XNAS:HELE Helen of Troy, Ltd. Quarterly Report 10-Q Filing - 8/31/2012

Effective Date 8/31/2012

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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

T

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

 

 

For the quarterly period ended August 31, 2012

 

 

or

 

 

£

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

 

 

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

 

Commission file number: 001-14669

 

 

HELEN OF TROY LIMITED

 

(Exact name of registrant as specified in its charter)

 

Bermuda

 

74-2692550

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Clarenden House

Church Street

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

 

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address)

 

(Zip Code)

 

(915) 225-8000

(Registrant’s telephone number, including area code)

 

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

 

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

 

Large accelerated filer T

Accelerated filer £

 

 

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

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 T

 

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

 

Class

 

Outstanding at October 3, 2012

Common Shares, $0.10 par value, per share

 

31,806,775 shares

 


 



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

INDEX – FORM 10-Q

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets (unaudited)
as of August 31, 2012 and February 29, 2012

3

 

 

 

 

 

 

Consolidated Condensed Statements of Income (unaudited)
for the Three- and Six-Months Ended
August 31, 2012 and August 31, 2011

4

 

 

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income (unaudited)
for the Three- and Six-Months Ended
August 31, 2012 and August 31, 2011

5

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows (unaudited)
for the Six Months Ended
August 31, 2012 and August 31, 2011

6

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements (unaudited)

7

 

 

 

 

 

Item 2.

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

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

 

 

Item 1A.

Risk Factors

42

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

 

Item 6.

Exhibits

43

 

 

 

 

 

Signatures

44

 

- 2 -



 

PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (unaudited)

(in thousands, except shares and par value)

 

 

August 31,

 

February 29,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Assets, current:

 

 

 

 

 

Cash and cash equivalents

 

$

21,767

 

$

21,846

 

Receivables - principally trade, less allowances of $5,487 and $5,541

 

208,284

 

195,283

 

Inventory, net

 

318,697

 

246,142

 

Prepaid expenses and other current assets

 

7,939

 

7,645

 

Deferred tax assets, net

 

17,462

 

17,620

 

Total assets, current

 

574,149

 

488,536

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $70,545 and $62,550

 

99,615

 

100,690

 

Goodwill

 

452,253

 

452,350

 

Other intangible assets, net of accumulated amortization of $62,436 and $52,268

 

366,651

 

377,150

 

Deferred tax assets, net

 

734

 

976

 

Other assets, net of accumulated amortization of $4,824 and $3,938

 

15,660

 

16,021

 

Total assets

 

$

1,509,062

 

$

1,435,723

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

Revolving line of credit

 

$

161,000

 

$

171,100

 

Accounts payable, principally trade

 

106,475

 

69,845

 

Accrued expenses and other current liabilities

 

124,753

 

131,632

 

Income taxes payable

 

7,692

 

352

 

Deferred tax liabilities, net

 

1,168

 

2,960

 

Long-term debt, current maturities

 

-

 

3,000

 

Total liabilities, current

 

401,088

 

378,889

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

175,000

 

175,000

 

Deferred tax liabilities, net

 

57,265

 

60,576

 

Other liabilities, noncurrent

 

23,349

 

24,529

 

Total liabilities

 

656,702

 

638,994

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

-

 

-

 

Common stock, $0.10 par. Authorized 50,000,000 shares; 31,789,225 and 31,681,067 shares issued and outstanding

 

3,179

 

3,168

 

Additional paid in capital

 

159,879

 

151,006

 

Accumulated other comprehensive loss

 

(4,747

)

(5,589

)

Retained earnings

 

694,049

 

648,144

 

Total stockholders’ equity

 

852,360

 

796,729

 

Total liabilities and stockholders’ equity

 

$

1,509,062

 

$

1,435,723

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 3 -



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

287,411

 

$

277,420

 

$

587,622

 

$

548,887

 

Cost of goods sold

 

170,381

 

165,138

 

349,444

 

326,692

 

Gross profit

 

117,030

 

112,282

 

238,178

 

222,195

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

86,189

 

81,933

 

176,189

 

161,192

 

Operating income

 

30,841

 

30,349

 

61,989

 

61,003

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

31

 

(658

)

54

 

(515

)

Interest expense

 

(3,130

)

(3,265

)

(6,442

)

(6,694

)

Income before income taxes

 

27,742

 

26,426

 

55,601

 

53,794

 

 

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

 

 

Current

 

8,487

 

1,044

 

14,388

 

2,434

 

Deferred

 

(3,713

)

1,789

 

(5,227

)

3,162

 

Net income

 

$

22,968

 

$

23,593

 

$

46,440

 

$

48,198

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.75

 

$

1.46

 

$

1.55

 

Diluted

 

$

0.72

 

$

0.74

 

$

1.46

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

31,743

 

31,292

 

31,721

 

31,074

 

Diluted

 

31,846

 

31,731

 

31,843

 

31,696

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 4 -



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (unaudited)

(in thousands)

 

 

 

Three Months Ended August 31,

 

 

 

 

2012

 

 

2011

 

 

 

Before

 

 

 

Net of

 

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

 

Tax

 

Tax

 

Tax

 

Net income

 

$

27,742

 

$

(4,774

)

$

22,968

 

$

26,426

 

$

(2,833

)

$

23,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(457

)

160

 

(297

)

(846

)

296

 

(550

)

Interest rate settlements reclassified to income

 

980

 

(343

)

637

 

1,103

 

(386

)

717

 

Subtotal

 

523

 

(183

)

340

 

257

 

(90

)

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency swaps and contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(933

)

327

 

(606

)

499

 

(159

)

340

 

Ineffectiveness recorded in income

 

(14

)

5

 

(9

)

115

 

(36

)

79

 

Settlements reclassified to income

 

(11

)

3

 

(8

)

125

 

(40

)

85

 

Subtotal

 

(958

)

335

 

(623

)

739

 

(235

)

504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate security activity

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

-

 

-

 

-

 

1,423

 

(498

)

925

 

Settlements reclassified to income

 

-

 

-

 

-

 

(6

)

2

 

(4

)

Subtotal

 

-

 

-

 

-

 

1,417

 

(496

)

921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

(435

)

152

 

(283

)

2,413

 

(821

)

1,592

 

Comprehensive income

 

$

27,307

 

$

(4,622

)

$

22,685

 

$

28,839

 

$

(3,654

)

$

25,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31,

 

 

 

 

2012

 

 

2011

 

 

 

Before

 

 

 

Net of

 

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Net income

 

$

55,601

 

$

(9,161

)

$

46,440

 

$

53,794

 

$

(5,596

)

$

48,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(501

)

175

 

(326

)

(3,288

)

1,407

 

(1,881

)

Interest rate settlements reclassified to income

 

1,906

 

(667

)

1,239

 

2,629

 

(1,081

)

1,548

 

Subtotal

 

1,405

 

(492

)

913

 

(659

)

326

 

(333

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency swaps and contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(23

)

9

 

(14

)

12

 

(3

)

9

 

Ineffectiveness recorded in income

 

(49

)

17

 

(32

)

178

 

(56

)

122

 

Settlements reclassified to income

 

(37

)

12

 

(25

)

269

 

(86

)

183

 

Subtotal

 

(109

)

38

 

(71

)

459

 

(145

)

314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate security activity

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

-

 

-

 

-

 

1,465

 

(520

)

945

 

Settlements reclassified to income

 

-

 

-

 

-

 

(126

)

65

 

(61

)

Subtotal

 

-

 

-

 

-

 

1,339

 

(455

)

884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

1,296

 

(454

)

842

 

1,139

 

(274

)

865

 

Comprehensive income

 

$

56,897

 

$

(9,615

)

$

47,282

 

$

54,933

 

$

(5,870

)

$

49,063

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 5 -



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (unaudited)

(in thousands)

 

 

Six Months Ended August 31,

 

 

 

2012

 

2011

 

Cash provided (used) by operating activities:

 

 

 

 

 

Net income

 

$

46,440

 

$

48,198

 

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

 

 

 

 

 

Depreciation and amortization

 

17,795

 

13,691

 

Provision for doubtful receivables

 

(54

)

225

 

Share-based compensation

 

3,129

 

1,163

 

Gain on the sale of property and equipment

 

(15

)

(84

)

Unrealized loss on investments

 

-

 

756

 

Deferred income taxes and tax credits

 

(5,231

)

3,114

 

Changes in operating capital:

 

 

 

 

 

Receivables

 

(12,947

)

(12,411

)

Inventories

 

(72,450

)

(40,380

)

Prepaid expenses and other current assets

 

(674

)

(3,382

)

Other assets and liabilities, net

 

(390

)

(796

)

Accounts payable

 

36,611

 

31,394

 

Accrued expenses and other current liabilities

 

(8,544

)

(13,994

)

Accrued income taxes

 

7,083

 

1,792

 

Net cash provided by operating activities

 

10,753

 

29,286

 

 

 

 

 

 

 

Cash provided (used) by investing activities:

 

 

 

 

 

Capital and intangible asset expenditures

 

(5,760

)

(6,979

)

Proceeds from the sale of property and equipment

 

20

 

1,438

 

Proceeds from note receivable related to land sale

 

737

 

-

 

Proceeds from sale of investments

 

-

 

3,100

 

Net cash used by investing activities

 

(5,003

)

(2,441

)

 

 

 

 

 

 

Cash provided (used) by financing activities:

 

 

 

 

 

Proceeds from line of credit

 

114,950

 

485,500

 

Repayment of line of credit

 

(125,050

)

(451,500

)

Repayments of long-term debt

 

(3,000

)

(53,000

)

Payments of financing costs

 

(28

)

(25

)

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

 

6,913

 

2,619

 

Directors’ stock repurchased

 

(72

)

-

 

Payment of tax obligations resulting from cashless option exercise

 

-

 

(12,546

)

Share-based compensation tax benefit

 

458

 

52

 

Net cash used by financing activities

 

(5,829

)

(28,900

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(79

)

(2,055

)

Cash and cash equivalents, beginning balance

 

21,846

 

27,193

 

Cash and cash equivalents, ending balance

 

$

21,767

 

$

25,138

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 6 -



 

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

August 31, 2012

 

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

 

The accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of August 31, 2012 and February 29, 2012, and the results of our consolidated operations for the three- and six-month periods ended August 31, 2012 and 2011. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 29, 2012, and our other reports on file with the Securities and Exchange Commission (“SEC”).

 

In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us,” or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.” References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries.  References to “PUR” refer to the PUR brand of water filtration products that 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.  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 owners.  References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASC” refer to the codification of U.S. GAAP in the Accounting Standards Codification issued by the FASB.

 

We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have 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 provides 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.

 

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

 

- 7 -



 

Note 2 – New Accounting Pronouncements

 

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

 

Note 3 – Commitments and Contingencies

 

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

 

Notes (7), (9), (10), (11), and (14) provide additional information regarding certain of our significant long-term commitments and certain significant contingencies we have provided for in the accompanying consolidated condensed financial statements.

 

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

 

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

23,313

 

$

24,369

 

$

26,665

 

$

24,021

 

Additions to the accrual

 

7,899

 

9,386

 

14,773

 

16,496

 

Reductions of the accrual - payments and credits issued

 

(9,352

)

(9,303

)

(19,578

)

(16,065

)

Ending balance

 

$

21,860

 

$

24,452

 

$

21,860

 

$

24,452

 

 

Note 4 – Earnings per Share

 

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period and diluted earnings per share using basic earnings per share plus the effect of dilutive securities.  Our securities that can have dilutive effects consist of outstanding options to purchase common stock.  “In-the-money” options to purchase common stock are dilutive because they have exercise prices that are less than the average market price of our common stock during the period reported.  “Out-of-the-money” options to purchase common stock are antidilutive and are excluded from the computation of earnings per share because the exercise price of the options was greater than the average market price of our common stock during the period reported.  For the periods covered in the accompanying consolidated condensed statements of income, the basic and diluted shares are as follows:

 

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

31,743

 

31,292

 

31,721

 

31,074

 

Incremental shares from share-based payment arrangements

 

103

 

439

 

122

 

622

 

Weighted average shares outstanding, diluted

 

31,846

 

31,731

 

31,843

 

31,696

 

 

 

 

 

 

 

 

 

 

 

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

 

380

 

665

 

376

 

644

 

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

 

617

 

365

 

621

 

386

 

 

- 8 -



 

Note 5 – Segment Information

 

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

 

THREE MONTHS ENDED AUGUST 31, 2012 AND 2011

(in thousands)

 

 

Personal

 

 

 

Healthcare / Home

 

 

 

August 31, 2012

 

Care

 

Housewares

 

Environment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

112,364

 

$

64,570

 

$

110,477

 

$

287,411

 

Operating income

 

11,880

 

12,078

 

6,883

 

30,841

 

Capital and intangible asset expenditures

 

864

 

326

 

1,202

 

2,392

 

Depreciation and amortization

 

3,242

 

1,278

 

4,175

 

8,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

Healthcare / Home

 

 

 

August 31, 2011

 

Care

 

Housewares

 

Environment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

115,296

 

$

63,848

 

$

98,276

 

$

277,420

 

Operating income

 

11,155

 

11,973

 

7,221

 

30,349

 

Capital and intangible asset expenditures

 

3,736

 

385

 

822

 

4,943

 

Depreciation and amortization

 

2,582

 

1,398

 

2,617

 

6,597

 

 

SIX MONTHS ENDED AUGUST 31, 2012 AND 2011

(in thousands)

 

 

Personal

 

 

 

Healthcare / Home

 

 

 

August 31, 2012

 

Care

 

Housewares

 

Environment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

229,916

 

$

124,819

 

$

232,887

 

$

587,622

 

Operating income

 

23,760

 

23,355

 

14,874

 

61,989

 

Capital and intangible asset expenditures

 

3,119

 

517

 

2,124

 

5,760

 

Depreciation and amortization

 

6,509

 

2,576

 

8,710

 

17,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

Healthcare / Home

 

 

 

August 31, 2011

 

Care

 

Housewares

 

Environment

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

238,014

 

$

116,794

 

$

194,079

 

$

548,887

 

Operating income

 

31,007

 

22,838

 

7,158

 

61,003

 

Capital and intangible asset expenditures

 

4,633

 

965

 

1,381

 

6,979

 

Depreciation and amortization

 

5,243

 

2,839

 

5,609

 

13,691

 

 

We compute operating income for each segment based on net sales revenue, less cost of goods sold, selling, general and administrative expense (“SG&A”), and any impairment charges associated with the segment. SG&A used to compute each segment’s operating income is directly associated with the segment, plus overhead expenses allocable to the segment.  We make allocations of overhead between operating segments using a number of relevant allocation criteria, depending on the nature of the expense, the most significant of which are relative revenues, estimates of relative labor expenditures, headcount, and facilities square footage.  In fiscal 2013, we began making certain additional cost allocations to the Healthcare / Home Environment segment that were not made in fiscal 2012.  These allocations are costs of corporate and operating functions that are shared by our segments.  We made this change because we now have a complete fiscal year’s operating experience with the Healthcare / Home Environment segment.  In the past year, we have integrated certain of the segment’s corporate and operating functions into consolidated corporate and shared operating functions. For the three- and six-month periods ended August 31, 2012, the allocation totaled $4.10 and $8.22 million, respectively, compared to $1.51 and $3.01 million, respectively, for the same periods last year.  We do not allocate nonoperating income and expense, interest or income taxes to operating segments.

 

- 9 -



 

Note 6 – Comprehensive Income (Loss)

 

The components of accumulated other comprehensive loss, net of tax, are as follows:

 

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

(in thousands)

 

 

August 31,

 

February 29,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

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

 

$

(4,647

)

$

(5,559

)

Unrealized holding losses on cash flow hedges - foreign currency swaps and contracts, net of tax (2)

 

(100

)

(30

)

Total accumulated other comprehensive loss

 

$

(4,747

)

$

(5,589

)

 

(1) Includes net deferred tax benefits of $2.50 and $2.99 million at August 31, 2012 and February 29, 2012, respectively.

 

(2) Includes net deferred tax benefits of $0.05 and $0.02 million at August 31, 2012 and February 29, 2012, respectively.

 

Note 7 – Supplemental Balance Sheet Information

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

Estimated

 

 

 

 

 

 

 

Useful Lives

 

August 31,

 

February 29,

 

 

 

(Years)

 

2012

 

2012

 

 

 

 

 

 

 

 

 

Land

 

-

 

$

8,767

 

$

8,767

 

Building and improvements

 

3 - 40

 

66,953

 

66,580

 

Computer, furniture and other equipment

 

3 - 15

 

57,711

 

56,162

 

Tools, molds and other production equipment

 

1 - 10

 

30,818

 

25,617

 

Construction in progress

 

-

 

5,911

 

6,114

 

Property and equipment, gross

 

 

 

170,160

 

163,240

 

Less accumulated depreciation

 

 

 

(70,545

)

(62,550

)

Property and equipment, net

 

 

 

$

99,615

 

$

100,690

 

 

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

 

 

August 31,

 

February 29,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

Accrued sales returns, discounts and allowances

 

$

33,860

 

$

29,481

 

Accrued warranty returns

 

21,860

 

26,665

 

Accrued compensation, benefits and payroll taxes

 

22,331

 

31,754

 

Accrued advertising

 

9,514

 

7,849

 

Accrued royalties

 

7,782

 

6,990

 

Accrued property, sales and other taxes

 

5,781

 

5,745

 

Accrued legal expenses and professional fees

 

5,316

 

5,364

 

Derivative liabilities

 

3,896

 

3,694

 

Other

 

14,413

 

14,090

 

Total accrued expenses and other current liabilities

 

$

124,753

 

$

131,632

 

 

- 10 -



 

OTHER LIABILITIES, NONCURRENT

(in thousands)

 

 

August 31,

 

February 29,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

Deferred compensation liability

 

$

4,727

 

$

4,478

 

Liability for uncertain tax positions

 

13,375

 

13,213

 

Derivative liabilities

 

3,574

 

5,022

 

Other liabilites

 

1,673

 

1,816

 

Total other liabilities, noncurrent

 

$

23,349

 

$

24,529

 

 

Note 8 – Goodwill and Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal 2013 and 2012 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarters of fiscal 2013 and 2012.  As a result, we concluded no impairment charges were required during either period.  For both periods, the estimated fair value of the indefinite-lived 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.

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

 

 

 

 

 

 

 

August 31, 2012

 

February 29, 2012

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Description

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

81,842

 

$

(46,490

)

$

 -

 

$

35,352

 

 

 

$

81,842

 

$

(46,490

)

$

-

 

$

35,352

 

Trademarks - indefinite

 

75,803

 

-

 

-

 

75,803

 

 

 

75,303

 

-

 

-

 

75,303

 

Trademarks - finite

 

150

 

-

 

(70

)

80

 

 

 

150

 

-

 

(67

)

83

 

Licenses - indefinite

 

10,300

 

-

 

-

 

10,300

 

 

 

10,300

 

-

 

-

 

10,300

 

Licenses - finite

 

18,683

 

-

 

(15,344

)

3,339

 

 

 

19,564

 

-

 

(15,967

)

3,597

 

Other intangibles - finite

 

49,437

 

-

 

(17,998

)

31,439

 

 

 

49,437

 

-

 

(15,012

)

34,425

 

Total Personal Care

 

236,215

 

(46,490

)

(33,412

)

156,313

 

 

 

236,596

 

(46,490

)

(31,046

)

159,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

166,131

 

-

 

-

 

166,131

 

 

 

166,131

 

-

 

-

 

166,131

 

Trademarks - indefinite

 

75,200

 

-

 

-

 

75,200

 

 

 

75,200

 

-

 

-

 

75,200

 

Other intangibles - finite

 

15,724

 

-

 

(9,572

)

6,152

 

 

 

15,774

 

-

 

(9,000

)

6,774

 

Total Housewares

 

257,055

 

-

 

(9,572

)

247,483

 

 

 

257,105

 

-

 

(9,000

)

248,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare / Home Environment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

250,770

 

-

 

-

 

250,770

 

 

 

250,867

 

-

 

-

 

250,867

 

Trademarks - indefinite

 

54,000

 

-

 

-

 

54,000

 

 

 

54,000

 

-

 

-

 

54,000

 

Licenses - finite

 

15,300

 

-

 

(1,974

)

13,326

 

 

 

14,900

 

-

 

(481

)

14,419

 

Other Intangibles - finite

 

114,490

 

-

 

(17,478

)

97,012

 

 

 

114,790

 

-

 

(11,741

)

103,049

 

Total Healthcare / Home Environment

 

434,560

 

-

 

(19,452

)

415,108

 

 

 

434,557

 

-

 

(12,222

)

422,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

927,830

 

$

(46,490

)

$

 (62,436

)

$

818,904

 

 

 

$

928,258

 

$

(46,490

)

$

(52,268

)

$

829,500

 

 

The following table summarizes the amortization expense attributable to intangible assets for the periods covered in the accompanying consolidated condensed statements of income, as well as our estimated amortization expense for the fiscal years 2013 through 2018.

 

- 11 -


 


 

AMORTIZATION OF INTANGIBLE ASSETS

 

 

 

(in thousands)

 

 

 

Aggregate Amortization Expense

 

 

 

For the three months ended

 

 

 

 

 

 

 

August 31, 2012

 

$

5,626

 

August 31, 2011

 

$

4,492

 

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the six months ended

 

 

 

 

 

 

 

August 31, 2012

 

$

11,262

 

August 31, 2011

 

$

9,049

 

 

 

 

 

Estimated Amortization Expense

 

 

 

For the fiscal years ended

 

 

 

 

 

 

 

February 2013

 

$

22,326

 

February 2014

 

$

21,583

 

February 2015

 

$

21,019

 

February 2016

 

$

20,835

 

February 2017

 

$

20,500

 

February 2018

 

$

16,677

 

 

- 12 -



 

NOTE 9 - Acquisitions

 

PUR Acquisition - 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 million, subject to future adjustments.  The acquisition was funded entirely 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.  We are operating the PUR business in our Healthcare / Home Environment segment and market its products primarily into retail trade channels in the U.S.  Goodwill arising from the acquisition consists largely of the distribution network, marketing synergies and economies of scale that are anticipated from the addition of the new product line.

 

In connection with this acquisition, we 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. We finished using certain of these services in the second quarter of fiscal 2013 and acquired the remaining PUR inventory on-hand from P&G.

 

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. None of the goodwill recognized is expected to be deductible for income tax purposes. We completed our preliminary estimate of the economic lives of all the assets acquired and a preliminary allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and are amortizing the customer list,  patents, trademarks and technology license agreements, and covenant not to compete over expected weighted average lives of approximately 15.0,  12.4,  5.2, and 2.0  years, respectively.  For the customer list, we used historical attrition rates to assign an expected life.  For patent rights, we used the underlying non-renewable term of a royalty-free license we acquired for the use of patented designs in certain PUR products.

 

The following schedule presents the acquisition date fair value of the net assets of PUR:

 

PUR - NET ASSETS ACQUIRED ON DECEMBER 30, 2011

(in thousands)

 

 

 

 

 

 

 

Supplier tooling advances

 

$

1,432

 

Tools, dies, molds and other production equipment

 

12,495

 

Goodwill

 

86,162

 

Trademarks

 

54,000

 

Trademark and technology licensing agreements

 

14,900

 

Patents

 

4,140

 

Customer relationships

 

18,600

 

Covenant not to compete

 

200

 

Total assets acquired

 

191,929

 

Less: Deferred tax liabilities recorded at acquisition

 

(31,929

)

Net assets acquired

 

$

160,000

 

 

We estimated the fair values of the PUR assets acquired by applying income and market approaches. The fair value measurement of the intangible assets is based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.  Key assumptions included various discount rates based upon a 15.20 percent weighted average cost of capital, a royalty rate of 7.0 percent used to determine the trademark fair value, royalty rates of 0.50 to 1.00 percent used to determine patent estate values, and customer attrition rates of 5.00 percent per year used to determine customer list value.

 

- 13 -



 

Note 10 – Debt

 

Revolving Line of Credit - We have a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. that provides for an unsecured total revolving commitment of up to $250.00 million. The commitment under the Credit Agreement terminates on December 30, 2015.  Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement.  With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time.  We also incur loan commitment fees and letter of credit fees under the Credit Agreement.  Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis.  As of August 31, 2012, the outstanding revolving loan principal balance was $161.00 million and there were $0.62 million of open letters of credit outstanding against the Credit Agreement. For the three- and six-month periods ended August 31, 2012, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.61 to 3.63 percent and 1.61 to 4.00 percent, respectively.  As of August 31, 2012, the amount available for borrowings under the Credit Agreement was $88.38 million.

 

Long-Term Debt – A summary of our long-term debt is as follows:

 

LONG-TERM DEBT

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

Date

 

Interest

 

 

 

August 31,

 

February 29,

 

 

 

Borrowed

 

Rates

 

Matures

 

2012

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

$15 million unsecured Senior Note payable at a fixed interest rate of 7.24%. Interest payable quarterly. Annual principal payments of $3 million began in July 2008. Paid in July 2012.

 

07/97

 

7.24%

 

07/12

 

$

-

 

$

3,000

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

06/04

 

6.01%

 

06/14

 

75,000

 

75,000

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

01/11

 

3.90%

 

01/18

 

100,000

 

100,000

 

Total long-term debt

 

 

 

 

 

 

 

175,000

 

178,000

 

Less current maturities of long-term debt

 

 

 

 

 

 

 

-

 

(3,000

)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

$

175,000

 

$

175,000

 

 

(1)          Floating interest rates have been hedged with an interest rate swap (the “Swap”) to effectively fix interest rates. Additional information regarding the swap is provided in Note 12 to these consolidated condensed financial statements.

 

The fair market value of the fixed rate debt at August 31, 2012 computed using a discounted cash flow analysis was $104.56 million compared to the $100.00 million book value and represents a Level 2 liability. All other long-term debt has floating interest rates, and its book value approximates its fair value at August 31, 2012.

 

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

 

- 14 -



 

As of August 31, 2012, our debt agreements effectively limited our ability to incur more than $237.60 million of additional debt from all sources, including draws on the Credit Agreement. As of August 31, 2012, we were in compliance with the terms of all of our debt agreements.

 

Note 11 – Fair Value

 

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

 

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

Active Markets

 

Observable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

August 31, 2012

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Money market accounts

 

$

1,119

 

$

1,119

 

$

-

 

Foreign currency contracts and currency swaps

 

36

 

-

 

36

 

Total assets

 

$

1,155

 

$

1,119

 

$

36

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

104,559

 

$

-

 

$

104,559

 

Long-term debt - floating rate

 

75,000

 

-

 

75,000

 

Interest rate swap

 

7,148

 

-

 

7,148

 

Foreign currency contracts

 

322

 

-

 

322

 

Total liabilities

 

$

187,029

 

$

-

 

$

187,029

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

Active Markets

 

Observable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

February 29, 2012

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets: