $ (1,482
  

 

 

    

 

 

   

 

 

 

The Company’s comprehensive income consists of net income, foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized gains (losses), net of taxes, related to the Company’s foreign currency contracts.

The components of comprehensive income for the years ended June 30, 2012, 2011 and 2010, were as follows:

 

     Year Ended June 30,  
(Amounts in thousands)    2012     2011     2010  

Net income

   $ 57,419      $ 40,989      $ 19,533   

Foreign currency translation adjustments

     (5,551     8,388        (397

Unrealized hedging gain (loss), net of taxes

     1,576        (1,765     379   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 53,444      $ 47,612      $ 19,515   
  

 

 

   

 

 

   

 

 

 

Fair Value of Financial Instruments. The Company’s financial instruments include accounts receivable, accounts payable, currency forward contracts, short-term debt and long-term debt. On January 1, 2012, the Company adopted the new FASB and the International Accounting Standards Board (“IASB”) guidance on fair value measurement and disclosure requirements. This update supersedes most of the guidance in Topic 820, Fair Value Measurements and Disclosures and many of the changes are clarifications of existing guidance or wording changes to align with International Financial Reporting Standards. The changes to Topic 820 did not have a material impact on the Company’s consolidated financial statements or disclosures. The fair value of the Company’s senior notes and all other financial instruments was not materially different than their carrying value as of June 30, 2012, and June 30, 2011. See Note 15.

Share-Based Compensation. All share-based payments to employees, including the grants of employee stock options, are recognized in the consolidated financial statements based on their fair values, but only to the extent that vesting is considered probable. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The fair value of stock options is determined using the Black-Scholes option-pricing model and the fair value of restricted stock and restricted stock unit awards is based on the closing price of the Company’s common stock, $.01 par value (“Common Stock”) on the date of grant. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions are based on or determined from external data and other assumptions may be derived from the Company’s historical experience with share-based arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.

The Company relies on its historical experience and post-vested termination activity to provide data for estimating expected term for use in determining the fair value of its stock options. The Company currently estimates its stock volatility by considering historical stock volatility experience and other key factors. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. The Company estimates forfeitures using its historical experience, which will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change. If, for example, actual forfeitures are lower than the Company’s estimate, additional charges to net income may be required.

Out-Of-Period Adjustments. During the year ended June 30, 2010, the Company recorded out-of-period adjustments which related to fiscal years 2001 to 2009. Net sales and gross profit for fiscal year 2010 decreased by $2.7 million and $0.9 million, respectively. The Company did not adjust the prior periods as it concluded that such adjustments were not material to the current or prior periods’ consolidated financial statements.

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

 

NOTE 2. Net Income Per Share

Basic net income per share is computed by dividing the net income by the weighted average shares of the Company’s outstanding Common Stock. The calculation of net income per diluted share is similar to basic income per share except that the denominator includes potentially dilutive Common Stock, such as stock options and non-vested restricted stock and restricted stock units. The following table represents the computation of net income per share:

 

     Year Ended June 30,  
(Amounts in thousands, except per share data)    2012      2011      2010  

Basic

        

Net income

   $ 57,419       $ 40,989       $ 19,533   
  

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     29,115         27,843         28,017   
  

 

 

    

 

 

    

 

 

 

Net income per basic share

   $ 1.97       $ 1.47       $ 0.70   
  

 

 

    

 

 

    

 

 

 

Diluted

        

Net income

   $ 57,419       $ 40,989       $ 19,533   
  

 

 

    

 

 

    

 

 

 

Weighted average basic shares outstanding

     29,115         27,843         28,017   

Potential common shares - treasury method

     996         1,165         772   
  

 

 

    

 

 

    

 

 

 

Weighted average shares and potential diluted shares

     30,111         29,008         28,789   
  

 

 

    

 

 

    

 

 

 

Net income per diluted share

   $ 1.91       $ 1.41       $ 0.68   
  

 

 

    

 

 

    

 

 

 

The following table shows the number of shares of Common Stock subject to options and restricted stock and restricted stock unit awards that were outstanding for the years ended June 30, 2012, 2011 and 2010, which were not included in the net income per diluted share calculation because to do so would have been anti-dilutive:

 

     Year Ended June 30,  
     2012      2011      2010  
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