Edgar Filing: HELEN OF TROY LTD

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2014

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

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

Commission file number: 001-14669

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

Bermuda		74-2692550

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Clarenden House 2 Church Street Hamilton, Bermuda

(Address of principal executive offices)

1 Helen of Troy Plaza

El Paso, Texas		79912

(Registrant’s United States Mailing Address)		(Zip Code)

(915) 225-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 £

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 July 3, 2014

Common Shares, $0.10 par value, per share		28,368,876 shares

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	41

PART 2.	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 6.	Exhibits	44

SIGNATURES		45

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited)

(in thousands, except shares and par value)

	May 31,			February 28,
	2014			2014

Assets
Assets, current:
Cash and cash equivalents	$	29,170		$	70,027
Receivables - principally trade, less allowances of $4,894 and $4,679	217,415			213,054
Inventory, net	298,450			289,255
Prepaid expenses and other current assets	8,501			10,097
Income taxes receivable	7,924			3,783
Deferred tax assets, net	24,834			29,260
Total assets, current	586,294			615,476

Property and equipment, net of accumulated depreciation of $74,730 and $71,516	127,586			129,117
Goodwill	453,241			453,241
Other intangible assets, net of accumulated amortization of $99,956 and $94,698	308,161			322,309
Deferred tax assets, net	2,343			2,523
Other assets, net of accumulated amortization of $7,180 and $6,781	10,030			10,636
Total assets	$	1,487,655		$	1,533,302

Liabilities and Stockholders’ Equity
Liabilities, current:
Revolving line of credit	$	235,000		$	-
Accounts payable, principally trade	84,818			75,585
Accrued expenses and other current liabilities	124,571			156,688
Deferred tax liabilities, net	182			181
Long-term debt, current maturities	96,900			96,900
Total liabilities, current	541,471			329,354

Long-term debt, excluding current maturities	93,807			95,707
Deferred tax liabilities, net	54,069			56,988
Other liabilities, noncurrent	18,505			21,766
Total liabilities	707,852			503,815

Commitments and contingencies

Stockholders’ equity:
Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued	-			-
Common stock, $0.10 par. Authorized 50,000,000 shares; 28,358,198 and 32,272,519 shares issued and outstanding	2,836			3,227
Additional paid in capital	170,087			180,861
Accumulated other comprehensive loss	(290		)	(1,091		)
Retained earnings	607,170			846,490
Total stockholders’ equity	779,803			1,029,487
Total liabilities and stockholders’ equity	$	1,487,655		$	1,533,302

See accompanying notes to consolidated condensed financial statements.

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except per share data)

	Three Months Ended May 31,
	2014			2013

Sales revenue, net	$	311,778		$	304,516
Cost of goods sold	192,258			184,351
Gross profit	119,520			120,165

Selling, general and administrative expense	87,397			87,490
Asset impairment charges	9,000			12,049
Operating income	23,123			20,626

Nonoperating income (expense), net	50			84
Interest expense	(3,417		)	(2,942		)
Income before income taxes	19,756			17,768

Income tax expense:
Current	2,039			3,896
Deferred	1,319			(520		)
Net income	$	16,398		$	14,392

Earnings per share:
Basic	$	0.56		$	0.45
Diluted	$	0.55		$	0.45

Weighted average shares of common stock used in computing net earnings per share:
Basic	29,105			31,908
Diluted	29,616			32,180

See accompanying notes to consolidated condensed financial statements.

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three months ended May 31,
	2014							2013
	Before					Net of		Before						Net of
	Tax		Tax			Tax		Tax			Tax			Tax

Income	$	19,756	$	(3,358	)	$	16,398	$	17,768		$	(3,376	)	$	14,392

Other comprehensive income
Cash flow hedge activity - interest rate swaps
Changes in fair market value	12		(5		)	7		(3		)	1			(2		)
Interest rate settlements reclassified to income	914		(320		)	594		914			(320		)	594
Subtotal	926		(325		)	601		911			(319		)	592

Cash flow hedge activity - foreign currency contracts
Changes in fair market value	78		(17		)	61		36			(7		)	29
Settlements reclassified to income	166		(27		)	139		(216		)	40			(176		)
Subtotal	244		(44		)	200		(180		)	33			(147		)

Total other comprehensive income	1,170		(369		)	801		731			(286		)	445
Comprehensive income	$	20,926	$	(3,727	)	$	17,199	$	18,499		$	(3,662	)	$	14,837

See accompanying notes to consolidated condensed financial statements.

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

	Three months ended May 31,
	2014			2013

Cash provided (used) by operating activities:
Net income	$	16,398		$	14,392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,757			8,447
Provision for doubtful receivables	118			279
Non-cash share-based compensation	1,295			3,378
Intangible asset impairment charges	9,000			12,049
(Gain) loss on the sale of property and equipment	1			37
Deferred income taxes and tax credits	1,321			(509		)
Changes in operating capital, net of effects of acquisition of businesses:
Receivables	(4,479		)	13,419
Inventories	(9,195		)	(7,510		)
Prepaid expenses and other current assets	1,641			(3,302		)
Other assets and liabilities, net	(2,987		)	1,748
Accounts payable	9,233			14,275
Accrued expenses and other current liabilities	(23,939		)	(11,389		)
Accrued income taxes	(4,193		)	1,519
Net cash provided by operating activities	2,971			46,833

Cash provided (used) by investing activities:
Capital and intangible asset expenditures	(1,822		)	(17,000		)
Net cash used by investing activities	(1,822		)	(17,000		)

Cash provided (used) by financing activities:
Proceeds from line of credit	337,700			28,400
Repayment of line of credit	(102,700		)	(72,400		)
Proceeds from issuance of long-term debt	-			11,835
Repayment of long-term debt	(1,900		)	-
Payment of financing costs	(1		)	(157		)
Proceeds from share issuances under share-based compensation plans, including tax benefits	2,935			2,758
Payment of tax obligations resulting from cashless share award exercises	(4,569		)	(393		)
Payments for repurchases of common stock	(273,598		)	(1,311		)
Share-based compensation tax benefit	127			723
Net cash used by financing activities	(42,006		)	(30,545		)

Net decrease in cash and cash equivalents	(40,857		)	(712		)
Cash and cash equivalents, beginning balance	70,027			12,842
Cash and cash equivalents, ending balance	$	29,170		$	12,130

See accompanying notes to consolidated condensed financial statements.

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

May 31, 2014

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

The accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of May 31, 2014 and February 28, 2014, and the results of our consolidated operations for the fiscal quarters ended May 31, 2014 and 2013. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2014, and our other reports on file with the Securities and Exchange Commission (“SEC”).

In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries. We refer to the Company’s common shares, par value $0.10 per share, as “common stock.” References to “OXO” refer to the operations of OXO International and certain of its affiliated subsidiaries that comprise our Housewares segment. References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries. 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. 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 other intellectual property rights of the Company and other parties in the United States and 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. 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 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: Housewares, Healthcare / Home Environment and Personal Care. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation tools, gadgets and storage containers, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on health care devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our 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 business is seasonal due to different calendar events, holidays and seasonal weather patterns. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

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

Table of Contents

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

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

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

	Three months ended May 31,
	2014			2013

Beginning balance	$	19,269		$	23,150
Additions to the accrual	13,286			13,578
Reductions of the accrual - payments and credits issued	(13,415		)	(15,946		)
Ending balance	$	19,140		$	20,782

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. We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities. For the fiscal quarter ended May 31, 2014, our dilutive securities consisted of outstanding options to purchase common stock and the impact of a $15 million severance payment to our former Chief Executive Officer (“CEO”) to be settled with common stock on September 1, 2014. For the fiscal quarter ended May 31, 2013, our dilutive securities consisted of outstanding options to purchase common stock and issued and contingently issuable unvested restricted share units and awards. Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive. See Note 14 to these consolidated condensed financial statements for more information regarding restricted share units and awards. For the periods covered below, the basic and diluted shares are as follows:

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

	Three months ended May 31,
	2014	2013

Weighted average shares outstanding, basic	29,105	31,908
Incremental shares from share-based payment arrangements	511	272
Weighted average shares outstanding, diluted	29,616	32,180

Dilutive securities, as a result of in-the-money options	728	199
Dilutive securities, as a result of unvested or unsettled share awards due	231	234
Antidilutive securities, as a result of out-of-the-money options	233	797

Table of Contents

Note 5 – Segment Information

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

THREE MONTHS ENDED MAY 31, 2014 AND 2013

(in thousands)

			Healthcare /		Personal
May 31, 2014	Housewares		Home Environment		Care		Total

Sales revenue, net	$	66,756	$	142,489	$	102,533	$	311,778
Asset impairment charges	-		-		9,000		9,000
Operating income	13,035		8,717		1,371		23,123
Capital and intangible asset expenditures	824		406		592		1,822
Depreciation and amortization	914		5,463		2,380		8,757

			Healthcare /		Personal
May 31, 2013	Housewares		Home Environment		Care		Total

Sales revenue, net	$	63,530	$	125,602	$	115,384	$	304,516
Asset impairment charges	-		-		12,049		12,049
Operating income	12,456		6,536		1,634		20,626
Capital and intangible asset expenditures	214		16,105		681		17,000
Depreciation and amortization	1,019		4,781		2,647		8,447

We compute segment operating income based on net sales revenue, less cost of goods sold, selling, general and administrative expense (“SG&A”), and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment, plus overhead expenses that are allocable to the segment.

We do not allocate nonoperating income and expense, including interest or income taxes to operating segments.

Table of Contents

Note 6 – Comprehensive Loss

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

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

(in thousands)

	Unrealized Holding Gains (Losses)
	On Cash Flow Hedges
				Foreign
	Interest Rate			Currency
	Swaps (1)			Contracts (2)			Total

Balance at February 28, 2014	$	(797	)	$	(294	)	$	(1,091	)

Other comprehensive income before reclassification	12			78			90
Amounts reclassified out of accumulated other comprehensive income	914			166			1,080
Tax effects	(325		)	(44		)	(369		)
Other comprehensive income	601			200			801

Balance at May 31, 2014	$	(196	)	$	(94	)	$	(290	)

(1) Includes net deferred tax benefits of $0.11 and $0.43 million at May 31, 2014 and February 28, 2014, respectively.

(2) Includes net deferred tax benefits of $0.03 and $0.08 million at May 31, 2014 and February 28, 2014, respectively.

Note 7 – Supplemental Balance Sheet Information

PROPERTY AND EQUIPMENT

(in thousands)

	Estimated
	Useful Lives	May 31,			February 28,
	(Years)	2014			2014

Land	-	$	12,800		$	12,800
Building and improvements	3 - 40	98,818			98,660
Computer, furniture and other equipment	3 - 15	62,174			60,291
Tools, molds and other production equipment	1 - 10	23,022			23,017
Construction in progress	-	5,502			5,865
Property and equipment, gross		202,316			200,633
Less accumulated depreciation		(74,730		)	(71,516		)
Property and equipment, net		$	127,586		$	129,117

Table of Contents

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

	May 31,		February 28,
	2014		2014

Accrued compensation, benefits and payroll taxes	$	30,103	$	69,877
Accrued sales returns, discounts and allowances	28,376		25,297
Accrued warranty returns	19,140		19,269
Accrued advertising	20,902		16,414
Accrued product liability, legal and professional fees	5,769		5,705
Accrued royalties	5,335		5,712
Accrued property, sales and other taxes	6,666		6,835
Derivative liabilities, current	471		1,596
Liability for uncertain tax positions	-		453
Other	7,809		5,530
Total accrued expenses and other current liabilities	$	124,571	$	156,688

OTHER LIABILITIES, NONCURRENT
*(in thousands)*
	May 31,		February 28,
	2014		2014

Deferred compensation liability	$	3,998	$	7,257
Liability for uncertain tax positions	13,546		13,471
Other liabilities	961		1,038
Total other liabilities, noncurrent	$	18,505	$	21,766

Note 8 – Goodwill and Intangible Assets

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

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

Table of Contents

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

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

	May 31, 2014										February 28, 2014
	Gross		Cumulative								Gross		Cumulative
	Carrying		Goodwill			Accumulated			Net Book		Carrying		Goodwill			Accumulated			Net Book
Description	Amount		Impairments			Amortization			Value		Amount		Impairments			Amortization			Value

Housewares:
Goodwill	$	166,132	$	-		$	-		$	166,132	$	166,132	$	-		$	-		$	166,132
Trademarks - indefinite	75,200		-			-			75,200		75,200		-			-			75,200
Other intangibles - finite	15,803		-			(11,463		)	4,340		15,693		-			(11,149		)	4,544
Total Housewares	257,135		-			(11,463		)	245,672		257,025		-			(11,149		)	245,876

Healthcare / Home Environment:
Goodwill	251,758		-			-			251,758		251,758		-			-			251,758
Trademarks - indefinite	54,000		-			-			54,000		54,000		-			-			54,000
Licenses - finite	15,300		-			(7,156		)	8,144		15,300		-			(6,416		)	8,884
Other intangibles - finite	114,490		-			(37,329		)	77,161		114,490		-			(34,606		)	79,884
Total Healthcare / Home Environment	435,548		-			(44,485		)	391,063		435,548		-			(41,022		)	394,526

Personal Care:
Goodwill	81,841		(46,490		)	-			35,351		81,841		(46,490		)	-			35,351
Trademarks - indefinite	54,754		-			-			54,754		63,754		-			-			63,754
Trademarks - finite	150		-			(78		)	72		150		-			(77		)	73
Licenses - indefinite	10,300		-			-			10,300		10,300		-			-			10,300
Licenses - finite	18,683		-			(15,966		)	2,717		18,683		-			(15,887		)	2,796
Other intangibles - finite	49,437		-			(27,964		)	21,473		49,437		-			(26,563		)	22,874
Total Personal Care	215,165		(46,490		)	(44,008		)	124,667		224,165		(46,490		)	(42,527		)	135,148

Total	$	907,848	$	(46,490	)	$	(99,956	)	$	761,402	$	916,738	$	(46,490	)	$	(94,698	)	$	775,550

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

AMORTIZATION OF INTANGIBLE ASSETS

(in thousands)

Aggregate Amortization Expense
For the three months ended

May 31, 2014	$	5,259
May 31, 2013	$	5,431


Estimated Amortization Expense
For the fiscal years ended

February 2015	$	21,035
February 2016	$	20,853
February 2017	$	20,540
February 2018	$	16,717
February 2019	$	12,012
February 2020	$	10,285

Table of Contents

Note 9 – 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 $375 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 May 31, 2014, the outstanding revolving loan principal balance was $235 million and there were $0.30 million of open letters of credit outstanding against the Credit Agreement. For the fiscal quarter ended May 31, 2014, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.90 to 4.00 percent. For the fiscal quarter ended May 31, 2013, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.57 to 3.63 percent. As of May 31, 2014, the amount available for borrowings under the Credit Agreement was $139.70 million.

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

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

LONG-TERM DEBT

(dollars in thousands)

Original

Date

Interest

May 31,

February 28,

Borrowed

Rates

Matures

2014

2014

$37.61 million unsecured loan with a state industrial development corporation, interest is set and payable quarterly at a Base Rate, plus a margin of up to 1.125%, or applicable LIBOR plus a margin of up to 2.125%, as determined by the interest rate elected. Loan subject to holder’s call on or after March 1, 2018. Loan can be prepaid without penalty.

03/13

1.90%

03/23

35,707

37,607

$75 million unsecured floating interest rate Senior Notes. Interest set and payable quarterly at three month LIBOR plus 90 basis points. Principal is due in June 2014. Notes can be prepaid without penalty. (1) (2)

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

80,000

80,000

Total long-term debt

190,707

192,607

Less current maturities of long-term debt

(96,900

)

(96,900

)

Long-term debt, excluding current maturities

93,807

95,707

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

(2) On June 30, 2014, $75 million of principal on our Senior Notes was repaid at maturity.

Table of Contents

The fair market value of the fixed rate debt at May 31, 2014, computed using a discounted cash flow analysis, was $83.87 million compared to the $80 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 May 31, 2014.

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

As of May 31, 2014, our debt agreements effectively limited our ability to incur more than $150.84 million of additional debt from all sources, including our Credit Agreement. We were in compliance with the terms of these agreements as of May 31, 2014.

See Note 15 to these consolidated condensed financial statements for information regarding subsequent amendments to our debt agreements that increased borrowing limits under the unsecured revolving commitment of the Credit Agreement from $375 million to $570 million.

Note 10 – Income Taxes

Income tax expense for the fiscal quarter ended May 31, 2014 was 17.0 percent of income before income taxes compared to 19.0 percent for the same period last year. The year-over-year change in our effective tax rate was primarily due to shifts in the mix of taxable income between our various tax jurisdictions. Our effective tax rates were also impacted by asset impairment charges of $9.00 million for the fiscal quarter ended May 31, 2014, and $12.05 million for the fiscal quarter ended May 31, 2013, for which the related tax benefits were $0.86 and $0.02 million, respectively.

Table of Contents

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	May 31, 2014		(Level 1)		(Level 2)

Assets:
Money market accounts	$	1,365	$	1,365	$	-
Foreign currency contracts	45		45		-
Total assets	$	1,410	$	1,410	$	-

Liabilities:
Long-term debt - fixed rate (1)	$	83,866	$	-	$	83,866
Long-term debt - floating rate	110,707		-		110,707
Interest rate swaps and foreign currency contracts	471		-		471
Total liabilities	$	195,044	$	-	$	195,044

			Quoted Prices in		Significant Other
			Active Markets		Observable
	Fair Values at		for Identical Assets		Market Inputs
Description	February 28, 2014		(Level 1)		(Level 2)

Assets:
Money market accounts	$	1,549	$	1,549	$	-
Foreign currency contracts	-		-		-
Total assets	$	1,549	$	1,549	$	-


Liabilities:
Long-term debt - fixed rate (1)	$	83,951	$	-	$	83,951
Long-term debt - floating rate	112,607		-		112,607
Interest rate swaps and foreign currency contracts	1,596		-		1,596
Total liabilities	$	198,154	$	-	$	198,154

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

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

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of these financial liabilities requires the use of discount rates based upon current market rates of interest for debt with comparable remaining terms. Such comparable rates are significant other observable market inputs. The fair

Table of Contents

market value of the fixed rate debt was computed using a discounted cash flow analysis and discount rates of 1.54 percent at May 31, 2014 and 1.75 percent at February 28, 2014. All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

We use derivatives for hedging purposes and our derivatives are primarily foreign currency contracts and an interest rate swap. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair value hierarchy. See Notes 6, 9 and 12 to these consolidated condensed financial statements for more information on our hedging activities.

The Company’s other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 assets. These assets are measured at fair value on a non-recurring basis as part of the Company’s impairment assessments and as circumstances require. As discussed in Note 8 to these consolidated condensed financial statements, in connection with our annual impairment testing during the fiscal quarter ended May 31, 2014, we recorded a non-cash asset impairment charge of $9.00 million ($8.16 million after tax). The charge related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

Note 12 – Financial Instruments and Risk Management

Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During each of the fiscal quarters ended May 31, 2014 and 2013, approximately 15 percent of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses from remeasurement are recognized in SG&A. For the fiscal quarters ended May 31, 2014 and 2013, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.03) and ($0.12) million, respectively, in SG&A and $0.04 and $0.05 million, respectively, in income tax expense.

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

Venezuelan Bolivar Currency Exchange Uncertainties - In February 2013, the Venezuelan government devalued its currency from 4.30 to 6.30 Bolivars per U.S. Dollar for all goods and services. In connection with this devaluation, we recorded a charge of $1.41 million in the fourth quarter of fiscal year 2013. In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism known as SICAD 1. SICAD 1 was made available to certain companies that operate in designated industry sectors. At May 31, 2014, the SICAD 1 rate was 10 Bolivars to the U.S. Dollar. In early 2014, the Venezuelan government created a National Center of Foreign Commerce (“CENCOEX”) to control the multiple currency exchange rate mechanisms that may be available for a company to exchange funds. CENCOEX was granted the authority to determine the sectors that will be allowed to buy U.S. dollars in SICAD auctions, and subsequently introduced a more accessible market-based, SICAD 2 daily auction exchange market. At May 31, 2014, the SICAD 2 rate was approximately 50 Bolivars to the U.S. Dollar.

Table of Contents

Despite the recent announcements made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available for particular types of transactions. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD 1 or SICAD 2 auctions, nor do we intend to. These auctions do not eliminate or change the official rate of 6.30 Bolivars per U.S. Dollar.

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

For the fiscal quarters ended May 31, 2014 and 2013, sales in Venezuela represented approximately 0.6 and 0.5 percent, respectively, of the Company’s consolidated net sales revenue. At May 31, 2014, we had a U.S. Dollar based net investment in our Venezuelan business of $7.84 million, consisting almost entirely of working capital.

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, nor can we assess what impacts, if any, such events may have on our Venezuelan business. We will continue to closely monitor the applicability and viability of the various exchange mechanisms. A future devaluation, if any, would result in additional charges against income, and these charges could be material.

Interest Rate Risk - Interest on our outstanding debt as of May 31, 2014 is both floating and fixed. Fixed rates are in place on $80 million of Senior Notes at 3.90 percent, while floating rates are in place on the balance of all other debt outstanding, which totaled $345.71 million as of May 31, 2014. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and MBFC Loan. The floating rate $75 million Senior Notes due June 2014 reset as described in Note 9 and have been effectively converted to fixed rate debt using an interest rate swap (the “swap”). As of May 31, 2014, the swap converted the total aggregate notional principal from floating interest rate payments to fixed interest rate payments at 6.01 percent. In the swap transaction, we maintain contracts to pay fixed rates of interest on an aggregate notional principal at a rate of 5.11 percent, while simultaneously receiving floating rate interest payments set at 0.23 percent as of May 31, 2014 on the same notional amounts. The fixed rate side of the swap did not change over its life. The floating rate payments reset quarterly based on three month LIBOR. The resets were concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. The swap was 100 percent effective. As of June 30, 2014, the swap ended concurrent with the repayment at maturity of $75 million of principal on the related Senior Notes.

Table of Contents

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

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

May 31, 2014

Prepaid

Accrued

Expenses

Final

and Other

Settlement

Notional

Current

Designated as hedging instruments

Hedge Type

Date

Amount

Assets

Liabilities

Foreign currency contracts - sell Euro

Cash flow

10/2014

€

3,350

Foreign currency contracts - sell Pounds

Cash flow

2/2015

4,500

170

Interest rate swap

Cash flow

6/2014

75,000

301

Total fair value

471

February 28, 2014

Prepaid

Accrued

Expenses

Final

and Other

Settlement

Notional

Current

Designated as hedging instruments

Hedge Type

Date

Amount

Assets

Liabilities

Foreign currency contracts - sell Euro

Cash flow

6/2014

€

2,850

Foreign currency contracts - sell Pounds

Cash flow

11/2014

4,250

280

Interest rate swap

Cash flow

6/2014

75,000

1,227

Total fair value

1,596

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

PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS

(in thousands)

	Three months ended May 31,
	Gain / (Loss)					Gain / (Loss) Reclassified
	Recognized in OCI					from Accumulated Other
	(effective portion)					Comprehensive Loss into Income
	2014		2013			Location	2014			2013

Currency contracts - cash flow hedges	$	78	$	36		SG&A	$	(166	)	$	216
Interest rate swaps - cash flow hedges	12		(3		)	Interest expense	(914		)	(914		)
Total	$	90	$	33			$	(1,080	)	$	(698	)

We expect net losses of $0.13 million associated with foreign currency contracts and $0.30 million associated with our interest rate swap, currently reported in accumulated other comprehensive loss, to be reclassified into income over the next nine months. The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle.

Table of Contents

Counterparty Credit Risk - Financial instruments, including foreign currency contracts and interest rate swaps, expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk by only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. Although our theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote.

Note 13 – Repurchase of Helen of Troy Common Stock

As of May 31, 2014, we were authorized by our Board of Directors to purchase up to $265.43 million of common stock in the open market or through private transactions. On March 14, 2014, t