XNAS:HELE Helen of Troy, Ltd. Annual Report 10-K Filing - 2/29/2012

Effective Date 2/29/2012

XNAS:HELE (Helen of Troy, Ltd.): Fair Value Estimate
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XNAS:HELE (Helen of Troy, Ltd.): Consider Buying
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XNAS:HELE (Helen of Troy, Ltd.): Fair Value Uncertainty
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XNAS:HELE (Helen of Troy, Ltd.): Economic Moat
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XNAS:HELE (Helen of Troy, Ltd.): Stewardship
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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended February 29, 2012

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Commission file number 001-14669

 

HELEN OF TROY LIMITED

(Exact name of the registrant as specified in its charter)

 

Bermuda

 

74-2692550

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Clarenden House

Church Street

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

 

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address )

 

(Zip Code)

 

Registrant’s telephone number, including area code: (915) 225-8000

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Shares, $.10 par value per share

 

The NASDAQ Global Select Market

 

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

NONE

 

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

 

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

 

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 þ 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 þ 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.                                                                                                                                                     þ

 

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

 

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

 

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                   Yes ¨ No þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 31, 2011, based upon the closing price of the common shares as reported by The NASDAQ Global Select Market on such date, was approximately $875,420,000.

 

As of April 23, 2012 there were 31,700,150 common shares, $.10 par value per share (“common stock”), outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required for Part III of this annual report will be set forth in and incorporated herein by reference into Part III of this report from the Company’s definitive Proxy Statement for the 2012 Annual General Meeting of Shareholders.

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

PAGE

 

 

 

 

 

PART I

Item 1.

Business

4

 

Item 1A.

Risk Factors

12

 

Item 1B.

Unresolved Staff Comments

22

 

Item 2.

Properties

23

 

Item 3.

Legal Proceedings

24

 

Item 4.

Mine Safety Disclosures

25

 

 

 

 

 

 

 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

26

 

Item 6.

Selected Financial Data

29

 

Item 7.

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

31

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

51

 

Item 8.

Financial Statements and Supplementary Data

55

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

105

 

Item 9A.

Controls and Procedures

105

 

Item 9B.

Other Information

105

 

 

 

 

 

 

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

106

 

Item 11.

Executive Compensation

106

 

Item 12.

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

106

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

106

 

Item 14.

Principal Accounting Fees and Services

106

 

 

 

 

 

 

 

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules

107

 

 

 

 

 

 

Signatures

110

 

 

 

 

 

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CERTAIN CONVENTIONS USED IN THIS REPORT

 

In this report and accompanying consolidated financial statements and notes thereto, unless the context suggests otherwise or otherwise indicated, references to “the Company”, “our Company”, “Helen of Troy”, “we” , “us”, or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars.  References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries, which we acquired in a merger on December 31, 2010.  References to “PUR” refer to the PUR brand of water filtration products we acquired, along with certain other assets and liabilities, from The Procter & Gamble Company and certain of its affiliates on December 30, 2011.  Kaz and PUR comprise a segment within the Company referred to as the Healthcare / Home Environment segment.  References to “OXO” refer to the operations of OXO International and certain of its affiliated subsidiaries that comprise the Housewares segment of the Company’s business.  Product and service names mentioned in this report are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions.  The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right.  All trademarks, trade names, service marks and logos referenced herein belong to their respective owners.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.”  References to “the FASB” refer to the Financial Accounting Standards Board.  References to “GAAP” refer to U.S. generally accepted accounting principles.  References to “ASC” refer to the codification of U.S. GAAP in the Accounting Standards Codification issued by the FASB .

 

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

·                  the departure and recruitment of key personnel;

 

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

 

·                  our geographic concentration of certain U.S. distribution facilities, which at certain times operate at or near capacity, increases our exposure to significant shipping disruptions and added shipping and storage costs;

 

·                  our projections of product demand, sales and net income (including the Company’s guidance for PUR net sales revenue and the expectation that the acquisition will be accretive) are highly subjective in nature and future sales and net income could vary in a material amount from such projections;

 

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

 

·                  our relationship with key customers and licensors;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  foreign currency exchange rate fluctuations;

 

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

 

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

 

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

 

·                  the risks associated with information security breaches;

 

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

 

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

 

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

 

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

 

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PART I

 

ITEM 1.  BUSINESS

 

GENERAL

 

We are a global designer, developer, importer, and distributor of an expanding portfolio of brand-name consumer products.  We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy Limited in Bermuda in 1994.  We have three segments: Personal Care, Housewares and Healthcare / Home Environment.  Our Personal Care segment’s products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid, solid- and powder-based personal care and grooming products. Our Housewares segment reports the operations of the OXO family of brands, which provide a broad range of innovative consumer products for the home. Product offerings include food preparation and storage, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on health care devices, such as thermometers, blood pressure monitors, humidifiers and heating pads; water filtration systems; and small home appliances, such as air purifiers, portable heaters, fans, and bug zappers. All three segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores.  In addition, the Personal Care segment sells extensively through beauty supply retailers and wholesalers, and the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores.  We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

 

On December 30, 2011, we completed an asset and stock purchase transaction in which we acquired 100 percent of the stock of PUR Water Purification Products, Inc., and certain other assets and liabilities from The Procter & Gamble Company and certain of its affiliates (“P&G”) for a net cash purchase price of $160.00 million, subject to future adjustments.  Significant assets acquired include manufacturing equipment, trademarks, customer lists, distribution rights, patents, and the goodwill of the PUR water filtration business.  PUR’s product line includes faucet mount water filtration systems and filters, pitcher systems and filters, and refrigerator filters.  PUR is one of two leading brands in its product categories.  We operate the PUR business in our Healthcare / Home Environment segment and market its products primarily into retail trade channels in the U.S.  At the closing, the Company and P&G also entered into transitional services and supply agreements whereby P&G or one or more of its affiliates will provide certain short-term services for and supply certain products to the Company in exchange for specified fees.  The terms of the transitional agreements are between six months and two years. We expect the acquisition to help broaden the Company’s product portfolio, provide additional opportunities for expansion into adjacent product groups and continue to increase our significance with common customers.

 

As discussed below, one of our core initiatives in our efforts to grow our business and increase shareholder value is to broaden our growth opportunities through acquisitions of companies, brands and product categories. In addition to our purchase of the PUR water filtration business, we have made the following material acquisitions since the beginning of fiscal 2010:

 

·                  On December 31, 2010, we completed our merger with Kaz, a world leader in providing a broad range of consumer products in two primary product categories consisting of healthcare and home environment.  Pursuant to the terms of the merger agreement, all of the shares of capital stock of Kaz were cancelled and converted into a total cash purchase price of $271.50 million, subject to certain adjustments.  The acquisition was funded with $77.50 million of cash and $194.00 million in short- and long-term debt.  Kaz sources, markets and distributes a number of well-recognized brands including: Vicks, Braun, Kaz, SmartTemp, SoftHeat, Honeywell, Duracraft, Protec, Stinger, and Nosquito.  We are continuing to integrate Kaz into the Helen of Troy operating structure.

 

·                  On March 31, 2010, we completed the acquisition of certain assets and liabilities of the Pert Plus hair care and Sure antiperspirant and deodorant businesses from Innovative Brands, LLC for a net cash purchase price of $69.00 million, which we paid with cash on hand. Pert Plus enjoys a long history as a leading brand in the $2 billion U.S. shampoo category through its pioneering development of the 2-in-1 shampoo and conditioner combination technology. Sure is one of the leading brands in the $1.7 billion U.S. antiperspirant and deodorant category, well known for its product efficacy and value to both women and men. We market Pert Plus and Sure

 

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products primarily into retail trade channels. In the second quarter of fiscal 2011, we substantially completed the integration of this acquisition into our operations.

 

·                  On March 31, 2009, we completed the acquisition of certain assets, trademarks, customer lists, distribution rights, patents, goodwill, and formulas for Infusium 23 (“Infusium”) hair care products from The Procter & Gamble Company for a cash purchase price of $60.00 million, which we paid with cash on hand.  The Infusium brand of shampoos and conditioners added to our domestic grooming, skin care and hair care product line offerings.

 

In each of our segments, we strive to be the first to market with a broad line of competitively priced innovative products.  We believe this strategy is one of our most important growth drivers.  Our goal is to provide consumers with unique features, better functionality and higher performance at competitive price points.  We believe this strategy will allow us to sustain, and in many categories to strengthen, our market position in many of our product lines over the long term.  As we extend our product lines and enter new product categories, we intend to expand our business in our existing customer base and attract new customers.

 

As part of our overarching objective to grow our business and increase shareholder value, we have five core initiatives on which we continually focus. These initiatives and their key elements are outlined below, along with our thoughts on how activities of the past fiscal year supported these initiatives:

 

·                  Maximize high growth potential branded products.  We seek to maximize high growth products by selectively investing in consumer marketing propositions that we believe offer the best opportunities to capture market share and increase growth.   With the acquisition of PUR, we added another nationally recognized brand with powerful consumer “top of mind” presence and continued to diversify our product portfolio.  The PUR brand gives us additional scale and expands our product footprints, particularly with wholesale clubs and home improvement retailers.  In fiscal 2012, ten brands accounted for approximately 71 percent of our consolidated annual net sales revenue, compared to aproximately 72 percent for fiscal 2011.  Pro forma year-over-year growth in those brands as a group averaged 4 percent.  When a brand fails to achieve a desired market potential, we evaluate whether to continue to invest in brand maintenance, exit the brand and/or selectively replace it with revenue streams from similar, more effectively performing branded products.

 

·                  Accelerate our new product pipeline.  We strive to reduce the time required to develop and introduce new products to meet changing consumer preferences and take advantage of opportunities sooner.  A majority of our products are produced in China, where long production lead times are normal.  We continuously work with our manufacturers to simplify and shorten the length of our supply chain for new products.  The Kaz acquisition in fiscal 2011 provided us with the opportunity to leverage global sourcing economies of scale while sharing and standardizing best practices.  During fiscal 2012, we fully implemented new product data management functionality in our Enterprise Resource Management system that streamlines and more effectively communicates new product specifications and status across our organization and throughout our supply chain. We expect this new functionality will provide a number of operational efficiencies that can continue to reduce our time to market.

 

·                  Leverage innovation.  We constantly seek ways to foster our culture of innovation and new product development.  We intend to enhance and extend our existing product categories and develop new allied product categories to grow our business.  We believe new innovative products drive higher sales prices and margins for us and the customers we serve, and increase the value of our brand base.  Examples of products released to the market during fiscal 2012 that used innovation to become high volume sellers were:

 

Personal Care: The Revlon Artistry line of styling appliances is a full complement of professional level styling tools with unique finishes that look as though they were “hand painted.”  We also released our HOT Tools Curly-Q tapered conical barrel curling irons. In brushes, we released the Revlon True Red series of brushes in vented, cushioned and all purpose designs.

 

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Housewares:  Our OXO Egg Beater is an old fashioned idea updated with OXO’s ergonomic design and features that allow for easy use, storage and cleaning.  We expanded our refrigerator food storage containers with our OXO Good Grips LockTop stackable containers in durable BPA-free container bodies. We also released OXO Good Grips French Press coffee makers in four- and eight-cup models combining stainless steel, traditional glass carafes and non-slip grips.

 

Healthcare / Home Environment:  We released the Vicks Behind Ear Thermometer, providing a revolutionary new way to measure temperature that is easy to use, non-invasive and highly accurate.  We also released our Honeywell Top Fill line of easy-to-care-for humidifiers.

 

·                  Broaden our growth opportunities.  We plan to continue to seek opportunities to acquire companies, brands and product categories through development and acquisitions.  When brand acquisition is not possible, we look for licensed brands that have developed substantial brand equity in product categories that will create synergies with our existing products.  For example, the fiscal 2012 addition of the PUR brand of water filtration products continues to diversify the Company’s sales base and provides certain adjacent product opportunities.

 

·                  Reduce cost and increase productivity.  We seek to control our expenses and strengthen operating margins by eliminating unnecessary spending, co-innovating with our manufacturers to eliminate costs, leveraging technology, and making productivity a key focus throughout our Company.  During fiscal 2012, we executed and completed various synergistic integration initiatives dealing with Kaz’s IT, sourcing, distribution, accounting, customer service, and credit and collections operations.  The end result has been lower costs of operation across most of our enterprise.  We believe the PUR acquisition will provide us with opportunities to leverage our back office infrastructure and operations to achieve additional efficiencies.

 

We present financial information by operating segment in Note (20) of our accompanying consolidated financial statements. The matters discussed in this Item 1., “Business,” pertain to all existing operating segments, unless otherwise specified.

 

TRADEMARKS, PATENTS AND PRODUCTS

 

We sell certain of our products under trademarks licensed from third parties.  We also market products under a number of trademarks that we own.  The following are a representative, but not all-inclusive, listing of some of the more important trademarks by segment and major product category:

 

SEGMENT

PRODUCT CATEGORY

OWNED TRADEMARKS

LICENSED TRADEMARKS

 

    Personal Care

Retail and Professional Appliances and Accessories

 

PRO Beauty Tools®, Karina®, HOT Tools®, Gold ‘N Hot®, Carel®, Comare®, Shear Technology®, DCNL®

 

Revlon ® (1), Vidal Sassoon®, Dr. Scholls®, Scholl®, Toni&Guy®, Bed Head®, Health o Meter®, Laila Ali®

 

Grooming, Skin Care and Hair Care Solutions

 

Brut®, Infusium 23®, Pert Plus®, Sure®, Ammens®, Ogilvie®, Final Net®

 

Sea Breeze®

Housewares

 

OXO®, Good Grips®, SoftWorks®, OXO SteeL®, OXO tot®

 

 

Healthcare / Home Environment

Healthcare

SoftHeat®, Protec®, SmartTemp®

Braun®, Vicks®

Water Filtration

PUR®

 

Home Environment

Duracraft®, Stinger®, Nosquito®

Honeywell®, Febreze®

 

(1)  The remaining duration of the agreements, including renewal terms, is approximately 51 years.

 

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Licensed Trademarks

 

The Personal Care and Healthcare / Home Environment segments depend upon the continued use of trademarks licensed under various agreements for a substantial portion of their net sales revenue.  New product introductions under licensed trademarks require approval from the respective licensors. The licensors must also approve the product packaging. Many of our license agreements require us to pay minimum royalties, meet minimum sales volumes and make minimum levels of advertising expenditures.  If we decide to renew upon expiration of their current terms, we may be required to pay prescribed renewal fees for certain agreements at the time of that election or we may be unable to renegotiate acceptable terms that will allow for renewal.

 

We believe our principal trademarks, both owned and licensed, have high levels of brand name recognition among retailers and consumers throughout the world. In addition, we believe our brands have an established reputation for quality, reliability and value.

 

Patents, Other Intellectual Property and Infringement Considerations

 

Helen of Troy maintains over 585 design and utility patents in the United States and several foreign countries.  We believe the loss of the protection afforded by any one of these patents would not have a material adverse effect on our business as a whole.  We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage.

 

We monitor and protect our brands against infringement, as we deem appropriate; however, our ability to enforce patents, copyrights, licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability of various intellectual property rights in various jurisdictions.

 

Products

 

We market and sell Personal Care, Housewares and Healthcare / Home Environment products that we acquire, design and/or develop. The following table summarizes the types of products we sell by business segment:

 

SEGMENT

PRODUCT CATEGORY

SIGNIFICANT PRODUCTS

 

   Personal Care

Retail and Professional Appliances and Accessories

 

Curling irons, straightening irons, hot air brushes, hand-held dryers, hard and soft-bonnet hair dryers, hair setters, facial care appliances, foot care appliances, hair clippers and trimmers, hand held and lighted mirrors, hair brushes, hair styling implements, and decorative hair accessories

 

 

Grooming, Skin Care and Hair Care Solutions

 

Liquid hair styling products, treatments, conditioners, shampoos, liquid and/or medicated skin care products, fragrances, deodorants, and antiperspirants

 

Housewares

 

Food preparation tools and gadgets, food storage containers, cutlery, household cleaning tools, trash cans, bathroom accessories, storage and organization products, and baby and toddler care products

 

Healthcare / Home Environment

Healthcare

 

Thermometers, blood pressure monitors, humidifiers, heating pads, and hot/cold wraps

 

Water Filtration

 

Faucet mount water filtration systems, pitcher based water filtration systems and refrigerator filters

 

Home Environment

 

Air purifiers, heaters, fans, humidifiers, dehumidifiers, and bug zappers

 

 

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We continue to develop new products, respond to market innovations and enhance existing products with the objective of improving our position in the Personal Care, Housewares and Healthcare / Home Environment markets. Overall, in fiscal 2012, we introduced 377 new products across all of our categories compared to 443 and 362 new products introduced in fiscal 2011 and 2010, respectively.  Currently, 383 additional new products are in our product development pipeline for expected introduction in fiscal 2013.

 

SALES AND MARKETING

 

We now market our products in approximately 84 countries throughout the world.  Sales within the United States comprised 77, 80 and 79 percent of total net sales revenue in fiscal 2012, 2011 and 2010, respectively.  We sell our products through mass merchandisers, drugstore chains, warehouse clubs, home improvement stores, catalogs, grocery stores, specialty stores, beauty supply retailers, e-commerce retailers, wholesalers, and various types of distributors, as well as directly online to end user consumers. We collaborate extensively with our retail customers and in many instances produce specific versions of our product lines with exclusive designs and packaging for their stores, which are appropriately priced for their respective customer bases.

 

We market products principally through the use of outside sales representatives and our own internal sales staff, supported by our internal marketing, category management, engineering, creative services, and customer and consumer service staff.  These groups work closely together to develop pricing and distribution strategies, to design packaging and to help develop product line extensions and new products.

 

Regional sales and business unit managers work with our inside and outside sales representatives.  Our sales managers are organized by product group and geographic area and, in some cases, key customers.  Our regional managers are responsible for customer relations management, pricing and discount programs, distribution strategies, and sales generation.

 

The companies from whom we license many of our brand names promote those names extensively. The Honeywell, Braun, Vicks, Febreze, Revlon, Vidal Sassoon, Dr. Scholl’s, Scholl, Bed Head, and Toni&Guy trademarks are widely recognized because of the licensor’s advertising and the sale of a variety of products in categories other than ours. We believe we benefit from the name recognition associated with a number of our licensed trademarks and seek to further improve the name recognition and perceived quality of all trademarks under which we sell products through our own advertising and product development efforts. We also promote our non-licensed products through television advertising and through print media, including consumer and trade magazines, extensive in-store and customer cooperative advertising, the internet, and various industry trade shows.

 

MANUFACTURING AND DISTRIBUTION

 

We contract with unaffiliated manufacturers in the Far East, primarily in China, to manufacture a significant portion of our products in the Personal Care appliance and accessories, Housewares, Healthcare, Water Filtration and Home Environment product categories.  Our mix of Far East manufacturing has declined since 2010 as the Healthcare / Home Environment segment and Grooming, Skin Care and Hair Care Solutions product categories have become a larger part of our business.  These product categories source a higher proportion of their products in both the U.S. and Mexico.  For a discussion regarding our dependency on third-party manufacturers, see Item 1A., “Risk Factors.”  For fiscal 2012, 2011 and 2010, cost of goods sold manufactured by vendors in the Far East comprised approximately 78, 80 and 85 percent, respectively, of total consolidated cost of goods sold.

 

Many of our key Far East manufacturers have been doing business with us for over 30 years.  In some instances, we are now working with the second generation of entrepreneurs from the same families.  We believe these relationships give us a stable and sustainable advantage over many of our competitors.

 

Manufacturers who produce our products use formulas, molds and certain other tooling, some of which we own, in manufacturing those products.  We employ numerous technical and quality control personnel responsible for ensuring high product quality.  Most of our products manufactured outside the countries in which they are sold are subject to import duties, which increase the amount we pay to obtain such products.

 

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Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within relatively short time frames. Consequently, our policy is to maintain several months of supply of inventory in order to meet our customers’ needs. Accordingly, we order products substantially in advance of the anticipated time of their sale to our customers. While we have limited formal long-term arrangements with our suppliers, in most instances, we place purchase orders for products several months in advance of receipt of orders from our customers.  Our relationships and arrangements with most of our manufacturers allow for some flexibility in modifying the quantity, composition and delivery dates of orders.  Most purchase orders are in U.S. Dollars.  Because of our long lead times, from time to time, we must discount end of model product or sell it through closeout sales channels to eliminate excess inventories.

 

In total, we occupy approximately 2,672,000 square feet of distribution space in various locations to support our operations, which includes a 1,200,000 square foot distribution center in Southaven, Mississippi, and a 500,000 square foot distribution center in Memphis, Tennessee, used to support a significant portion of our domestic distribution.  Approximately 72 percent of our consolidated gross sales volume shipped from these two facilities in fiscal 2012.  For a further discussion of the risks associated with our distribution capabilities, see Item 1A., “Risk Factors.”   Products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the United States and Canada. The products are then shipped by truck or rail service to distribution centers in El Paso, Texas; Southaven, Mississippi; Memphis, Tennessee; and Toronto, Canada, or directly to customers. We ship substantially all products to North American customers from these distribution centers by ground transportation services. Products sold outside the United States and Canada are shipped from manufacturers, primarily in the Far East, to distribution centers in the Netherlands, Belgium, the United Kingdom, Mexico, or directly to customers. We then ship products stored at these international distribution centers to distributors or retailers.

 

CUSTOMERS

 

Sales to Wal-Mart Stores, Inc. (including its worldwide affiliates) accounted for approximately 20, 17 and 18 percent of our consolidated net sales revenue in fiscal 2012, 2011 and 2010, respectively.   Sales to our second largest customer, Target Corporation, all within the United States, accounted for approximately 11, 10 and 9 percent of our consolidated net sales revenue in fiscal 2012, 2011 and 2010, respectively.  Sales to our third largest customer, Bed Bath and Beyond, Inc., all within the United States, accounted for approximately 6, 8 and 10 percent of our consolidated net sales revenue in fiscal 2012, 2011 and 2010, respectively.  No other customers accounted for ten percent or more of consolidated net sales revenue during those fiscal years.  Sales to our top five customers accounted for approximately 44, 44 and 46 percent in fiscal 2012, 2011 and 2010, respectively.

 

ORDER BACKLOG

 

When placing orders, our retail and wholesale customers usually request that we ship the related products within a short time frame.  As such, there usually is no significant backlog of orders in any of our distribution channels.

 

COMPETITIVE CONDITIONS

 

The markets in which we sell our products are very competitive and mature.  The rapid growth of large mass merchandisers, together with changes in consumer shopping patterns, have contributed to a significant consolidation of the consumer products retail industry and the formation of dominant multi-category retailers with strong negotiating power.  Current trends among retailers include fostering high levels of competition among suppliers, insistence on  maintaining or reducing prices and the requirement to deliver products under shorter lead times.  Additionally, certain retailers source and sell products under their own private label brands that compete with our Company’s products.  We believe that we have certain key competitive advantages, such as well recognized brands, engineering expertise and innovation, sourcing and supply chain know-how, and productive co-development relationships with our Far East manufacturers, some of which have been built over 30 years or more of working together. We believe these advantages allow us to bring our retailers a value proposition in our products that can significantly out-perform private label products in most categories.  Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality, performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches.

 

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The following table summarizes our primary competitors by business segment:

 

SEGMENT

PRODUCT CATEGORY

PRIMARY COMPETITORS

 

   Personal Care

Retail and Professional Appliances and Accessories

 

Conair, Farouk Systems Inc. (CHI), T3 Micro, Inc., International Consulting Associates (InfraShine), FHI Heat, Inc., Jamella Limited (GHD), Turbo Ion, Inc. (Croc Hair Products), Spectrum Brands, Inc. (Remington), Goody Products, Inc. a division of Newell Rubbermaid, Inc., and Homedics-U.S.A., Inc.

 

 

Grooming, Skin Care and Hair Care Solutions

 

KAO Brands Company, The Procter & Gamble Company, L’Oréal Group, Unilever N.V., Colgate-Palmolive Company, Beirsdorf AG, and Coty Inc.

 

Housewares

 

Lifetime Brands, Inc. (KitchenAid), Zyliss AG, Wilton Industries, Inc. (Copco), Simplehuman LLC, Casabella Holdings LLC, Interdesign, Inc., Boon Inc., Munchkin, Inc., Skip Hop, Inc. and Stokke AS.

 

Healthcare / Home Environment

Healthcare

 

Phillips Electronics N.V., Microlife AG Swiss Corporation, Omron Corporation, Medisana AG, Beurer GmbH, Exergen Corporation, Paul Hartmann AG, and Visiomed Group SA (Thermoflash)

 

Water Filtration

 

The Clorox Company (Brita), 3M Company (Filtrete)

 

Home Environment

 

Panasonic Corporation, Sharp Corporation, Jarden Corporation (Sunbeam, Bionair and Holmes), Lasko Products, Inc., and De’ Longhi S.p.A.

 

 

Some of these competitors have significantly greater financial and other resources than we do.

 

SEASONALITY

 

Our business is somewhat seasonal. With the number of acquisitions we have made over the last five years, our seasonality has been changing.  The following table shows our seasonality over the latest three fiscal years.

 

SEASONALITY AS A PERCENTAGE OF ANNUAL NET SALES REVENUE

 

 

 

 

Fiscal Years Ended

Fiscal Quarter Ended

2012

2011

2010

 

 

 

 

 

 

 

 

May

23.0%

20.6%

22.2%

August

23.5%

22.5%

25.0%

November

28.7%

26.4%

29.2%

February

24.9%

30.5%

23.5%

 

The third fiscal quarter normally produces the highest net sales revenue during the fiscal year.  Seasonality in fiscal 2011 was skewed toward the fourth fiscal quarter by the inclusion of two months of net sales revenue from Kaz following its acquisition on December 31, 2010.  Because of the impact of the seasonality of our net sales revenues, our working capital needs fluctuate during the year.

 

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GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS

 

Our operations are subject to national, state, local, and provincial jurisdictions’ environmental, and health and safety laws and regulations.  These laws and regulations impose workplace standards and regulate the discharge of pollutants into the environment.  In addition, they establish various standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials, and substances including solid and hazardous wastes.

 

Many of the products we sell are subject to a number of product safety laws and regulations in various jurisdictions.  These laws and regulations specify the maximum allowable levels of certain materials that may be contained in our products, provide statutory prohibitions against misbranded and adulterated products, establish ingredients and manufacturing procedures for certain products, specify product safety testing requirements, and set product identification and labeling requirements.

 

We believe that we are in material compliance with these laws and regulations. Further, the cost of maintaining compliance has not had a material adverse effect on our business, consolidated results of operations and consolidated financial condition, nor do we expect it to do so in the foreseeable future.  Due to the nature of our operations and the frequently changing nature of environmental compliance standards and technology, we cannot predict with any certainty that future material capital or operating expenditures will not be required in order to comply with all applicable environmental laws and regulations.

 

EMPLOYEES

 

As of February 29, 2012, we employed 1,443 full-time employees world-wide.  We also use temporary, part-time and seasonal employees as needed.  None of our U.S. employees are covered by a collective bargaining agreement.  Certain of our employees in Europe are covered by collective arrangements in accordance with local practice.  We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees.

 

GEOGRAPHIC INFORMATION

 

Note (20) to our accompanying consolidated financial statements contains geographic information concerning our net sales revenue and long-lived assets.

 

AVAILABLE INFORMATION

 

We maintain our main Internet site at the following address: http://www.hotus.com. The information contained on this website is not included as a part of, or incorporated by reference into, this report.  We make available on or through our main website’s Investor Relations page under the heading “SEC Filings” certain reports and amendments to those reports that we file with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements on Schedule 14A, amendments to these reports, and the reports required under Section 16 of the Exchange Act of transactions in Company shares by directors and officers.  We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.  Also, on the Investor Relations page, under the heading “Corporate Governance”, are the Company’s Code of Ethics, Corporate Governance Guidelines and the Charters of the Committees of the Board of Directors.

 

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ITEM 1A.  RISK FACTORS

 

The ownership of our common stock involves a number of risks and uncertainties.  When evaluating us and our business before making a decision regarding investment in our securities, potential investors should carefully consider the risk factors and uncertainties described below, together with other information contained in this report.  If any of the events or circumstances described below or elsewhere in this report actually occur, they could adversely effect our business and operating results.  The risks listed below are not the only risks that we face.  Additional risks that are presently unknown to us or that we currently think are not significant may also impact our business operations.

 

We rely on our Chief Executive Officer and a small number of other key senior executives to operate our business. The loss of any of these individuals could have a material adverse effect on our business.

 

The loss of our Chief Executive Officer or any of our key senior executives could have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable to hire or relocate and integrate suitable replacements on a timely basis or at all.  Further, in order to continue to grow our business, we will need to expand our senior management team.  We may be unable to attract or retain these persons.  This could hinder our ability to grow our business and could disrupt our operations or otherwise have a material adverse effect on our business.

 

Our ability to deliver products to our customers in a timely manner and to satisfy our customers’ fulfillment standards are subject to several factors, some of which are beyond our control.

 

Retailers place great emphasis on timely delivery of our products for specific selling seasons, especially during our third fiscal quarter, and on the fulfillment of consumer demand throughout the year. We cannot control all of the various factors that might affect product delivery to retailers. Vendor production delays, difficulties encountered in shipping from overseas, customs clearance delays, and operational issues with any of the third-party logistics providers we use in certain countries are on-going risks of our business. We also rely upon third-party carriers for our product shipments from our distribution centers to customers.  In certain circumstances, we rely on the shipping arrangements our suppliers have made in the case of products shipped directly to retailers from the suppliers. Accordingly, we are subject to risks, including labor disputes, inclement weather, natural disasters, possible acts of terrorism, availability of shipping containers, and increased security restrictions associated with such carriers’ ability to provide delivery services to meet our shipping needs.  Failure to deliver products to our retailers in a timely and effective manner, often under special vendor requirements to use specific carriers and delivery schedules, could damage our reputation and brands and result in loss of customers or reduced orders.

 

Certain of our U.S. distribution facilities are geographically concentrated and operate during peak shipping periods at or near capacity.  These factors increase our risk that disruptions could occur and significantly affect our ability to deliver products to our customers in a timely manner.  Such disruptions could have a material adverse effect on our business.

 

To make our distribution operations more efficient, we have consolidated many of our U.S. distribution, receiving and storage functions into our Southaven, Mississippi and Memphis, Tennessee distribution facilities.  Approximately 72 percent of our consolidated gross sales volume shipped from these two facilities in fiscal 2012.  For this reason, any disruption in our distribution process in either of these facilities, even for a few days, could adversely effect our business and operating results.

 

Additionally, our U.S. distribution operations have reached a level where we may incur capacity constraints during peak shipping periods as we continue to grow our sales revenue through a combination of organic growth and  acquisitions.  These and other factors described above could cause delays in the delivery of our products and increases in shipping and storage costs that could have a material and adverse effect on our business, financial condition and results of operations.

 

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Our projections of product demand, sales and net income (including the Company’s guidance for PUR net sales revenue and the expectation that the acquisition will be accretive) are highly subjective in nature and our future sales and net income could vary in a material amount from our projections.

 

From time to time, we may provide projections to our shareholders, lenders, investment community, and other stakeholders of our future sales and net income.  Since we do not require long-term purchase commitments from our major customers and the customer order and ship process is very short, it is difficult for us to accurately predict the demand for many of our products, or the amount and timing of our future sales and related net income.  Our projections are based on management’s best estimate of sales using historical sales data and other information deemed relevant.  These projections are highly subjective since sales to our customers can fluctuate substantially based on the demands of their retail customers and due to other risks described in this report. Additionally, changes in retailer inventory management strategies could make our inventory management more difficult. Because our ability to forecast product demand and the timing of related sales includes significant subjective input, there is a risk that our future sales and net income could vary materially from our projections.

 

Expectations regarding the acquisitions of Kaz and PUR, and any other future acquisitions, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses, may adversely affect the price of our common stock.

 

We completed our acquisition of Kaz on December 31, 2010.  Additionally, on December 30, 2011, we completed an asset and stock purchase transaction in which we acquired 100 percent of the stock of PUR Water Purification Products, Inc., and certain other assets and liabilities from The Procter & Gamble Company and certain of its affiliates.  These two transactions represent significant acquisitions for the Company.  In addition, we continue to look for opportunities to make complementary strategic business and/or brand acquisitions.  Recent and future acquisitions, if not favorably received by consumers, shareholders, analysts, and others in the investment community, could have a material adverse effect on the price of our common stock.  In addition, any acquisition involves numerous risks, including:

 

·                  difficulties in the assimilation of the operations, technologies, products, and personnel associated with the acquisitions;

 

·                  difficulties in integrating distribution channels;

 

·                  diversion of management’s attention from other business concerns;

 

·                  difficulties in transitioning and preserving customer, contractor, supplier, and other important third-party relationships;

 

·                  difficulties realizing anticipated cost savings, synergies and other benefits related to an acquisition;

 

·                  risks associated with subsequent operating asset write-offs, contingent liabilities and impairment of related acquired intangible assets;

 

·                  risks of entering markets in which we have no or limited experience; and

 

·                  potential loss of key employees associated with the acquisitions.

 

Any difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition and results of operations.

 

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Our results of operations are dependent on sales to several large customers and the loss of, or substantial decline in, sales to a top customer could have a material adverse effect on our revenues and profitability.

 

A few customers account for a substantial percentage of our net sales revenue.  Our financial condition and results of operations could suffer if we lost all or a portion of the sales to any one of these customers.  In particular, sales to our first and second largest customers accounted for approximately 20 and 11 percent, respectively, of our consolidated net sales revenue in fiscal 2012.  While only two customers individually accounted for 10 percent or more of our net sales revenue in fiscal 2012, sales to our top five customers accounted for approximately 44 percent of fiscal 2012 net sales revenue.  We expect that a small group of customers will continue to account for a significant portion of our net sales revenue.  Although we have long-standing relationships with our major customers, we generally do not have written agreements that require these customers to buy from us or to purchase a minimum amount of our products.  A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and results of operations.

 

With the continuing trend towards retail trade consolidation, we are increasingly dependent upon key customers whose bargaining strength is substantial and growing. We may be negatively affected by changes in the policies of our customers, such as on-hand inventory reductions, limitations on access to shelf space, use of private label brands, price demands and other conditions, which could negatively impact our financial condition and results of operations.

 

A significant deterioration in the financial condition of our major customers could have a material adverse effect on our sales and profitability. We regularly monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate.  Despite these efforts, a bankruptcy filing by a key customer could have a material adverse effect on our business, financial condition and results of operations.

 

Large sophisticated customers may take actions that adversely affect our gross profit and results of operations.

 

In recent years, we have observed a consumer trend away from traditional grocery and drugstore channels and toward mass merchandisers, which includes super centers and club stores.  This trend has resulted in the increased size and influence of these mass merchandisers. Additionally, these mass merchandisers source and sell products under their own private label brands that compete with our products.  As mass merchandisers grow larger and become more sophisticated, they may continue to demand lower pricing, special packaging, shorter lead times for the delivery of products, or impose other requirements on product suppliers.  These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship.  If we do not effectively respond to the demands of these mass merchandisers, they could decrease their purchases from us.  A reduction in the demand for our products by these mass merchandisers and the costs of complying with customer business demands could have a material adverse effect on our business, financial condition and results of operations.

 

We are dependent on third-party manufacturers, most of which are located in the Far East, and any inability to obtain products from such manufacturers could have a material adverse effect on our business,  financial condition and results of operations.

 

All of our products are manufactured by unaffiliated companies, most of which are in the Far East, principally in China.  This concentration exposes us to risks associated with doing business globally, including: changing international political relations; labor availability and cost; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations and policies; changes in customs duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; an extended and complex transportation cycle; the impact of changing economic conditions; and the availability and cost of raw materials and merchandise.  The political, legal and cultural environment in the Far East is rapidly evolving, and any change that impairs our ability to obtain products from manufacturers in that region, or to obtain products at marketable rates, could have a material adverse effect on our business, financial condition and results of operations.

 

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With most of our manufacturers located in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand accurately, we may encounter difficulties in filling customer orders on a timely basis or in liquidating excess inventories. We may also find that customers are canceling orders or returning products.  Any of these results could have a material adverse effect on our business, financial condition and results of operations.

 

Historically, labor in China has been readily available at relatively low cost as compared to labor costs in North America, Europe and other countries.  China has experienced rapid social, political and economic change in recent years. There is no assurance labor will continue to be available in China at costs consistent with historical levels or that changes in labor or other laws will not be enacted which would have a material adverse effect on the cost of products manufactured in China.  Many of our suppliers in China continue to experience labor shortages, which could result in future supply delays and disruptions and drive a substantial increase in labor costs.  Similarly, evolving government labor regulations and associated compliance standards could cause our product costs to rise or could cause manufacturing partners we rely on to exit the business.  This could have an adverse impact on product availability and quality.  The Chinese economy has experienced rapid expansion and highly fluctuating rates of inflation.  Higher general inflation rates will require manufacturers to continue to seek increased product prices.  During fiscal 2012 and 2011, the Chinese Renminbi appreciated against the U.S. Dollar approximately 4 percent each period.  During fiscal 2010, the Chinese Renminbi remained relatively stable against the U.S. Dollar.  To the extent the Chinese Renminbi appreciates with respect to the U.S. Dollar in the future, the Company may experience cost increases on such purchases, and this can adversely impact profitability. China’s currency intervention strategy with respect to the U.S. Dollar continues to evolve.  Future interventions by China may result in further currency appreciation and increase our product costs over time.  The Company may not be successful at implementing customer pricing or other actions in an effort to mitigate the related effects of the product cost increases.  Although China currently enjoys “most favored nation” trading status with the U.S., the U.S. government has in the past proposed to revoke such status and to impose higher tariffs on products imported from China. There is no assurance that our business will not be affected by any of the aforementioned risks, each of which could have a material adverse effect on our business, financial condition and results of operations.

 

High costs of raw materials and energy may result in increased cost of goods sold and certain operating expenses and adversely affect our results of operations and cash flow.

 

Significant variations in the costs and availability of raw materials and energy may negatively affect our results of operations.  Our suppliers purchase significant amounts of metals and plastics to manufacture our products. In addition, they also purchase significant amounts of electricity to supply the energy required in their production processes.  Changes in the cost of fuel as a result of continuing Middle East tensions and related political instabilities may continue to drive up fuel prices resulting in higher transportation prices in fiscal 2013.  The cost of these raw materials and energy, in the aggregate, represents a significant portion of our cost of goods sold and certain operating expenses.  Our results of operations could be adversely affected by future increases in these costs.  We have had some success in implementing price increases to our customers or passing on product cost increases by moving customers to newer product models with enhancements that justify higher prices, and we intend to continue these efforts.  We can make no assurances that these efforts will be successful in the future or will materially offset the cost increases we may incur.

 

If our goodwill, indefinite-lived intangible assets or other long-term assets become impaired, we will be required to record additional impairment charges, which may be significant.

 

A significant portion of our long-term assets continues to consist of goodwill and other indefinite-lived intangible assets recorded as a result of past acquisitions.  We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable.  If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of each of the individual assets exceeds its fair market value. If analysis indicates that an individual asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the individual asset’s carrying value over its fair value. The steps required by U.S. generally accepted accounting principles (“GAAP”) entail significant amounts of judgment and subjectivity.

 

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We complete our analysis of the carrying value of our goodwill and other intangible assets during the first quarter of each fiscal year, or more frequently, whenever events or changes in circumstances indicate their carrying value may not be recoverable.  Events and changes in circumstances that may indicate there is impairment and which may indicate interim impairment testing is necessary include, but are not limited to: strategic decisions to exit a business or dispose of an asset made in response to changes in economic, political and competitive conditions, the impact of the economic environment on our customer base and on broad market conditions that drive valuation considerations by market participants, our internal expectations with regard to future revenue growth and the assumptions we make when performing our impairment reviews, a significant decrease in the market price of our assets, a significant adverse change in the extent or manner in which our assets are used, a significant adverse change in legal factors or the business climate that could affect our assets, an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset, and significant changes in the cash flows associated with an asset.  We analyze these assets at the individual asset, reporting unit and company levels. As a result of such circumstances, we may be required to record a significant charge to net income in our financial statements during the period in which any impairment of our goodwill, indefinite-lived intangible assets or other long-term assets is determined.  Any such impairment charges could have a material adverse effect on our business, financial condition and results of operations.

 

We rely on licensed trademarks with third parties and license certain trademarks to third parties in exchange for royalty income, the loss of which could have a material adverse effect on our revenues and profitability.

 

We are dependent on our various licensed trademarks as a substantial portion of our sales revenue comes from selling products under licensed trademarks. As a result, we are dependent upon the continued use of these trademarks, including the Revlon, Vicks, Braun, Honeywell, and Vidal Sassoon trademarks.  Additionally, we now license certain trademarks, including OXO and PUR, to third parties in exchange for royalty income.  It is possible that certain actions taken by the Company, its licensors, licensees, or other third parties might diminish greatly the value of any of our licensed trademarks. Additionally, some of our licensors and licensees have the ability to terminate their license agreements with us at their option subject to each parties’ right to continue the license for a limited period of time following notice of termination.  If we or our licensees were unable to sell products under these licensed trademarks, or one or more of our license agreements are terminated or the value of the trademarks were diminished by the Company, a licensor, or licensee due to any inability to perform under the terms of the agreements or other reasons, or due to the actions of third parties, the effect on our business, financial condition and results of operations could be both negative and material.

 

We are subject to risks related to our dependence on the strength of retail economies and may be vulnerable in the event of a prolonged economic downturn.

 

Our business depends on the strength of the retail economies in various parts of the world, primarily in North America and to a lesser extent Europe, Asia and Latin America. These retail economies are affected primarily by factors such as consumer demand and the condition of the retail industry, which, in turn, are affected by general economic conditions and specific events such as natural disasters, terrorist attacks and political unrest.  Consumer spending in any geographic region is generally affected by a number of factors, including local economic conditions, government actions, inflation, interest rates, energy costs, unemployment rates, gasoline prices and consumer confidence, all of which are beyond our control.  Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. As a result of the prolonged recovery from the global recession, many consumers have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit, and sharply falling asset prices, among other things.  The slow recovery from the recession in the United States, the United Kingdom, Canada, Mexico or any of the other countries in which we conduct significant business may continue to cause significant readjustments in both the volume and mix of our product sales, which could materially and adversely affect our business, financial condition and results of operations.

 

The impact of these external factors and the extent to which they may continue is difficult to predict, and one or more of the factors could adversely impact our business. In recent years, the retail industry in the U.S. and, increasingly elsewhere, has been characterized by intense competition among retailers. Because such competition, particularly in weak retail economies, can cause retailers to struggle or fail, we must continuously monitor, and adapt to changes in, the

 

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profitability, creditworthiness and pricing policies of our customers.  A deterioration of certain key retail economies, such as we experienced during fiscal 2008 through 2010, could continue to have a material adverse effect on our business, financial condition and results of operations.

 

To compete successfully, we must develop and introduce a continuing stream of innovative new products to meet changing consumer preferences.

 

Our long-term success in the competitive retail environment depends on our ability to develop and commercialize a continuing stream of innovative new products that meet changing consumer preferences and take advantage of opportunities sooner than our competition. We face the risk that our competitors will introduce innovative new products that compete with our products. Our core initiatives include fostering our culture of innovation and new product development, enhancing and extending our existing product categories and developing new allied product categories.  There are numerous uncertainties inherent in successfully developing and commercializing new products on a continuing basis and new product launches may not deliver expected growth in sales or operating income.   If we are unable to develop and introduce a continuing stream of new products, it may have an adverse effect on our business, financial condition and results of operations.

 

Disruptions in U.S., Euro zone and other international credit markets may adversely affect our business, financial condition and results of operations.

 

Disruptions in national and international credit markets could result in limitations on credit availability, tighter lending standards, higher interest rates on consumer and business loans, and higher fees associated with obtaining and maintaining credit availability.  Disruptions may also materially limit consumer credit availability and restrict credit availability to our customer base and the Company.  In addition, in the event of disruptions in the financial markets, current or future lenders may become unwilling or unable to continue to advance funds under any agreements in place, increase their commitments under existing credit arrangements or enter into new financing arrangements.  The failure of our lenders to provide sufficient financing may constrain our ability to operate or grow the business and to make complementary strategic business and/or brand acquisitions.  This could have a material adverse effect on our business, financial condition and results of operations.

 

Our operating results may be adversely affected by foreign currency exchange rate fluctuations.

 

Our functional currency is the U.S. Dollar. Changes in the relation of other foreign currencies to the U.S. Dollar will affect our sales and profitability and can result in exchange losses because the Company has operations and assets located outside the United States.  The Company transacts a significant portion of its business in currencies other than the U.S. Dollar (“foreign currencies”).  Such transactions include sales, certain inventory purchases and operating expenses. As a result, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies.  Accordingly, foreign operations will continue to expose us to foreign currency fluctuations, both for purposes of actual conversion and financial reporting purposes.  Additionally, we purchase a substantial amount of our products from Chinese manufacturers.  During fiscal 2012 and 2011, the Chinese Renminbi appreciated against the U.S. Dollar approximately 4 percent each period.  During fiscal 2010, the Chinese Renminbi remained relatively stable against the U.S. Dollar.  We believe the trend towards continued appreciation is likely during fiscal 2013.  Although our purchases from China are in U.S. Dollars, if the Chinese Renminbi continues its rise against the U.S. Dollar, the costs of our products will likely rise over time because of the impact the fluctuations will have on our suppliers, and we may not be able to pass on any or all of these price increases to our customers.

 

Where operating conditions permit, we seek to reduce foreign currency risk by purchasing most of our inventory with U.S. Dollars and by converting cash balances denominated in foreign currencies to U.S. Dollars.  We have also historically hedged against certain foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar.  In these transactions, we execute a forward currency contract that will settle at the end of a forecasted period.  Because the size and terms of the forward contract are designed so that its fair market value will move in the opposite direction and approximate magnitude of the underlying foreign currency’s forecasted exchange gain or loss during the forecasted period, a hedging relationship is created.  To the extent we forecast

 

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the expected foreign currency cash flows from the period the forward contract is entered into until the date it will settle with reasonable accuracy, we significantly lower or materially eliminate a particular currency’s exchange risk exposure over the life of the related forward contract. We enter into these types of agreements where we believe we have meaningful exposure to foreign currency exchange risk and the hedge pricing appears reasonable.  It is not practical for us to hedge all our exposures, nor are we able to project in any meaningful way the possible effect and interplay of all foreign currency fluctuations on translated amounts or future net income.  This is due to our constantly changing exposure to various currencies, the fact that each foreign currency reacts differently to the U.S. Dollar and the significant number of currencies involved.

 

The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted.  Accordingly, there can be no assurance that U.S. Dollar foreign exchange rates will be stable in the future or that fluctuations in foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.

 

Our operating results may be adversely affected by trade barriers, exchange controls, expropriations, and other risks associated with foreign operations.

 

The economies of other foreign countries important to our operations, including countries in Asia, Europe and Latin America, could suffer slower economic growth or economic, social and/or political instability or hyperinflation in the future. Our international operations in countries in Asia, Europe and Latin America, including manufacturing and sourcing operations (and the international operations of our customers), are subject to inherent risks which could adversely affect us, including, among other things:

 

·                  protectionist policies restricting or impairing the manufacturing, sales or import and export of our products;

 

·                  new restrictions on access to markets;

 

·                  lack of developed infrastructure;

 

·                  inflation (including hyperinflation) or recession;

 

·                  changes in, and the burdens and costs of compliance with, a variety of foreign laws and regulations, including tax laws, accounting standards, environmental laws and occupational health and safety laws;

 

·                  social, political or economic instability;

 

·                  acts of war and terrorism;

 

·                  natural disasters or other crises;

 

·                  reduced protection of intellectual property rights in some countries;

 

·                  increases in duties and taxation;

 

·                  restrictions on transfer of funds and/or exchange of currencies;

 

·                  expropriation of assets; and

 

·                  other adverse changes in policies, including monetary, tax and/or lending policies, encouraging foreign investment or foreign trade by our host countries.

 

Should any of these events occur, our ability to sell or export our products or repatriate profits could be impaired, we could experience a loss of sales and profitability from our international operations, and/or we could experience a substantial impairment or loss of assets, any of which could materially and adversely affect our business, financial condition and results of operations.

 

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We recently incurred significant additional debt to fund the Kaz and PUR acquisitions and may incur additional debt to fund future acquisitions and capital expenditures, which could have an adverse impact on our business and profitability.

 

Our debt levels can adversely affect our financial condition and can add constraints on our ability to operate our business.  Our indebtedness can, among other things:

 

·                  increase our vulnerability to general adverse economic conditions;

 

·                  limit our ability to obtain necessary financing and to fund future working capital, capital expenditures and other general corporate requirements;

 

·                  require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and capital expenditures, and for other general corporate purposes;

 

·                  subject us to higher interest expense (the majority of our debt is fixed or effectively fixed through the use of interest rate swaps and these rates may produce higher interest expense than would be available with floating rate debt, as is currently the case with decreased market interest rates);

 

·                  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt;

 

·                  limit our ability to pursue acquisitions or sell assets; and

 

·                  limit our ability to borrow additional funds.

 

Any of these events could have a material adverse effect on us. In addition, our debt agreements contain restrictive financial and operational covenants. Significant restrictive covenants include limitations on, among other things, our ability under certain circumstances to:

 

·                  incur additional debt, including guarantees;

 

·                  grant certain types of liens;

 

·                  sell or otherwise dispose of assets;

 

·                  engage in mergers, acquisitions or consolidations;

 

·                  pay dividends on our common stock;

 

·                  repurchase our common stock;

 

·                  enter into substantial new lines of business; and

 

·                  enter into certain types of transactions with our affiliates.

 

Our failure to comply with these and other restrictive covenants could result in an event of default, which if not cured or waived, could have a material adverse effect on us.

 

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We rely on central Global Enterprise Resource Planning (“ERP”) systems and other peripheral information systems, which we recently upgraded for two of our three business segments.  Obsolescence or interruptions in the operation of our computerized systems or other information technologies could have a material adverse effect on our operations and profitability.

 

We conduct most of our businesses under two ERP systems.  Our operations are largely dependent on these systems. We continuously make adjustments to improve the effectiveness of the ERP and other peripheral information systems.  In fiscal 2011, we began to convert our ERP systems to a more updated version of our software provider’s system. The first phase of this upgrade was completed in January 2012.  As a result, all significant operating units within the Personal Care and Housewares segments are now running under the updated system.  In the next phase, we plan to migrate our Healthcare / Home Environment segment to the new version. Later, we plan to activate several new subsystems within the organization.  These upgrades have been, and will continue to be, a significant undertaking, which we expect to continue throughout much of fiscal 2013. Testing the new conversions and subsystems before active deployment will continue to require significant additional effort across much of our organization. Complications or delays in completing these projects could cause considerable disruptions to our business and may result in higher implementation costs than planned along with concurrent reallocation of human resources.

 

Any failures or disruptions in the ERP and other information systems or any complications resulting from ongoing adjustments to our systems could cause interruption or loss of data in our information or logistical systems that could materially impact our ability to procure products from our factories and suppliers, transport them to our distribution centers, and store and deliver them to our customers on time and in the correct amounts. In addition, natural disasters or other extraordinary events may disrupt our information systems and other infrastructure, and our data recovery processes may not be sufficient to protect against loss. Furthermore, application program bugs, system conflict crashes, user error, data integrity issues, customer data conflicts, and integration issues all pose significant risks.

 

We rely on certain outside vendors to assist us with the upgrade of our software, the ongoing implementation of new enhancements to our information systems and to assist us in maintaining some of our infrastructure. Should any of these vendors fail to perform as expected, it could adversely affect our service levels and restrict our ability to conduct business.

 

Information security breaches and any related operational interruptions could have a material adverse effect on our operations and profitability.

 

Information systems require constant updates to their security policies and hardware systems to reduce the risk of unauthorized access, malicious destruction of data or information theft.  We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmission and storage of confidential information.  Improper activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our computer systems, some of which may go undetected for extended periods.

 

Any such compromise or breach could cause interruptions in our operations, damage to our reputation and might require us to spend significant management time and money investigating the event and dealing with local and federal law enforcement.  In addition, we could become the subject of litigation and various claims from our customers, employees, suppliers, service providers, and shareholders. Regardless of the merits and ultimate outcome of these matters, litigation and proceedings of this type are expensive to respond to and defend, and we could be forced to devote substantial resources and time responding to and defending them, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Audits and related disputes with taxing authorities could have an adverse impact on our business.

 

From time to time, we are involved in tax audits and related disputes in various taxing jurisdictions.  The acquisitions of Kaz and PUR have added considerable complexity to our tax structure, and the risk of liability for past activities under prior ownership.   We believe that we have complied with all applicable reporting and tax payment obligations.   However,  in the past we have sometimes disagreed with taxing authority positions on various issues.  Historically, we have vigorously defended our tax positions through available administrative and judicial avenues.  Based on currently available information, we have established reserves for our best estimate of the probable tax liabilities.  Future actions by taxing authorities may result in tax liabilities that are significantly higher or lower than the reserves established, which could have a material effect on our consolidated results of operations or cash flows.  For more information about tax audits and related disputes, see Note (10) to the accompanying consolidated financial statements.

 

Potential changes in laws, including tax laws, and the costs and complexities of compliance with such laws could have an adverse impact on our business.

 

The impact of future legislation in the U.S. or abroad, including such things as employment and insurance laws, climate change related legislation, tax legislation, regulations or treaties, including any that would affect the companies or subsidiaries that comprise our consolidated group, is always uncertain. The U.S. Congress continues to consider certain proposed changes in the tax laws, and new energy and environmental legislation that, if enacted, may increase our costs of doing business.  In addition, changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosures related to the use of “Conflict Minerals”, if not modified before becoming effective, will increase the cost of our sourcing compliance operations.  Our ability to respond to such changes, the cost and complexity of compliance with new law changes, and their impact on our ability to operate economically and effectively in jurisdictions always presents a risk.

 

Under current tax law,  favorable tax treatment of our non-U.S. net income is dependent on our ability to avoid classification as a Controlled Foreign Corporation. Changes in the composition of our stock ownership could have an impact on our classification. If our classification were to change, it could have a material adverse effect on the largest U.S. shareholders and, in turn, on the Company’s business.

 

A non-U.S. corporation, such as ours, will constitute a “controlled foreign corporation” or “CFC” for U.S. federal income tax purposes if its largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of the stock outstanding.  If the IRS or a court determined that we were a CFC, then each of our U.S. shareholders who own (directly, indirectly, or constructively) 10 percent or more of the total combined voting power of all classes of our stock on the last day of our taxable year would be required to include in gross income for U.S. federal income tax purposes its pro rata share of our “subpart F income” (and the subpart F income of any our subsidiaries determined to be a CFC) for the period during which we (and our non-U.S. subsidiaries) were a CFC. In addition, any gain on the sale of our shares realized by such a shareholder may be treated as ordinary income to the extent of the shareholder’s proportionate share of our and our CFC subsidiaries’ undistributed earnings and profits accumulated during the shareholder’s holding period of the shares while we are a CFC.

 

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2.  PROPERTIES

 

PLANT AND FACILITIES

 

The Company owns, leases or otherwise utilizes through third-party management service agreements, a total of 50 facilities, which include selling, procurement, research and development, administrative, and distribution facilities worldwide.  All facilities operated by the Company are adequate for the purpose for which they are intended.  Summarized information regarding the location, number, type and use, segment, ownership and approximate size of our principal and other facilities as of February 29, 2012 is provided in the table below:

 

Location

 

Type and Use

 

Business Segment

Approximate
Size (Square
Feet / Acres)

 

 

 

 

 

 

Owned Facilities

 

 

 

 

 

 

 

 

 

 

 

El Paso, Texas, USA

 

Land & Building - U.S. Headquarters

 

All Segments

135,000

El Paso, Texas, USA

 

Land - Held for Future Expansion

 

All Segments

4 Acres

Southaven, Mississippi, USA

 

Land - Held for Future Expansion

 

All Segments

31 Acres

El Paso, Texas, USA

 

Land & Building - Distribution Facility

 

All Segments

408,000

Sheffield, England

 

Land & Building - Office Space

 

All Segments

10,000

Southaven, Mississippi, USA

 

Land & Building - Distribution Facility

 

Personal Care & Housewares

1,200,000

Mexico City, Mexico

 

Office Space - Latin American Headquarters

 

Personal Care & Healthcare /

3,900

 

 

 

 

Home Environment

 

 

 

 

 

 

 

Leased Facilities

 

 

 

 

 

 

 

 

 

 

 

3   - Facilities in China

 

Office Space - Primarily Supply Chain Operations

 

All Segments

32,150

7   - Facilities Worldwide

 

Office Space

 

Personal Care

27,550

9   - Facilities Worldwide

 

Distribution Facilities

 

Personal Care

257,450

3   - Facilities Worldwide

 

Office Space

 

Housewares

29,100

1   - Facility, Hong Kong, China

 

Distribution Facility

 

Housewares

3,500

1   - Facility, Darwen, England

 

Distribution Facility

 

Personal Care & Housewares

75,000

11 - Facilities Worldwide

 

Office Space

 

Healthcare / Home Environment

74,950

4   - Facilities Worldwide

 

Distribution Facilities

 

Healthcare / Home Environment

727,600

 

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ITEM 3.  LEGAL PROCEEDINGS

 

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

 

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ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

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

 

PRICE RANGE OF COMMON STOCK

 

Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) [symbol: HELE].  The following table sets forth, for the periods indicated, in dollars per share, the high and low sales prices of the common stock as reported on the NASDAQ.  These quotations reflect the inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.

 

 

 

High

 

Low

 

 

 

 

 

 

 

FISCAL 2012

 

 

 

 

 

First quarter

 

$

33.63

 

$

26.82

 

Second quarter

 

36.75

 

26.89

 

Third quarter

 

30.62

 

23.83

 

Fourth quarter

 

34.22

 

28.34

 

 

 

 

 

 

 

FISCAL 2011

 

 

 

 

 

First quarter

 

$

28.98

 

$

23.30

 

Second quarter

 

25.93

 

21.00

 

Third quarter

 

27.49

 

22.55

 

Fourth quarter

 

32.95

 

22.51

 

 

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS OF RECORD

 

Our common stock is our only class of equity security outstanding at February 29, 2012.  As of April 23, 2012, there were approximately 239 holders of record of the Company's common stock. Shares held in “nominee” or “street” name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder.

 

CASH DIVIDENDS

 

Our current policy is to retain earnings to provide funds for the operation and expansion of our business and for potential acquisitions.  We have not paid any cash dividends on our common stock since inception.  Our current intention is to pay no cash dividends in fiscal 2013.  Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations, and other factors deemed relevant by our Board of Directors.  Generally, our revolving credit facility limits our ability to declare or pay cash dividends to our shareholders to an amount (when combined with the amount of any stock repurchases) equal to 35% of our Consolidated Net Earnings (as defined in our revolving credit facility agreement) for the previous fiscal year. 

 

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ISSUER PURCHASES OF EQUITY SECURITIES

 

On October 11, 2011, our Board of Directors approved a resolution to add 3,000,000 shares to the then existing shares of common stock authorized for repurchase in open market or through private transactions. On October 31, 2011, our Board of Directors approved a resolution to extend our existing repurchase program through October 31, 2014. Under this program, as of February 29, 2012, we are authorized to purchase up to 3,068,354 shares of common stock in the open market or through private transactions. We did not repurchase any shares on the open market during fiscal 2012.  For fiscal years 2011 and 2010, we repurchased and retired 80,000 and 47,648 shares of common stock at a total purchase price of $1.80 and $0.42 million, and an average purchase price of $22.49 and $8.80 per share, respectively. 

 

Our current equity compensation plans include provisions that allow for the “cashless exercise” of stock options by all plan participants. In a cashless exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to the amounts due. Cashless exercises are accounted for by the Company as a purchase and retirement of shares.

 

For the fiscal years ended 2012 and 2011, employees and certain members of our Board of Directors tendered 108,336 and 7,733 shares of common stock having an aggregate market value of $3.53 and $0.23 million, or an average of $32.62 and $29.22 per share, respectively, as payment for the exercise price arising from the exercise of options.

 

In addition to the activity above, during fiscal 2012, our Chief Executive Officer tendered 1,016,227 shares of common stock having a market value of $36.52 million, or $35.93 per share, as payment for the exercise price and related federal tax obligations arising from the exercise of stock options to purchase 1,625,000 shares of common stock.  During fiscal 2010, our Chief Executive Officer tendered a combined total of 1,438,109 shares of common stock having a market value of $30.15 million, or $20.97 per share, as payment for the exercise price and related federal tax obligations arising from the exercise of options to purchase 2,000,000 shares of common stock. We accounted for this activity as a purchase and retirement of the shares.  The following schedule sets forth the purchase activity for each month during the three months ended February 29, 2012:

 

ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED FEBRUARY 29, 2012

 

Period

 

Total Number of
Shares
Purchased

 

Average Price
Paid per Share

 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

December 1 through December 31, 2011

 

1,919

 

$29.82

 

1,919

 

 

3,118,120

 

January 1 through January 31, 2012

 

5,257

 

31.69

 

5,257

 

 

3,112,863

 

February 1 through February 29, 2012

 

44,509

 

32.75

 

44,509

 

 

3,068,354

 

Total

 

51,685

 

$32.53

 

51,685

 

 

 

 

 

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PERFORMANCE GRAPH

 

The graph below compares the cumulative total return of our Company to the NASDAQ Market Index and a peer group index, assuming $100 invested March 1, 2007. The Peer Group Index is the Dow Jones–U.S. Personal Products, Broad Market Cap, Yearly, and Total Return Index.  The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of the possible future performance of our common stock. 

 

 

The Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 under the Exchange Act.  In addition, it shall not be deemed incorporated by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate this information by reference.

 

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ITEM 6.  SELECTED FINANCIAL DATA

 

The selected consolidated statements of income and cash flow data for the years ended on the last day of February 2012, 2011 and 2010, and the selected consolidated balance sheet data as of the last day of February 2012 and 2011, have been derived from our audited consolidated financial statements included in this report.  The selected consolidated statements of income (loss) and cash flow data for the years ended on the last day of February 2009 and 2008, and the selected consolidated balance sheet data as of the last day of February 2010, 2009 and 2008, have been derived from our audited consolidated financial statements which are not included in this report.  This information should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to those statements included in this report.  All currency amounts are denominated in U.S. Dollars.

 

Years Ended the Last Day of February,

(in thousands, except per share data)

 

 

 

2012 (1)(2)

 

2011 (2)(3)

 

2010 (4)

 

2009

 

2008 (5)(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

1,181,676

 

$

777,043

 

$

647,626

 

$

622,745

 

$

652,548

 

Gross profit

 

478,484

 

349,246

 

279,156

 

255,402

 

281,695

 

Asset impairment charges

 

-    

 

2,161

 

900

 

107,274

 

4,983

 

Operating income (loss)

 

139,386

 

111,744

 

89,369

 

(40,216

)

72,550

 

Interest expense

 

12,917

 

9,693

 

10,310

 

13,687

 

15,025

 

Income tax expense (benefit)

 

15,718

 

9,323

 

8,288

 

5,328

 

(236

)

Net income (loss)

 

110,374

 

93,305

 

71,817

 

(56,793

)

61,509

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

3.52

 

$

3.04

 

$

2.38

 

$

(1.88

)

$

2.01

 

Earnings per share - diluted

 

$

3.48

 

$

2.98

 

$

2.32

 

$

(1.88

)

$

1.93

 

Weighted average shares outstanding - basic

 

31,340

 

30,669

 

30,217

 

30,173

 

30,531

 

Weighted average shares outstanding - diluted

 

31,705

 

31,355

 

30,921

 

30,173

 

31,798

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

30,178

 

$

18,502

 

$

15,261

 

$

14,185

 

$

14,298

 

Net cash provided by operating activities

 

103,880

 

87,430

 

152,099

 

21,927

 

109,906

 

Capital and intangible asset expenditures

 

16,051

 

4,629

 

7,715

 

5,859

 

7,709

 

Payments to acquire businesses, net of cash received

 

160,000

 

336,240

 

60,000

 

4,765

 

36,500

 

Net amounts borrowed (repaid)

 

47,100

 

168,000

 

(78,000

)

(3,000

)

(35,000

)

 

Last Day of February,

(in thousands)

 

 

 

2012 (1)

 

2011 (2)(3)

 

2010 (4)

 

2009

 

2008 (5)(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

109,647

 

$

121,510

 

$

254,060

 

$

233,218

 

$

276,304

 

Goodwill and other intangible assets

 

829,500

 

660,947

 

363,061

 

309,791

 

415,360

 

Total assets

 

1,435,723

 

1,240,524

 

834,733

 

822,126

 

911,993

 

Long-term debt

 

175,000

 

178,000

 

131,000

 

134,000

 

212,000

 

Stockholders' equity (7)

 

796,729

 

685,549

 

583,772

 

508,693

 

568,376

 

Cash dividends

 

-    

 

-    

 

-    

 

-    

 

-    

 

 

(1)      Fiscal 2012 includes two months of operating results from PUR, which we acquired on December 30, 2011 for a net cash purchase price of $160.00 million, subject to certain future adjustments.  The acquisition of PUR was funded with $160.00 million in short-term debt.  In connection with the acquisition, we recorded $12.50 million of property and equipment, $1.43 million in supplier advances, $178.00 million of goodwill and other intangible assets, and $31.93 million of deferred tax liabilities.  See Notes (4), (5), (6) and (19) to our accompanying consolidated financial statements for more information regarding the PUR acquisition. 

 

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ITEM 6.  SELECTED FINANCIAL DATA, CONTINUED

 

(2)      Fiscal 2011 includes two months of operating results from Kaz and fiscal 2012 includes a full year’s operating results.  We acquired Kaz on December 31, 2010 for a net cash purchase price of $271.50 million subject to certain later adjustments.  The acquisition was funded with $77.50 million of cash and $194.00 million in short- and long-term debt.  In connection with the acquisition, we recorded $31.45 million of net working capital, $4.08 million of property and equipment, $246.25 million of goodwill and other intangible assets, $12.38 million in deferred tax assets, $3.10 million in other assets, $24.30 million in deferred tax liabilities, and $1.45 million in liabilities for uncertain tax positions.  See Notes (4), (5), (7), and (19) to our accompanying consolidated financial statements for more information regarding the Kaz acquisition. 

 

(3)      Fiscal 2011 includes eleven months of operating results from the Pert Plus hair care and Sure antiperspirant and deodorant brands and fiscal 2012 includes a full year’s operating results.  We acquired Pert Plus and Sure on March 31, 2010 for a net cash purchase price of $69.00 million including the assumption of certain liabilities.  The acquisition was funded with cash.  In connection with the acquisition, we recorded $4.90 million of net working capital, $0.73 million of fixed assets, and $63.37 million of goodwill, trademarks and other intangible assets.

 

(4)      Fiscal 2010 includes eleven months of operating results from the Infusium business and fiscal 2011 and thereafter include a full year’s operating results.  We acquired Infusium on March 31, 2009 for a cash purchase price of $60.00 million.  The acquisition was funded with cash.  In connection with the acquisition, we recorded $19.70 million of goodwill, $18.70 million of trademarks, $21.00 million for a customer list, and $0.6 million of patent rights.

 

(5)      Fiscal 2008 includes ten months of operating results from the Belson Products business and fiscal 2009 and thereafter include a full year’s operating results.  We acquired Belson on May 1, 2007 for a net cash purchase price of $36.50 million including the assumption of certain liabilities.  The acquisition was funded with cash.  In connection with the acquisition, we recorded $13.98 million of working capital, $0.14 million of fixed assets, and $22.38 million of goodwill, trademarks and other intangible assets.

 

(6)      During fiscal 2008, we settled certain tax disputes with the Hong Kong Inland Revenue Department, and the U.S. Internal Revenue Service.  As a result of these settlements, we recorded tax benefits totaling $9.31 million during fiscal 2008.  These benefits represent the reversal of tax provisions previously established for the periods under dispute.  See Note (10) to our accompanying consolidated financial statements for more information on our income taxes.

 

(7)      For the fiscal years ended 2012, 2011, 2010, 2009, and 2008, we repurchased and retired 1,124,563;  87,733; 1,485,757;  574,365; and 1,095,392 shares of common stock at a total purchase price of $40.05;  $2.03;  $30.57;  $7.42; and $26.00 million, respectively. 

 

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

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this report, including Part I, Item 1., “Business”;  Part II, Item 6., “Selected Financial Data”; and Part II, Item 8., “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations. Actual results may differ materially due to a number of factors, including those discussed on page 3 of this report in the section entitled “Information Regarding Forward-Looking Statements,”  Item 1A., “Risk Factors,” and in Item 7A., “Quantitative and Qualitative Disclosures About Market Risk.” 

 

OVERVIEW

 

In fiscal 2012, Helen of Troy continued to see some improvement in global macroeconomic conditions.  While we believe the economy has strengthened somewhat domestically, the recovery has not occurred in many of our international markets.  Domestically, we believe several of our major retail partners have recently experienced same-store sales increases, and we are encouraged by recent gains in employment.  However, we believe the recovery could be challenged as rising gasoline prices, continued malaise in most domestic housing markets and other conditions temper consumer confidence.  Internationally, we believe that the outlook for improving consumer-spending patterns is more uncertain.  While we are modestly optimistic regarding the macroeconomic outlook for fiscal 2013, the potential impacts of Middle East tensions and related political instabilities on fuel and transportation prices, uncertainties regarding the direction of foreign currency markets, the potential for additional Euro zone sovereign debt defaults, and the cost variability and availability of materials used in some of our products continue to keep us cautious. 

 

Significant Developments During Fiscal 2012

 

·                  Throughout fiscal 2012, we worked on upgrading our Enterprise Resource Planning (“ERP”) system, including implementing significant new functionality in the areas of sales forecasting, transportation management, business intelligence, and product information management.  On January 3, 2012, the Personal Care and Housewares segments began using the new system and experienced minimal operational issues.

 

·                  We continued to move forward with integrating Kaz into the Helen of Troy operating structure.  Many of the key implementation initiatives have been completed, including some significant back-office staffing integrations and consolidation of facilities.  Key initiatives that we will work on in fiscal 2013 are the continued consolidation of our European operations, integration of our Far East-based supply chain operations and migration of Kaz’s information systems onto the Company’s newly upgraded ERP system.  Many of the remaining key initiatives are dependent on the migration of Kaz onto the Company’s ERP system. Implementing these initiatives is a complex process and requires the devotion of significant time by our employees.  If complications arise in the process, we could potentially experience supply disruptions, order cancellations, loss of product placement, and charge-backs as a result of late deliveries.

 

·                  On December 30, 2011, we completed an asset and stock purchase transaction in which we acquired 100 percent of the stock of PUR Water Purification Products, Inc., and certain other assets and liabilities from The Procter & Gamble Company and certain of its affiliates (“P&G”) for a net cash purchase price of $160.00 million, subject to future adjustments.  The acquisition was funded with short-term debt.  Significant assets acquired include manufacturing equipment, trademarks, customer lists, distribution rights, patents, and the goodwill of the PUR water filtration business.  PUR’s product line includes faucet mount water filtration systems and filters, pitcher systems and filters, and refrigerator filters.  PUR is one of two leading brands in the U.S. market in its product categories.  We are operating the PUR business in our Healthcare / Home Environment segment and are marketing its products primarily into retail trade channels in the U.S.  At the closing, the Company and P&G also entered into various transitional services and supply agreements whereby P&G or one or more of its affiliates will provide certain short-term services for and supply certain products to the Company in exchange for specified fees.  The terms of the transitional agreements are between six months and two years. We expect the acquisition to help

 

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broaden the Company’s product portfolio, provide additional opportunities for expansion into adjacent product groups and continue to increase our significance with common customers and vendors.  

 

Financial Recap of Fiscal 2012

 

·                  Consolidated net sales revenue increased 52.1 percent, or $404.63 million, to $1,181.68 million in fiscal 2012 compared to $777.04 million in fiscal 2011.  Acquisitions accounted for a fiscal 2012 increase of $385.73 million, or 49.6 percentage points. Core business net sales revenue accounted for a fiscal 2012 increase of $18.90 million, or 2.4 percentage points.  Personal Care segment net sales revenue increased 1.1 percent in fiscal 2012 when compared to fiscal 2011.  Housewares segment net sales revenue increased 9.6 percent in fiscal 2012 when compared to fiscal 2011.   Healthcare / Home Environment net sales revenues for the fiscal year totaled $447.70 million.  Our fiscal 2012 net sales revenue includes a favorable impact of net foreign exchange fluctuations of $7.21 million compared to fiscal 2011, most of which impacted the Personal Care and Healthcare / Home Environment segments.  

 

·                  Consolidated gross profit margin as a percentage of net sales revenue decreased 4.4 percentage points to 40.5 percent in fiscal 2012 compared to 44.9 percent in fiscal 2011.

 

·                  SG&A as a percentage of net sales revenue decreased 1.6 percentage points to 28.7 percent in fiscal 2012 compared to 30.3 percent in fiscal 2011. 

 

·                  Interest expense was $12.92 million in fiscal 2012 compared to $9.69 million in fiscal 2011.  The increase in interest expense in fiscal 2012, when compared to fiscal 2011, was principally due to the impact of debt used to fund both the Kaz and PUR acquisitions.

 

·                  Income tax expense was $15.72 million in fiscal 2012 compared to $9.32 million in fiscal 2011.

 

·                  Our net income of $110.37 million in fiscal 2012 compares to net income of $93.31 million in fiscal 2011.  Diluted earnings per share was $3.48 in fiscal 2012 compared to $2.98 in fiscal 2011. 

 

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RESULTS OF OPERATIONS

 

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

 

 

 

Fiscal Years Ended (in thousands)

 

% of Sales Revenue, net (1)

 

 

% Change

 

 

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

 

12/11

 

11/10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

496,605

 

$

491,215

 

$

449,151

 

42.0

%

63.2

%

69.4%

 

 

1.1

%

9.4

%

Housewares

 

237,376

 

216,681

 

198,475

 

20.1

%

27.9

%

30.6%

 

 

9.6

%

9.2

%

Healthcare / Home Environment **

 

447,695

 

69,147

 

-    

 

37.9

%

8.9

%

0.0%

 

 

*

 

*

 

Total sales revenue, net

 

1,181,676

 

777,043

 

647,626

 

100.0

%

100.0

%

100.0%

 

 

52.1

%

20.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

703,192

 

427,797

 

368,470

 

59.5

%

55.1

%

56.9%

 

 

64.4

%

16.1

%

Gross profit

 

478,484

 

349,246

 

279,156

 

40.5

%

44.9

%

43.1%

 

 

37.0

%

25.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

339,098

 

235,341

 

188,887

 

28.7

%

30.3

%

29.2%

 

 

44.1

%

24.6

%

Operating income before impairments

 

139,386

 

113,905

 

90,269

 

11.8

%

14.7

%

13.9%

 

 

22.4

%

26.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

-    

 

2,161

 

900

 

0.0

%

0.3

%

0.1%

 

 

*

 

*

 

Operating income

 

139,386

 

111,744

 

89,369

 

11.8

%

14.4

%

13.8%

 

 

24.7

%

25.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

(377

)

577

 

1,046

 

0.0

%

0.1

%

0.2%

 

 

-165.3

%

-44.8

%

Interest expense - Other

 

(12,917

)

(9,693

)

(10,310

)

-1.1

%

-1.2

%

-1.6%

 

 

33.3

%

-6.0

%

Total other income (expense)

 

(13,294

)

(9,116

)

(9,264

)

-1.1

%

-1.2

%

-1.4%

 

 

45.8

%

-1.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

126,092

 

102,628

 

80,105

 

10.7

%

13.2

%

12.4%

 

 

22.9

%

28.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

15,718

 

9,323

 

8,288

 

1.3

%

1.2

%

1.3%

 

 

68.6

%

12.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

110,374

 

$

93,305

 

$

71,817

 

9.3

%

12.0

%

11.1%

 

 

18.3

%

29.9

%

 

*

 

Calculation is not meaningful

**

 

Reflects two months of Kaz net sales revenue in fiscal 2011 and a full year in fiscal 2012. Also reflects two months of PUR net sales revenue in fiscal 2012.

 

(1)         Sales revenue percentages by segment are computed as a percentage of the related segment’s sales revenue, net to total sales revenue, net.  All other percentages are computed as a percentage of total sales revenue, net.

 

Consolidated Net Sales Revenue:

 

Consolidated net sales revenue increased $404.63 million, or 52.1 percentage points, in fiscal 2012 compared to fiscal 2011.  Acquisitions accounted for a fiscal 2012 increase of $385.73 million, or 49.6 percentage points.  Net sales revenue from acquisitions in fiscal 2012 includes one month of incremental net sales revenue from our Pert Plus & Sure acquisition, ten months of incremental net sales revenue from our Kaz acquisition and two months of incremental net sales revenue from our PUR acquisition.  Core business net sales revenue accounted for a fiscal 2012 increase of $18.90 million, or 2.4 percentage points.  Our fiscal 2012 net sales revenue includes a favorable impact of net foreign exchange fluctuations of $7.21 million compared to fiscal 2011, most of which impacted the Personal Care and Healthcare / Home Environment segments.  Our Personal Care segment provided 0.7 percentage points of consolidated net sales revenue growth, or an increase of $5.39 million. Personal Care’s net sales revenue increased 1.1 percent in fiscal 2012 when compared to fiscal 2011, consisting of unit volume driven growth of 0.1 percent and an increase of 0.9 percent in average unit selling prices.  Our Housewares segment provided 2.7 percentage points of consolidated net sales revenue growth, or an increase of $20.70 million.  Housewares net sales revenue increased 9.6 percent in fiscal 2012 when compared to fiscal 2011, consisting of unit volume driven growth of 9.0 percent and an increase of 0.5 percent in average unit selling prices.  Our Healthcare / Home Environment segment provided 48.7 percentage points of consolidated net sales revenue growth. Total sales for the segment were $447.70 million, including $21.45 million of PUR net sales revenue.  PUR was acquired on December 30, 2011 and two full months of its operations are included in the Healthcare / Home Environment

 

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segment’s results for fiscal 2012.  Fiscal 2012 was the Healthcare / Home Environment segment’s first full fiscal year of operations since the acquisition of Kaz on December 31, 2010. 

 

Consolidated net sales revenue increased $129.42 million, or 20.0 percentage points, in fiscal 2011 compared to fiscal 2010. Acquisitions accounted for an increase of $135.64 million, or 20.9 percentage points, more than offsetting a decline in core business net sales revenue (net sales revenue without acquisitions). Core business net sales revenue showed an overall decline in fiscal 2011 of $6.23 million, or 0.9 percent, which includes most of the unfavorable impact of net foreign exchange fluctuations of $3.62 million compared to fiscal 2010. Our Personal Care segment provided 6.5 percentage points of consolidated net sales revenue growth, or an increase of $42.06 million. Personal Care’s net sales revenue increased 9.4 percent in fiscal 2011 when compared to fiscal 2010, consisting of unit volume growth of 6.0 percent and an increase of 3.4 percent in average unit selling prices. Our Housewares segment provided 2.8 percentage points of consolidated net sales revenue growth, or an increase of $18.21 million. Housewares’ net sales revenue increased 9.2 percent in fiscal 2011 when compared to fiscal 2010, consisting of unit volume growth of 7.6 percent and an increase of 1.6 percent in average unit selling prices. Our Healthcare / Home Environment segment provided 10.7 percentage points of consolidated net sales revenue growth representing two months of activity since acquisition on December 31, 2010.

 

The following table summarizes, for the periods indicated, the impact that acquisitions had on our net sales revenue:

 

IMPACT OF ACQUISITIONS ON NET SALES REVENUE

(in thousands)

 

 

 

 

Fiscal Years Ended

 

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

Prior year's sales revenue, net

 

 

$

777,043

 

$

647,626

 

$

622,745

 

 

 

 

 

 

 

 

 

 

Components of sales revenue change, net

 

 

 

 

 

 

 

 

Core business

 

 

18,900

 

(6,227

)

(14,118

)

Incremental net sales revenue from acquisitions:

 

 

 

 

 

 

 

 

Ogilvie (seven months in fiscal 2010)

 

 

-    

 

-    

 

4,810

 

Infusium (one and eleven months in fiscal 2011 and 2010, respectively)

 

 

-    

 

2,367

 

34,189

 

Pert Plus & Sure (one and eleven months in fiscal 2012 and 2011, respectively)

 

 

6,513

 

64,130

 

-    

 

Kaz (ten months and two months in fiscal 2012 and 2011, respectively)

 

 

357,773

 

69,147

 

-    

 

PUR (two months in fiscal 2012)

 

 

21,447

 

-    

 

-    

 

Change in sales revenue, net

 

 

404,633

 

129,417

 

24,881

 

Sales revenue, net

 

 

$

1,181,676

 

$

777,043

 

$

647,626

 

 

 

 

 

 

 

 

 

 

Total net sales revenue growth

 

 

52.1%

 

20.0%

 

4.0%

 

Core business

 

 

2.4%

 

-0.9%

 

-2.3%

 

Acquisitions

 

 

49.6%

 

20.9%

 

6.3%

 

 

In the above table, core business is net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand was acquired.  Net sales revenue from internally developed brands or product lines are always considered core business.  Net sales revenue from acquisitions is net sales revenue associated with product lines or brands that we have acquired and operated for less than twelve months during each period presented.

 

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Segment Net Sales Revenue:

 

SALES REVENUE, NET BY SEGMENT

(dollars in thousands)

 

 

 

Fiscal Years Ended

 

$ Change

 

% Change

 

 

2012

 

2011

 

Volume

 

Price

 

Net

 

Volume

 

Price

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

496,605

 

$

491,215

 

$

728

 

$

4,662

 

$

5,390

 

0.1

%

0.9

%

1.1

%

Housewares

 

237,376

 

216,681

 

19,602

 

1,093

 

20,695

 

9.0

%

0.5

%

9.6

%

Healthcare / Home Environment **

 

447,695

 

69,147

 

*   

 

*   

 

378,548

 

*   

 

*   

 

*   

 

Total sales revenue, net

 

$

1,181,676

 

$

777,043

 

*   

 

*   

 

$

404,633

 

*   

 

*   

 

*   

 

 

 

 

Fiscal Years Ended

 

$ Change

 

% Change

 

 

 

2011

 

2010

 

Volume

 

Price

 

Net

 

Volume

 

Price

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

491,215

 

$

449,151

 

$

26,715

 

$

15,349

 

$

42,064

 

6.0

%

3.4

%

9.4

%

Housewares

 

216,681

 

198,475

 

15,143

 

3,063

 

18,206

 

7.6

%

1.6

%

9.2

%

Healthcare / Home Environment **

 

69,147

 

-    

 

*   

 

*   

 

69,147

 

*   

 

*   

 

*   

 

Total sales revenue, net

 

$

777,043

 

$

647,626

 

*   

 

*   

 

$

129,417

 

*   

 

*   

 

*   

 

 

*

 

Calculation is not meaningful, or comparable prior year information is unavailable.

**

 

Reflects two months of Kaz net sales revenue in fiscal 2011 and a full year in fiscal 2012. Also reflects two months of PUR net sales revenue in fiscal 2012.

 

Personal Care

 

Our Personal Care segment currently offers products in three categories: appliances; grooming, skin care and hair care solutions; and brushes, combs and accessories. 

 

Fiscal 2012 Net Sales Revenue Compared to Fiscal 2011:

 

Net sales in our Personal Care segment increased 1.1 percent, or $5.39 million, to $496.61 million in fiscal 2012 compared to $491.22 million in fiscal 2011.  Net sales revenue from new product acquisitions included $6.51 million of net sales revenue from our Pert Plus and Sure acquisition, which represents one month of fiscal 2012 net sales revenue through the first anniversary of its acquisition.  Core business net sales revenue for fiscal 2012 decreased 0.2 percent, or $1.12 million.  The segment experienced unit volume growth increases of 0.1 percent and average unit selling price increases of 0.9 percent. Significant increases in professional distribution and mix were offset by lower demand in retail distribution channels.  We believe that throughout the year, consumers were trading down to value priced and heavily promoted merchandise, which negatively impacted sales.  The Personal care segment’s fiscal 2012 net sales revenue benefited from the favorable impact of net foreign exchange fluctuations of $3.11 million compared to fiscal 2011. We continue to believe that sales revenue performance in our Personal Care segment’s product lines will be heavily dependent on improvements in domestic and international employment, housing markets and consumers’ personal finances. 

 

Fiscal 2011 Net Sales Revenue Compared to Fiscal 2010:

 

Net sales in our Personal Care segment increased 9.4 percent, or $42.06 million, to $491.22 million in fiscal 2011 compared to $449.15 million in fiscal 2010.  Net sales revenue from new product acquisitions included $2.37 million of net sales revenue from our Infusium acquisition, which represents one month of Infusium’s fiscal 2011 net sales revenue through the first anniversary of its acquisition, and $64.13 million of net sales revenue from our Pert Plus and Sure acquisition, which represents eleven months of net sales revenue of Pert Plus and Sure products since acquisition.  Net sales revenue increases due to these acquisitions were partially offset by $24.43 million of core business net sales revenue declines.  These declines occurred in the appliances and accessories product lines, primarily due to a loss of shelf placement for appliances, a loss of a significant customer for accessories and the negative impact of foreign currency fluctuations.  These losses were partially offset by new customer and product distribution.  We continued to see

 

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significant growth in the curling and specialty iron categories, which were offset by declines in straightening iron and dryer categories.  Net sales revenue declines in our retail appliance business were partially offset by net sales revenue gains in our professional appliance business.  Declines in our international appliance and accessories business were due to considerably weaker economic conditions than those in the U.S. and were exacerbated by the effect of unfavorable foreign currency fluctuations of $3.62 million across all segments in fiscal 2011.  This was due to the continuing impact of a strengthening U.S. Dollar versus most other currencies.  Typically, a stronger dollar means that foreign results translate into fewer dollars on a reported basis.  Most of this currency impact affected our appliance business sales. 

 

Housewares

 

Our Housewares segment reports the operations of OXO, whose most significant product offerings include food preparation and storage, cleaning, organization, and baby and toddler care products. 

 

Fiscal 2012 Net Sales Revenue Compared to Fiscal 2011:

 

Net sales revenue in our Housewares segment increased 9.6 percent, or $20.70 million, to $237.38 million in fiscal 2012 compared to $216.68 million in fiscal 2011.  Increased unit net sales volume contributed 9.0 percent to net sales revenue growth and higher average unit selling prices due to changes in sales mix contributed 0.5 percent to net sales revenue growth.  We experienced growth both internationally and domestically with a disproportionate amount of the dollar growth continuing to occur domestically.  Key drivers of this growth include increases in the food preparation and storage and organization categories, contributing $12.51 and $5.84 million in net sales revenue growth, respectively, when compared to the prior year.  The largest growth in any one brand came from OXO tot, baby and toddler care products, which across several product categories contributed $7.19 million of net sales revenue growth, when compared to the prior year.

 

Future net sales revenue growth in this segment of our business continues to be dependent on new product innovation, continued product line expansion, new sources of distribution, and geographic expansion.  The growth rate in the Housewares segment has begun to slow over the last two fiscal years when compared to years prior due to the continued maturation of its domestic markets.  While we believe in the segment’s organic growth potential, we remain cautious about its ability to sustain the pace of net sales revenue growth experienced prior to fiscal 2012. We expect net sales revenue annual growth rates for the segment to remain around mid to high single digits in fiscal 2013. 

 

Fiscal 2011 Net Sales Revenue Compared to Fiscal 2010:

 

Net sales revenue in our Housewares segment increased 9.2 percent, or $18.21 million, to $216.68 million in fiscal 2011 compared to $198.48 million in fiscal 2010.  Increased unit net sales volume contributed 7.6 percent to net sales revenue growth and higher average unit selling prices contributed 1.6 percent to net sales revenue growth.  We experienced growth both internationally and domestically with a disproportionate amount of the growth continuing to occur domestically.  Key drivers of this growth include increases in food preparation and bath categories, contributing $14.70 and $3.06 million in net sales revenue growth, respectively, when compared to the prior year.

 

Healthcare / Home Environment

 

The Healthcare / Home Environment segment completed its first full year of operations since the acquisition of Kaz on December 31, 2010.   This segment focuses on health care devices, such as thermometers, blood pressure monitors, humidifiers, and heating pads; water filtration systems; and small home appliances, such as air purifiers, portable heaters, fans, and bug zappers.

 

Fiscal 2012 Net Sales Revenue Compared to Fiscal 2011:

 

Healthcare / Home Environment net sales revenues for the fiscal year totaled $447.70 million compared to $69.15 million in fiscal 2011.  Fiscal 2011 net sales revenue included only two months of operations following the Kaz acquisition.  Fiscal 2012 also includes $21.45 million in net sales revenue representing two months of operations from the

 

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Table of Contents

 

acquisition of the PUR water filtration business from P&G on December 30, 2011.  The segment experienced expanded shelf space with key retail accounts and demand for new higher end thermometry and humidification products.  Sales were constrained during the first half of the fiscal year by product sourcing and customer order delays, and in the second half of the fiscal year by an unusually warm fall and winter in both the U.S. and Europe and by a mild cold and flu season.  Warm fall and winter weather tends to slow down the sales of heating units and a mild cold and flu season typically has a negative impact on demand for thermometry and humidification appliances. The Healthcare / Home Environment segment’s fiscal 2012 net sales revenue benefited from the favorable impact of net foreign exchange fluctuations of $4.10 million compared to fiscal 2011.

 

Geographic Net Sales Revenue:

 

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

 

 

 

Fiscal Years Ended (in thousands)

 

% of Sales Revenue, net (1)

 

% Change

 

 

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

12/11

 

11/10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net by geographic region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

906,864

 

$

619,378

 

$

511,027

 

76.7

%

79.7

%

78.9%

 

46.4

%

21.2

%

Canada

 

69,406

 

40,714

 

28,874

 

5.9

%

5.3

%

4.5%

 

70.5

%

41.0

%

Europe and other

 

155,616

 

78,720

 

68,723

 

13.2

%

10.1

%

10.6%

 

97.7

%

14.5

%

Latin America

 

49,790

 

38,231

 

39,002

 

4.2

%

4.9

%

6.0%

 

30.2

%

-2.0

%

Total sales revenue, net

 

$

1,181,676

 

$

777,043

 

$

647,626

 

100.0

%

100.0

%

100.0%

 

52.1

%

20.0

%

 

(1)      Percentages of net sales revenue by geographic region are computed as a percentage of the geographic region’s net sales revenue to consolidated total net sales revenue.

 

In fiscal 2012, the U.S. contributed 37.0 percentage points to consolidated net sales revenue growth or $287.49 million.  International (Canada, Europe and other, and Latin America) operations contributed 15.1 percentage points to our consolidated net sales revenue growth, or $117.15 million.  Canadian operations accounted for a 3.7 percentage point increase in our consolidated net sales revenue, or $28.69 million.  Europe and other country operations accounted for a 9.9 percentage point increase in our consolidated net sales revenue, or $76.90 million.  Latin American operations accounted for a 1.5 percentage point increase in our consolidated net sales revenue, or $11.56 million. Our growth in each region is primarily attributed to the impact of the acquisition of Kaz, which is a part of the Healthcare / Home Environment segment, and was operated by the Company for a full twelve months in fiscal 2012 compared to only two months in fiscal 2011.  Also, fiscal 2012 net sales revenue for the segment includes two months of operations of the PUR water filtration business.  PUR was acquired on December 30, 2011 and currently has net sales revenues in the U.S. and Canada only.  Our international net sales revenue performance benefited by an overall change in direction in foreign exchange rates.  The net impact of exchange rate changes contributed $7.21 million to our consolidated net sales revenue in fiscal 2012, principally due to the weakening of the dollar against most foreign currencies, with the exception of the Mexican Peso.  In fiscal 2012, Canada, Europe and other, and Latin American regions accounted for approximately 25, 57 and 18 percent of international net sales revenue, respectively.  

 

In fiscal 2011, the U.S. contributed 16.7 percentage points to growth in our consolidated net sales revenue or $108.35 million.  International (Canada, Europe and other, and Latin America) operations contributed 3.3 percentage points to our consolidated net sales revenue growth, or $21.07 million.  Canadian operations accounted for a 1.8 percentage point increase in our consolidated net sales revenue, or $11.84 million.  Europe and other country operations accounted for a 1.5 percentage point increase in our consolidated net sales revenue, or $10.00 million.  Latin American operations accounted for a 0.1 percentage point decrease in our consolidated net sales revenue, or $0.77 million. Our Latin American and European operations continued to be negatively impacted by unfavorable local economies, which are recovering at a slower rate than that of the U.S.  Our international net sales revenue performance included the negative effects of year-over-year foreign exchange fluctuations on net sales revenue of $3.62 million in fiscal 2011, principally due to the weakening of most foreign currencies, with the exception of the Canadian Dollar and Mexican Peso, against the

 

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U.S. Dollar.  In fiscal 2011, Canada, Europe and other, and Latin American regions accounted for approximately 26, 50 and 24 percent of international net sales revenue, respectively.  

 

Gross Profit Margins:

 

Gross profit, as a percentage of net sales revenue, decreased to 40.5 percent in fiscal 2012 from 44.9 percent in fiscal 2011.  The decline in our margin was primarily due to:

 

·                  the dilutive impact of the Healthcare / Home Environment segment, whose overall gross profit margin is below the margins of our other two segments; and

 

·                  the broad impact across most of our businesses of product cost increases in the second half of fiscal 2012.

 

Our product sourcing mix is heavily dependent on imports from China. China’s currency is no longer pegged solely to the U.S. dollar. As a result, we believe China’s currency will continue to appreciate against the U.S. Dollar in the short-to-intermediate-term, resulting in increased product costs over time. In addition, there has been recent variability across all segments in raw materials, fuel and associated inbound transportation costs.  Accordingly, we remain cautious about our ability to improve our gross profit margin in fiscal 2013.

 

Gross profit, as a percentage of net sales revenue, increased to 44.9 percent in fiscal 2011 from 43.1 percent in fiscal 2010.  The primary components of the improvement are as follows:

 

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

 

·                  a change in sales mix as grooming, skin care and hair care solutions products, with comparatively higher margins, became a more significant portion of the Company’s overall net sales revenue during fiscal 2011, particularly as a result of the acquisition of the Pert Plus and Sure brands.

 

Selling, general and administrative expense (“SG&A”):

 

SG&A decreased to 28.7 percent of net sales revenue in fiscal 2012 from 30.3 percent in fiscal 2011.  The year-over-year decrease in SG&A as a percentage of net sales revenue is primarily due to the impact of Kaz, which operates on lower overall SG&A as a percentage of net sales revenue than the Company’s consolidated SG&A as a percentage of net sales revenue for the same period last year.  The overall impact of Kaz was partially offset by the impact of the PUR acquisition, which operates on higher SG&A as a percentage of sales due primarily to higher advertising and amortization expenses, and by the unfavorable impact of net foreign exchange gains/losses year-over-year.

 

SG&A increased to 30.3 percent of net sales revenue in fiscal 2011 from 29.2 percent in fiscal 2010.  SG&A increased primarily due to higher advertising expense in support of new product acquisitions in our Personal Care segment and higher intangible asset amortization as a result of recent acquisitions.  Advertising expense was $34.99 million, or 4.5 percent of net sales revenue, in fiscal 2011, compared to $20.77 million, or 3.2 percent of net sales revenue, in fiscal 2010.  Intangible asset amortization expense was $9.89 million, or 1.3 percent of net sales revenue, in fiscal 2011, compared to $6.13 million, or 0.9 percent of net sales revenue, in fiscal 2010. 

 

We continue to strive to improve our operations and processes, which we believe will ultimately help drive down costs.  We believe our competitive position and the long-term health of our business depends on fulfillment and transportation excellence.  Our operations have become increasingly intertwined with our retailers, especially large retailers. The breadth and complexity of the packaging, handling and shipping services continue to escalate in order for us to keep our current customers and to pursue opportunities to increase market share.  Consequently, it continues to be increasingly more expensive to do business with many of our customers.  Our Mississippi and Tennessee distribution centers operate near full capacity.  Together, they shipped approximately 72 percent of our consolidated gross sales volume during both fiscal 2012 and fiscal 2011.  We may experience capacity constraints during peak shipping periods, should we continue to grow our sales revenue through either organic growth or acquisitions. These and other factors,

 

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including the costs of continuing to integrate Kaz and PUR, the risks related to attaining additional operating synergies

from the Kaz and PUR acquisitions, the ongoing challenges of rationalizing our global sourcing and distribution capabilities, and the potential impact of continued fuel price increases, could result in product delivery disruptions and increases in shipping and storage costs.  Accordingly, we are cautious about the expectation of SG&A cost improvements in fiscal 2013.

 

Operating income before impairments by segment:

 

Operating income before impairments by segment for fiscal 2012, 2011 and 2010 was as follows:

 

 

 

Fiscal Years Ended (in thousands)

 

% of Sales Revenue, net (1)

 

% Change

 

 

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

12/11

 

11/10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

62,152

 

$

63,368

 

$

46,515

 

12.5

%

12.9

%

10.4%

 

-1.9

%

36.2

%

Housewares

 

44,884

 

46,017

 

43,754

 

18.9

%

21.2

%

22.0%

 

-2.5

%

5.2

%

Healthcare / Home Environment (two months in 2011)

 

32,350

 

4,520

 

-    

 

7.2

%

6.5

%

*    

 

 

 

Total operating income before impairments

 

$

139,386

 

$

113,905

 

$

90,269

 

11.8

%

14.7

%

13.9%

 

22.4

%

26.2

%

 

   *    Calculation is not meaningful

 

(1) Percentages by segment are computed as a percentage of the segments’ net sales revenue.

 

Operating income before impairments for each operating segment is computed based on net sales revenue, less cost of goods sold and any SG&A associated with the segment. The SG&A used to compute each segment's operating profit is comprised of SG&A directly associated with the segment, plus overhead expenses that are allocable to the operating segment.  The two months of operations of the Healthcare / Home Environment segment included in our fiscal 2011 consolidated statement of income did not include any allocation of corporate overhead. Beginning in fiscal 2012, we began making an allocation of corporate overhead to the Healthcare / Home Environment segment. For the fiscal year ended February 29, 2012, these allocations totaled $6.02 million. As we gain operating experience with the new segment and continue to integrate its operations, we expect to allocate the costs of certain operating functions to be shared between segments. As we decide such operating cost allocations are appropriate, there may be a reduction in the operating results of the Healthcare / Home Environment segment offset by increases in operating income of the Personal Care and Housewares segments. The extent of this operating income impact between the segments has not yet been determined. 

 

Personal Care

 

The Personal Care segment’s operating income before impairments decreased $1.22 million, or 1.9 percent, for fiscal 2012 compared to fiscal 2011.   The decrease in fiscal 2012 when compared to fiscal 2011, was primarily due to the combined impacts of increased promotional allowances granted to customers and higher cost of goods sold.

 

The Personal Care segment’s operating income before impairments increased $16.85 million, or 36.2 percent, for fiscal 2011 compared to fiscal 2010.   The increase in fiscal 2011 when compared to fiscal 2010, was primarily due to an overall improvement in gross margin combined with the favorable impact of the Pert Plus, Sure and Infusium acquisitions on the sales and profitability of our domestic Grooming, Skin Care and Hair Care Solutions products lines.

 

Housewares

 

The Housewares segment’s operating income before impairments decreased $1.13 million, or 2.5 percent, for fiscal 2012 compared to fiscal 2011.  The decrease in fiscal 2012 when compared to fiscal 2011, was primarily due to higher cost of goods sold.

 

The Housewares segment’s operating income before impairments increased $2.26 million, or 5.2 percent, for fiscal 2011 compared to fiscal 2010.  Lower operating income growth when compared to the growth in the prior fiscal year was due to higher operating expenses and a slight overall decrease in gross margin due to higher than usual close-out sales, increased inbound freight and commodity costs and product mix changes. 

 

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Healthcare / Home Environment

 

The Healthcare / Home Environment segment’s operating income before impairments increased $27.83 million for fiscal 2012 compared to fiscal 2011.  Fiscal 2012 was the segment’s first full fiscal year of operations under the Company’s ownership.  During fiscal 2011, the Healthcare / Home Environment segment reported two months of operating results from Kaz, which we acquired on December 31, 2010.  The segment’s fiscal 2012 operating results also include two months of operations from the acquisition of the PUR water filtration business from P&G on December 30, 2011.  The segment operates on lower overall gross margins than the Personal Care and Housewares segments, which is the principal reason for its lower overall operating profit. 

 

During the year, the segment continued to benefit from the combined impact of better sales mix and synergy initiatives.  However, overall operating results for the second half of the year were negatively impacted by a drop in sales volume due to an unusually warm fall and winter in both the U.S. and Europe and a mild cold and flu season. Warm fall and winter weather tends to slow down the sales of heating units and a mild cold and flu season typically has a negative impact on demand for thermometry and humidification appliances.

 

Impairment charges:

 

The Company conducts its annual test of impairment of goodwill and indefinite-lived intangible assets in the first quarter of each fiscal year. The Company also tests for impairment if events or circumstances indicate a more frequent evaluation is necessary.

 

Annual Impairment Testing in the First Quarter of Fiscal 2012 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2012. As a result of its testing, the Company concluded no impairment charges were required as the estimated fair value of the indefinite-lived trademarks and licenses, reporting unit net assets and the Company’s estimated enterprise value substantially exceeded their respective carrying values as of the date of the evaluation.

 

Impairments in the Fourth Quarter of Fiscal 2011 - In the Housewares segment, as a result of continued net sales revenue declines associated with rechargeable lighting products, management performed a reassessment of the category’s long-term earnings prospects and decided to exit the category.  As a result, the Company wrote down the carrying value of the associated inventory, and wrote off all related trademark and patent costs. The various adjustments were recorded as a non-cash impairment charge of $0.75 million ($0.70 million after tax). In the Personal Care segment, based upon continued net sales revenue declines and the future market growth prospects for certain professional product trademarks, the Company performed interim impairment testing using a revised outlook for the brands.  As a result of its testing, the Company recorded a non-cash impairment charge of $0.91 million ($0.89 million after tax).  The charge was related to trademarks, which were written down to fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

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

 

Impairments in the Second Quarter of Fiscal 2010 - During the fiscal quarter ended August 31, 2009, a significant customer decided to discontinue carrying a trademarked line of certain skin care products.   Sales to this customer accounted for a substantial portion of the total sales of the trademark, and accordingly, non-cash impairment charges were recorded to write off the remaining $0.90 million ($0.89 million after tax) in carrying value of the associated trademark.

 

Annual Impairment Testing in the First Quarter of Fiscal 2010 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2010. As a result of its testing, the Company concluded no impairment charges were required as the estimated fair value of the indefinite-lived

 

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trademarks and licenses, reporting unit net assets and the Company’s estimated enterprise value exceeded their respective carrying values as of the date of the evaluation.

 

Interest expense:

 

Interest expense increased to $12.92 million in fiscal 2012 compared to $9.69 million in fiscal 2011.  Interest expense was higher when compared to the prior fiscal year primarily due to the increase in short-term and long-term debt outstanding, which was used to finance both the Kaz and PUR acquisitions. 

 

Interest expense decreased to $9.69 million in fiscal 2011 compared to $10.31 million in fiscal 2010.  The decrease in interest expense was principally due to lower overall average amounts of debt outstanding in fiscal 2011 compared to fiscal 2010 prior to the acquisition of Kaz on December 31, 2010.

 

Income tax expense:

 

Our fiscal 2012, 2011 and 2010 income tax expense was $15.72, $9.32 and $8.29 million, respectively, and our effective tax rates were 12.5, 9.1 and 10.3 percent, respectively.  In any given year, there may be significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates.  Without these transactions, the trend in our effective tax rates would follow a more normalized pattern. 

 

The increase in our effective tax rate in fiscal 2012 compared to fiscal 2011 is due primarily to the acquisitions of Kaz and PUR, which increased the proportion of U.S. taxable income relative to taxable income in lower tax rate jurisdictions.

 

The decrease in our effective tax rate in fiscal 2011 compared to fiscal 2010 is due primarily to the reversal of reserves for uncertain tax positions, based on settlements with tax authorities and the lapse of the statute of limitations.

 

Net Income:

 

Our net income was $110.37 million for fiscal 2012 compared to $93.31 million for fiscal 2011.  Our diluted earnings per share increased $0.50 to $3.48 for fiscal 2012 compared to $2.98 for fiscal 2011. 

 

Our net income was $93.31 million for fiscal 2011 compared to $71.82 million for fiscal 2010.  Our diluted earnings per share increased $0.66 to $2.98 for fiscal 2011 compared to $2.32 for fiscal 2010. 

 

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FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

 

Selected measures of our liquidity and capital utilization for fiscal years ended 2012 and 2011 are shown below:

 

 

 

Fiscal Years Ended

 

 

2012

 

2011

 

 

 

 

 

 

 

Accounts Receivable Turnover (Days) (1)

 

62.5

 

64.7

 

Inventory Turnover (Times) (1)

 

2.9

 

2.7

 

Working Capital (in thousands)

 

$109,647

 

$121,510

 

Current Ratio

 

1.3 : 1

 

1.4 : 1

 

Ending Debt to Ending Equity Ratio (2)

 

43.8%

 

44.1%

 

Return on Average Equity (1)

 

15.0%

 

14.8%

 

 

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

 

(2)       Debt is defined as all debt outstanding at the balance sheet date.  This includes the sum of the following lines on our consolidated balance sheets: “Revolving line of credit”, “Long-term debt, current maturities” and “Long-term debt, excluding current maturities.”  For further information regarding this financing, see Notes (6), (9), (11), (12), and (13) to our accompanying consolidated financial statements and our discussion below under “Financing Activities.”

 

Operating Activities:

 

Fiscal 2012 Compared to Fiscal 2011:

 

Operating activities provided $103.88 million of cash during fiscal 2012 compared with $87.43 million in fiscal 2011.  The increase in operating cash flow was principally due to the timing of fluctuations in working capital components, in addition to an increase in net income of $17.07 million and an increase in depreciation and amortization of $11.68 million, when compared year-over-year.

 

Our accounts receivable increased $6.88 million to $195.28 million at the end of fiscal 2012, while our accounts receivable turnover improved to 62.5 days from 64.7 days in fiscal 2011. 

 

Inventory increased $28.91 million to $246.14 million at the end of fiscal 2012, while our inventory turnover improved to 2.9 times per year from 2.7 times per year in fiscal 2011.  The increase in inventory was due to the following factors:

 

·                  a planned inventory build-up in the Personal Care and Housewares segments in advance of the implementation of a significant upgrade of our ERP system, which took place at the end of December 2011, and

 

·                  weaker than expected fourth quarter shipments, particularly in our Healthcare / Home Environment segment, which experienced a drop in sales volume due to an unusually warm fall and winter in both the U.S. and Europe and a mild cold and flu season.

 

Working capital decreased to $109.65 million at the end of fiscal 2012, compared to $121.51 million at the end of fiscal 2011.  Our current ratio decreased to 1.3:1 at the end of fiscal 2012, compared to 1.4:1 at the end of fiscal 2011. The decrease in our working capital and current ratio was primarily due to a net decrease in cash and increase in overall short-term debt obligations as a result of the use of our revolving line of credit to fund the PUR acquisition.

 

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Fiscal 2011 Compared to Fiscal 2010:

 

Operating activities provided $87.43 million of cash during fiscal 2011 compared with $152.10 million in fiscal 2010.  The decrease in operating cash flow was principally due to the timing of fluctuations in working capital components, particularly an increase in inventory, exclusive of acquisitions, when compared year-over-year.

 

Our accounts receivable increased $78.68 million to $188.40 million at the end of fiscal 2011, due in large part to the Kaz acquisition.  Our accounts receivable turnover improved slightly to 64.7 days from 65.3 days in fiscal 2010.

 

Inventory increased $93.21 million to $217.23 million at the end of fiscal 2011, while our inventory turnover improved slightly to 2.7 times per year from 2.5 times per year in fiscal 2010.  The increase in inventory was due to the addition of $67.30 million in inventories from acquired businesses during fiscal 2011. 

 

Working capital decreased to $121.51 million at the end of fiscal 2011, compared to $254.06 million at the end of fiscal 2010.  Our current ratio decreased to 1.4:1 at the end of fiscal 2011, compared to 3.4:1 at the end of fiscal 2010. The decrease in our working capital and current ratio was primarily due to the following activities:

 

·                  $50.00 million of long-term debt scheduled to mature in June 2011, which became classified as a current liability during the quarter ended August 31, 2010;

 

·                  The use of $146.50 million of cash generated from operations to fund business acquisitions during the fiscal year; and

 

·                  An increase of $71.00 million in short-term debt, which was used to finance the Kaz acquisition.

 

Investing Activities:

 

In fiscal 2012, investing activities used $152.02 million of cash compared with $340.44 and $66.43 million used in fiscal 2011 and fiscal 2010, respectively. 

 

Significant highlights of our fiscal 2012 investing activities:

 

·                  We paid $160.00 million to acquire the PUR water filtration business from P&G.

 

·                  We spent $3.21 million on molds and tooling, $10.64 million on information technology infrastructure, $0.90 million on building and leasehold improvements, $0.45 million on distribution equipment, and $0.34 million on the development of new patents.

 

·                  We sold a facility in Hudson, New York yielding net proceeds to us of $1.00 million.

 

·                  We sold a parcel of land in El Paso, Texas in exchange for $0.20 million of cash and a $0.73 million note receivable.

 

·                  We sold or redeemed $3.25 million of auction rate securities (“ARS”) at par. In addition, in November 2011, we settled the sale of the remaining portfolio of ARS for $18.05 million, or approximately 96 percent of par.

 

·                  We sold $1.17 million of interests in mutual funds.

 

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Significant highlights of our fiscal 2011 investing activities:

 

·                  We spent $2.26 million on molds and tooling, $1.20 million on information technology infrastructure, $0.36 million on internally developed patents, and $0.81 million on recurring capital additions and replacements.

 

·                  We spent $69.00 million to acquire certain assets, trademarks, customer lists, distribution rights, patents, goodwill, and formulas of the Pert Plus hair care and Sure antiperspirant and deodorant business for our Personal Care segment.

 

·                  We paid $271.50 million to acquire Kaz, including our current estimate for working capital adjustments, which became a new reporting segment that gave us entry into the healthcare and home environment product categories.

 

·                  We liquidated $0.35 million of ARS at par.

Significant highlights of our fiscal 2010 investing activities:

 

·                  We spent $2.67 million on molds and tooling and$3.59 million on information technology infrastructure, including $2.46 million principally to purchase additional ERP software licenses.

 

·                  We spent $60.00 million to acquire certain assets, trademarks, customer lists, distribution rights, patents, goodwill, and formulas of the Infusium hair care products line for our Personal Care segment.

 

·                  We sold substantially all of our trading securities, generating $1.00 million in cash, and liquidated $0.25 million of ARS at par.

 

Financing Activities:

 

During fiscal 2012, financing activities provided $42.80 million of cash compared to $170.00 million provided in fiscal 2011 and $78.13 million used in 2010.

 

Significant highlights of our fiscal 2012 financing activities:

 

·                  We had draws of $1,369.85 million against our line of credit.

 

·                  We repaid $1,269.75 million drawn against our line of credit.

 

·                  We repaid $53.00 million of long-term debt.

 

·                  We incurred $0.50 million in debt acquisition costs in connection with the amendment of our revolving credit facility.

 

·                  Employees and certain members of our Board of Directors exercised options to purchase 282,082 shares of common stock, providing $3.46 million of cash, including related tax benefits.

 

·                  On July 7, 2011, our Chief Executive Officer tendered 1,016,227 shares of common stock having a market value of $36.52 million, or $35.93 per share, as payment for the exercise price and related federal tax obligations arising from the exercise of stock options to purchase 1,625,000 shares of common stock. The exercise of these options required $12.55 million to pay related federal income tax obligations and generated $4.22 million in current tax benefits.

 

·                  Purchases of common stock through our employee stock purchase plan provided $1.01 million of cash.

 

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Significant highlights of our fiscal 2011 financing activities:

 

·                  We entered into a new revolving credit agreement borrowing $94.00 million to partially fund the Kaz acquisition, partially offset by subsequent repayments of $23.00 million of the principal amount borrowed.

 

·                  We issued $100.00 million in new senior notes to partially fund the Kaz acquisition.

 

·                  We incurred $3.90 million in debt acquisition costs in connection with the financing transactions highlighted above.

 

·                  We paid a $3.00 million principal installment on our fixed rate senior debt.

 

·                  Employees and directors exercised options to purchase 318,401 shares of common stock in cash transactions, providing $7.12 million of cash and related tax benefits.  Employees also purchased 24,601 shares of common stock through our employee stock purchase plan, providing $0.48 million of cash.

 

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

 

Significant highlights of our fiscal 2010 financing activities:

 

·                  We repaid $78.00 million of principal on senior notes.

 

·                  We repurchased and retired 47,648 shares of common stock at a total purchase price of $0.42 million, for an $8.80 per share average price.

 

·                  Employees and directors exercised options to purchase 141,800 shares of common stock in cash transactions, providing $2.19 million of cash and related tax benefits.  Employees also purchased 28,782 shares of common stock through our employee stock purchase plan, providing $0.35 million of cash.

 

·                  In addition, options to purchase 2,000,000 shares of common stock were exercised during the year in non-cash transactions in which our Chief Executive Officer tendered 1,438,109 shares of common stock having a market value of $30.15 million as payment of the exercise price and related federal tax obligations for the exercise of options.  The exercise of these options resulted in the payment of $7.17 million of related federal income and payroll taxes and resulted in $4.83 million in tax benefits.

 

Revolving Credit Agreement and Other Debt Agreements:

 

On December 30, 2010, we entered into a Credit Agreement (the “2010 RCA”) with Bank of America, N.A. that provided for an unsecured revolving commitment of up to $150.00 million. In connection with the acquisition of the PUR water filtration business, the Company amended the 2010 RCA on December 15, 2011. The amendment increased the amount of borrowings available under the revolving commitment from $150.00 million to $250.00 million, subject to the terms and limitations described below. The commitment under the 2010 RCA terminates on December 30, 2015. Borrowings under the 2010 RCA accrue interest at a “Base Rate” plus a margin of 0.00 to 1.125 percent per annum based on the Leverage Ratio (as defined in the 2010 RCA) at the time of borrowing. The base rate is equal to the highest of the Federal Funds Rate (as defined in the 2010 RCA) plus 0.50 percent, Bank of America’s prime rate or the one-month LIBOR rate plus 1.00 percent. Alternatively, if we elect, borrowings accrue interest based on the respective 1-, 2-, 3-, or 6-month LIBOR rate plus a margin of 1.00 to 2.125 percent per annum based upon the Leverage Ratio at the time of the borrowing. We incur loan commitment fees at a rate ranging from 0.25 to 0.45 percent per annum on the unused balance of the 2010 RCA. We incur letter of credit fees under the 2010 RCA at a rate ranging from 1.00 to 2.125 percent per annum on the face value of any letter of credit. Outstanding letters of credit reduce the borrowing availability under the 2010 RCA on a dollar-for-dollar basis. The 2010 RCA and our other debt are unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. As of February 29, 2012, the revolving loan principal balance was $171.10 million and there were $0.34 million of open letters of credit outstanding against the 2010 RCA. For the fiscal year ended February 29, 2012, borrowings under the 2010 RCA incurred interest charges at rates ranging from 1.94 to 4.00 percent. As of February 29, 2012, the amount available for borrowings under the 2010 RCA was $78.56 million.

 

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On January 12, 2011, the Company and certain of its subsidiaries entered into a Note Purchase Agreement, which provided for the issuance and sale of $100.00 million of 3.90 percent Senior Notes of Helen of Troy, L.P. (“the borrower”), due January 12, 2018 (the “Notes”). The borrower’s obligations under the Notes are unsecured. The Company used the proceeds of the Notes to repay all outstanding borrowings under a term loan credit agreement dated December 30, 2010 with Bank of America, N.A. that was used as short-term bridge financing for the Kaz acquisition. The Notes bear interest, payable semi-annually in arrears on January 12 and July 12 of each year at a rate of 3.90 percent per annum. Principal payments of $20.00 million (or, if applicable, such lesser principal amount then outstanding) are due on January 12, 2014 and each anniversary thereafter through January 12, 2017, with the remaining outstanding balance due at maturity. The borrower may redeem the Notes, in whole or in part, at any time, at a price equal to 100 percent of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. 

 

In addition to the Notes and the 2010 RCA, at February 29, 2012, we had an aggregate principal balance of $78.00 million of term debt with varying maturities due through June 2014. 

 

All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of financial covenants, including a maximum leverage ratio, a minimum interest coverage ratio and a minimum consolidated net worth. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt. Under the terms of our 2010 RCA, the commitments of the lenders to make loans to us are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility.

 

The table below provides the formulas for certain key financial covenants as defined in our various debt agreements:

 

Applicable Financial Covenant

2010 RCA

 

$75 Million Floating Rate Senior
Notes

 

$100 Million 3.90% Fixed Rate Senior Notes and
$3 Million 7.24% Fixed Rate Senior Notes

Minimum Consolidated Net Worth

$530 Million + 100% of Increase in Equity Due to Sale of Equity Interests After August 31, 2010

+

40% of Fiscal Quarter Net Earnings After August 31, 2010 (1)

 

$260 Million

+

25% of Fiscal Quarter Net Earnings After February 29, 2004 (1)

 

$500 Million

+

25% of Fiscal Quarter Net Earnings After November 30, 2010 (1)

Interest Coverage Ratio

EBIT (2)

÷

Interest Expense (2)

 

None

 

EBIT (2)

÷

Interest Expense (2)

 

Minimum Required:  3.00 to 1.00

 

 

Minimum Required:  2.50 to 1.00

Maximum Leverage Ratio

Total Current and Long Term Debt (3)

÷

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

 

Total Current and Long Term Debt (3)

÷

Total Capitalization (3)

 

Total Current and Long Term Debt (3)

÷

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

 

Maximum Allowed:  3:00 to 1:00

 

Maximum Allowed:  55%

 

Maximum Allowed:  3:25 to 1:00

 

Key Definitions:

 

 

 

EBIT:

Earnings Before Non-Cash Charges, Interest Expense and Taxes

 

 

EBITDA:

EBIT + Depreciation and Amortization Expense + Share Based Compensation

 

 

Total Capitalization:

Total Current and Long Term Debt + Total Equity

 

 

Pro Forma Effect of Acquisitions:

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

 

Notes:

(1) Excluding any fiscal quarter net losses.

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

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

 

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Additionally, our debt agreements contain other customary covenants, including, among other things, covenants restricting the Company, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on any of its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) limit our ability to repurchase shares of our common stock and pay dividends. As of February 29, 2012, our debt agreements effectively limited our ability to incur more than $254.40 million of additional debt from all sources, including the 2010 RCA.  We were in compliance with the terms of our debt agreements as of February 29, 2012.

 

Contractual Obligations:

 

Our contractual obligations and commercial commitments, as of the end of fiscal 2012 were:

 

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

(in thousands)

 

 

 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

After

 

 

 

Total

 

1 year

 

2 years

 

3 years

 

4 years

 

5 years

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term debt - fixed rate

 

$

103,000

 

$

3,000

 

$

20,000

 

$

20,000

 

$

20,000

 

$

20,000

 

$

20,000

 

Term debt - floating rate (1)

 

75,000

 

-    

 

-    

 

75,000

 

-    

 

-    

 

-    

 

Long-term incentive plan payouts

 

6,744

 

3,193

 

2,368

 

1,183

 

-    

 

-    

 

-    

 

Interest on fixed rate debt

 

15,165

 

3,981

 

3,796

 

3,016

 

2,236

 

1,460

 

676

 

Interest on floating rate debt (1)

 

10,655

 

4,570

 

4,570

 

1,515

 

-    

 

-    

 

-    

 

Open purchase orders

 

153,838

 

153,838

 

-    

 

-    

 

-    

 

-    

 

-    

 

Minimum royalty payments

 

90,724

 

15,222

 

13,540

 

11,564

 

9,031

 

5,539

 

35,828

 

Advertising and promotional

 

65,463

 

6,712

 

5,494

 

5,251

 

5,435

 

5,625

 

36,946

 

Operating leases

 

19,063

 

4,520

 

3,891

 

3,917

 

3,144

 

1,538

 

2,053

 

Capital spending commitments

 

809

 

809

 

-    

 

-    

 

-    

 

-    

 

-    

 

Total contractual obligations (2)

 

$

540,461

 

$

195,845

 

$

53,659

 

$

121,446