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

 

FORM 10-Q

 

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

 

For the quarterly period ended November 30, 2015

 

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

 

Picture 1

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.)

 

 

 

Clarendon 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       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       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

 

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

 

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

 

 

 

 

Class

 

Outstanding at January 6, 2016

Common Shares, $0.10 par value, per share

 

28,286,315 shares

 

 

 

 

 

 

 


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

FORM 10Q

TABLE OF CONTENTS

PAGE

 

 

 

 

 

 

 

 

 

PART 1. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Item 2. 

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

23 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

50 

 

 

 

Item 4. 

Controls and Procedures

55 

 

 

 

PART 2. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

56 

 

 

 

Item 1A. 

Risk Factors

56 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

57 

 

 

 

Item 5. 

Other Information

58 

 

 

 

Item 6. 

Exhibits

62 

 

 

 

SIGNATURES 

63 

 

 

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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)

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28, 

 

    

2015

    

2015

Assets

 

 

 

 

 

 

Assets, current:

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,141

 

$

12,295

Receivables - principally trade, less allowances of $8,058 and $5,882

 

 

288,979

 

 

222,499

Inventory, net

 

 

339,397

 

 

293,081

Prepaid expenses and other current assets

 

 

10,075

 

 

9,715

Income taxes receivable

 

 

110

 

 

417

Deferred tax assets, net

 

 

20,688

 

 

26,753

Total assets, current

 

 

680,390

 

 

564,760

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $91,100 and $82,154

 

 

126,919

 

 

126,068

Goodwill

 

 

582,812

 

 

549,727

Other intangible assets, net of accumulated amortization of $130,991 and $111,627

 

 

384,766

 

 

398,430

Deferred tax assets, net

 

 

1,097

 

 

2,132

Other assets, net of accumulated amortization of $10,132 and $9,166

 

 

6,488

 

 

12,638

Total assets

 

$

1,782,472

 

$

1,653,755

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

 

Accounts payable, principally trade

 

$

122,584

 

$

98,564

Accrued expenses and other current liabilities

 

 

147,602

 

 

141,201

Deferred tax liabilities, net

 

 

 -

 

 

200

Long-term debt, current maturities

 

 

23,800

 

 

21,900

Total liabilities, current

 

 

293,986

 

 

261,865

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

 

450,907

 

 

411,307

Deferred tax liabilities, net

 

 

43,312

 

 

52,711

Other liabilities, noncurrent

 

 

26,333

 

 

23,307

Total liabilities

 

 

814,538

 

 

749,190

 

 

 

 

 

 

 

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; 28,284,725 and 28,488,411 shares

 

 

 

 

 

 

issued and outstanding

 

 

2,828

 

 

2,849

Additional paid in capital

 

 

197,272

 

 

179,934

Accumulated other comprehensive income (loss)

 

 

1,729

 

 

(76)

Retained earnings

 

 

766,105

 

 

721,858

Total stockholders' equity

 

 

967,934

 

 

904,565

Total liabilities and stockholders' equity

 

$

1,782,472

 

$

1,653,755

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

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Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

 

    

2015

    

2014

    

2015

    

2014

Sales revenue, net

 

$

445,503

 

$

435,674

 

$

1,159,977

 

$

1,067,401

Cost of goods sold

 

 

262,979

 

 

254,263

 

 

686,129

 

 

632,726

Gross profit

 

 

182,524

 

 

181,411

 

 

473,848

 

 

434,675

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense ("SG&A")

 

 

126,891

 

 

116,368

 

 

356,240

 

 

312,906

Asset impairment charges

 

 

 -

 

 

 -

 

 

3,000

 

 

9,000

Operating income

 

 

55,633

 

 

65,043

 

 

114,608

 

 

112,769

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income, net

 

 

142

 

 

87

 

 

233

 

 

234

Interest expense

 

 

(2,741)

 

 

(4,173)

 

 

(8,135)

 

 

(11,588)

Income before income taxes

 

 

53,034

 

 

60,957

 

 

106,706

 

 

101,415

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

3,842

 

 

9,328

 

 

17,564

 

 

14,255

Deferred

 

 

2,414

 

 

(3,748)

 

 

(2,498)

 

 

(3,454)

Net income

 

$

46,778

 

$

55,377

 

$

91,640

 

$

90,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.66

 

$

1.95

 

$

3.23

 

$

3.17

Diluted

 

$

1.63

 

$

1.92

 

$

3.17

 

$

3.12

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in

 

 

 

 

 

 

 

 

 

 

 

 

computing net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

28,129

 

 

28,414

 

 

28,361

 

 

28,630

Diluted

 

 

28,634

 

 

28,824

 

 

28,903

 

 

29,070

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

2015

 

2014

 

 

Before

 

 

 

 

Net of

 

Before

 

 

 

 

Net of

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

Income

 

$

53,034

 

$

(6,256)

 

$

46,778

 

$

60,957

 

$

(5,580)

 

$

55,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Settlements reclassified to income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Subtotal

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

1,841

 

 

(270)

 

 

1,571

 

 

301

 

 

(59)

 

 

242

Settlements reclassified to income

 

 

(263)

 

 

100

 

 

(163)

 

 

(201)

 

 

31

 

 

(170)

Subtotal

 

 

1,578

 

 

(170)

 

 

1,408

 

 

100

 

 

(28)

 

 

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

1,578

 

 

(170)

 

 

1,408

 

 

100

 

 

(28)

 

 

72

Comprehensive income

 

$

54,612

 

$

(6,426)

 

$

48,186

 

$

61,057

 

$

(5,608)

 

$

55,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

2015

 

2014

 

 

Before

 

 

 

 

Net of

 

Before

 

 

 

 

Net of

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

Income

 

$

106,706

 

$

(15,066)

 

$

91,640

 

$

101,415

 

$

(10,801)

 

$

90,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

 -

 

 

 -

 

 

 -

 

 

28

 

 

(10)

 

 

18

Settlements reclassified to income

 

 

 -

 

 

 -

 

 

 -

 

 

1,199

 

 

(420)

 

 

779

Subtotal

 

 

 -

 

 

 -

 

 

 -

 

 

1,227

 

 

(430)

 

 

797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

2,653

 

 

(480)

 

 

2,173

 

 

515

 

 

(97)

 

 

418

Settlements reclassified to income

 

 

(503)

 

 

135

 

 

(368)

 

 

15

 

 

(11)

 

 

4

Subtotal

 

 

2,150

 

 

(345)

 

 

1,805

 

 

530

 

 

(108)

 

 

422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

2,150

 

 

(345)

 

 

1,805

 

 

1,757

 

 

(538)

 

 

1,219

Comprehensive income

 

$

108,856

 

$

(15,411)

 

$

93,445

 

$

103,172

 

$

(11,339)

 

$

91,833

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

  

2015

  

2014

Cash provided (used) by operating activities:

 

 

 

 

 

 

Net income

  

$

91,640

  

$

90,614

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

  

 

 

  

 

 

Depreciation and amortization

  

 

31,946

  

 

29,075

Amortization of financing costs

  

 

869

  

 

1,457

Provision for doubtful receivables

  

 

501

  

 

417

Non-cash share-based compensation

  

 

6,146

  

 

4,539

Intangible asset impairment charges

  

 

3,000

  

 

9,000

Loss on the sale of property and equipment

  

 

66

  

 

43

Deferred income taxes and tax credits

  

 

(3,833)

  

 

(3,454)

Changes in operating capital, net of effects of acquisition of businesses:

  

 

 

  

 

 

Receivables

  

 

(66,981)

  

 

(76,555)

Inventories

  

 

(46,316)

  

 

(23,468)

Prepaid expenses and other current assets

  

 

(361)

  

 

2,946

Other assets and liabilities, net

  

 

8,251

  

 

4,638

Accounts payable

  

 

24,020

  

 

19,377

Accrued expenses and other current liabilities

  

 

22,892

  

 

(113)

Accrued income taxes

  

 

919

  

 

4,956

Net cash provided by operating activities

  

 

72,759

  

 

63,472

 

  

 

 

  

 

 

Cash provided (used) by investing activities:

  

 

 

  

 

 

Capital and intangible asset expenditures

  

 

(12,418)

  

 

(4,893)

Proceeds from the sale of property and equipment

  

 

7

 

 

 -

Payments to acquire businesses

  

 

(42,750)

  

 

(195,943)

Net cash used by investing activities

  

 

(55,161)

  

 

(200,836)

 

  

 

 

  

 

 

Cash provided (used) by financing activities:

  

 

 

  

 

 

Proceeds from line of credit

  

 

415,200

  

 

694,400

Repayment of line of credit

  

 

(371,800)

  

 

(254,400)

Repayment of long-term debt

  

 

(1,900)

  

 

(76,900)

Payment of financing costs

  

 

(19)

  

 

(2,321)

Proceeds from share issuances under share-based compensation plans, including tax benefits

  

 

10,778

  

 

5,268

Payment of tax obligations resulting from cashless share award exercises

  

 

 -

  

 

(4,569)

Payment of tax obligations resulting from cashless share settlement of severance obligation

 

 

(12,000)

 

 

 -

Payments for repurchases of common stock

  

 

(50,000)

  

 

(273,599)

Share-based compensation tax benefit

  

 

989

  

 

514

Net cash (used) provided by financing activities

  

 

(8,752)

  

 

88,393

 

  

 

 

  

 

 

Net increase (decrease) in cash and cash equivalents

  

 

8,846

  

 

(48,971)

Cash and cash equivalents, beginning balance

  

 

12,295

  

 

70,027

Cash and cash equivalents, ending balance

  

$

21,141

  

$

21,056

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

 

 

 

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

November 30, 2015

 

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 November 30, 2015 and February 28, 2015, and the results of our consolidated operations for the interim periods presented. 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, 2015, and our other reports on file with the Securities and Exchange Commission (the “SEC”).

 

In this report and the accompanying consolidated condensed financial statements and notes, unless otherwise indicated or the context suggests otherwise, 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, which comprise a segment within the Company referred to as the Health & Home segment. References to “Healthy Directions” refer to the operations of Healthy Directions, LLC and its subsidiaries, acquired on June 30, 2014, that comprise the Nutritional Supplements segment. We use product and service names in this report for identification purposes only and they may be protected in the United States and other jurisdictions by trademarks, trade names, service marks, and other intellectual property rights of the Company and other parties. 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 “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.

 

We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have four segments: Housewares, Health & Home (formerly referred to as “Healthcare / Home Environment”), Nutritional Supplements, and Beauty (formerly referred to as “Personal Care”). Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food and beverage preparation tools and appliances, gadgets, storage containers, cleaning, organization, and baby and toddler care products. The Health & Home segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems, small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, as well as other health products sold directly to consumers. Our Beauty segment 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

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presentation. These reclassifications had no effect on previously reported results of operations, working capital or stockholders’ equity.

 

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 below, 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.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement for companies to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016. The Company does not expect the provisions of ASU 2015-17 to have a material effect on its consolidated financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. ASU 2015-03 is effective for annual periods and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the provisions of ASU 2015-03 to have a material effect on its consolidated financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, issued as a new Topic, ASC Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB affirmed its proposal to defer the effective date of the standard to annual reporting periods beginning after December 15, 2017 (and interim reporting periods within those years). Accordingly, we will be required to adopt the new standard in our fiscal year 2019 and can adopt either retrospectively or as a cumulative effect adjustment as of the date of adoption. We are currently evaluating the effect this new accounting guidance may have on our consolidated results of operations, cash flows and financial position.

 

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.

 

On November 12, 2015, the Company resolved a lawsuit with its former CEO, which resulted in the payment of severance compensation due under his employment and separation agreements. The severance compensation was previously accrued and disclosed in fiscal year 2014 and was paid through the issuance of common shares of the Company. The Company also transferred ownership of a life insurance policy on the lives of its former CEO and his spouse as part of the settlement.  As a result of the transfer of the policy and other expenses incurred in connection with the settlement, the Company recorded CEO succession costs of $6.71 million ($4.64 million after tax), or $0.16 per fully diluted share, in the third quarter of fiscal year 2016. 

 

Notes 7, 10, 12, 13, and 14 to these consolidated condensed financial statements provide additional information regarding certain of our significant commitments and contingencies.

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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 November 30, 

 

Nine Months Ended November 30, 

 

 

2015

    

2014

    

2015

 

2014 (1)

Beginning balance

 

$

20,797

 

$

22,492

 

$

23,553

 

$

19,269

Additions to the accrual

 

 

17,127

 

 

16,574

 

 

43,885

 

 

46,088

Reductions of the accrual - payments and credits issued

 

 

(14,386)

 

 

(13,821)

 

 

(43,900)

 

 

(40,112)

Ending balance

 

$

23,538

 

$

25,245

 

$

23,538

 

$

25,245

(1)

Includes opening balance accrual additions totaling $3.19 million and related payments and credits issued of $1.82 million attributed to the Healthy Directions acquisition.

 

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. Dilutive securities at any given point in time may consist of outstanding stock options, issued and contingently issuable unvested restricted share units, and other performance-based share awards. Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive. See Note 15 to these consolidated condensed financial statements for more information regarding share-based payment arrangements. 

 

For the periods covered below, the basic and diluted shares are as follows:

 

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

 

 

2015

    

2014

    

2015

    

2014

Weighted average shares outstanding, basic

 

28,129

 

28,414

 

28,361

 

28,630

Incremental shares from share-based payment arrangements

 

505

 

410

 

542

 

440

Weighted average shares outstanding, diluted

 

28,634

 

28,824

 

28,903

 

29,070

 

 

 

 

 

 

 

 

 

Dilutive securities, stock options

 

505

 

643

 

553

 

686

Dilutive securities, unvested or unsettled share awards

 

269

 

278

 

292

 

267

Antidilutive securities, stock options

 

139

 

245

 

162

 

240

 

 

 

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Note 5 – Segment Information

 

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

 

THREE MONTHS ENDED

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

November 30, 2015

    

Housewares

    

Health & Home

    

Supplements

    

Beauty

    

Total

Sales revenue, net

 

$

87,816

 

$

186,418

 

$

37,492

 

$

133,777

 

$

445,503

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Operating income (2)

 

 

15,536

 

 

18,072

 

 

3,034

 

 

18,991

 

 

55,633

Capital and intangible asset expenditures

 

 

406

 

 

4,734

 

 

865

 

 

467

 

 

6,472

Depreciation and amortization

 

 

1,065

 

 

5,281

 

 

1,956

 

 

2,417

 

 

10,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

November 30, 2014

    

Housewares

    

Health & Home

    

Supplements

    

Beauty

    

Total

Sales revenue, net

 

$

85,984

 

$

176,994

 

$

38,462

 

$

134,234

 

$

435,674

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Operating income

 

 

18,275

 

 

18,694

 

 

6,214

 

 

21,860

 

 

65,043

Capital and intangible asset expenditures

 

 

233

 

 

535

 

 

211

 

 

226

 

 

1,205

Depreciation and amortization

 

 

892

 

 

5,125

 

 

2,032

 

 

2,533

 

 

10,582

 

NINE MONTHS ENDED

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

November 30, 2015

    

Housewares

    

Health & Home

    

Supplements (1)

    

Beauty

    

Total

Sales revenue, net

 

$

231,850

 

$

472,714

 

$

114,980

 

$

340,433

 

$

1,159,977

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

3,000

 

 

3,000

Operating income (2)

 

 

41,861

 

 

31,298

 

 

8,623

 

 

32,826

 

 

114,608

Capital and intangible asset expenditures

 

 

1,022

 

 

6,258

 

 

2,771

 

 

2,367

 

 

12,418

Depreciation and amortization

 

 

3,148

 

 

15,858

 

 

5,889

 

 

7,051

 

 

31,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

November 30, 2014

    

Housewares

    

Health & Home

    

Supplements (1)

    

Beauty

    

Total

Sales revenue, net

 

$

222,377

 

$

445,701

 

$

63,096

 

$

336,227

 

$

1,067,401

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

9,000

 

 

9,000

Operating income

 

 

45,201

 

 

31,919

 

 

6,324

 

 

29,325

 

 

112,769

Capital and intangible asset expenditures

 

 

1,275

 

 

2,022

 

 

388

 

 

1,208

 

 

4,893

Depreciation and amortization

 

 

2,669

 

 

15,384

 

 

3,391

 

 

7,631

 

 

29,075

(1)

Includes nine- and five-months of operations of the Nutritional Supplements segment for the nine months ending November 30, 2015 and 2014, respectively. The segment was formed upon the acquisition of Healthy Directions on June 30, 2014.

 

(2)   Operating income for the three and nine months ended November 30, 2015 includes each segment’s allocated share of CEO succession costs totaling $6.71 million. There was no comparable expense in the same periods last year.

 

We compute segment operating income based on net sales revenue, less cost of goods sold, 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 shared service and corporate overhead expenses that are allocable to the segment. In fiscal year 2016, we began making an allocation of shared service and corporate overhead costs to the Nutritional Supplements segment. For the three- and nine-months ended November 30, 2015, those allocations totaled $2.59 and $4.19 million, respectively, which includes an allocation of CEO succession costs referred to above. We do not allocate nonoperating income and expense, including interest or income taxes, to operating segments.

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Note 6 – Comprehensive Income (Loss)

 

The table below presents the changes in accumulated other comprehensive income (loss) by component and the amounts reclassified out of accumulated other comprehensive income (loss) for the 2016 fiscal year-to-date:

 

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT

(in thousands)

 

 

 

 

 

 

 

Unrealized Holding
 Gains (Losses)

on Cash Flow
Hedges (1)

Balance at February 28, 2015

 

$

(76)

Other comprehensive income before reclassification

 

 

2,653

Amounts reclassified out of accumulated other comprehensive income

 

 

(503)

Tax effects

 

 

(345)

Other Comprehensive Income (Loss)

 

 

1,805

Balance at November 30, 2015

 

$

1,729

(1)

Represents activity associated with foreign currency contracts. Balances at November 30, 2015 and February 28, 2015 include net deferred tax (expense) benefits of ($0.31) and $0.03 million, respectively.

 

 

Note 7 – Supplemental Balance Sheet Information

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

Useful Lives

 

November 30, 

 

February 28, 

 

    

(Years)

    

2015

    

2015

Land

 

 

-

 

 

$

12,800

 

$

12,800

Building and improvements

 

3

-

40

 

 

106,960

 

 

102,058

Computer, furniture and other equipment

 

3

-

15

 

 

66,992

 

 

64,464

Tools, molds and other production equipment

 

1

-

10

 

 

29,074

 

 

25,861

Construction in progress

 

 

-

 

 

 

2,193

 

 

3,039

Property and equipment, gross

 

 

 

 

 

 

218,019

 

 

208,222

Less accumulated depreciation

 

 

 

 

 

 

(91,100)

 

 

(82,154)

Property and equipment, net

 

 

 

 

 

$

126,919

 

$

126,068

 

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28, 

 

    

2015

    

2015

Accrued compensation, benefits and payroll taxes

 

$

25,732

 

$

44,382

Accrued sales returns, discounts and allowances

 

 

35,161

 

 

24,271

Accrued warranty returns

 

 

23,538

 

 

23,553

Accrued advertising

 

 

28,042

 

 

18,930

Accrued product liability, legal and professional fees

 

 

5,718

 

 

6,001

Accrued royalties

 

 

8,840

 

 

7,683

Accrued property, sales and other taxes

 

 

10,018

 

 

6,850

Derivative liabilities, current

 

 

7

 

 

240

Liability for uncertain tax positions

 

 

536

 

 

 -

Other

 

 

10,010

 

 

9,291

Total accrued expenses and other current liabilities

 

$

147,602

 

$

141,201

 

OTHER LIABILITIES, NONCURRENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28, 

 

    

2015

    

2015

Deferred compensation liability

 

$

6,962

 

$

7,091

Liability for uncertain tax positions

 

 

10,371

 

 

10,295

Other liabilities

 

 

9,000

 

 

5,921

Total other liabilities, noncurrent

 

$

26,333

 

$

23,307

 

 

 

 

 

 

Note 8 – Goodwill and Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2016 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2016. As a result of our testing of indefinite-lived trademarks, we recorded a non-cash asset impairment charge of $3.00 million ($2.66 million after tax). The charge was related to a trademark in our Beauty segment, which was written down to its 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 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 Beauty 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.

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2015

 

February 28, 2015

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

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

 

 

15,924

 

 

 -

 

 

(13,273)

 

 

2,651

 

 

15,754

 

 

 -

 

 

(12,331)

 

 

3,423

Total Housewares

 

 

257,256

 

 

 -

 

 

(13,273)

 

 

243,983

 

 

257,086

 

 

 -

 

 

(12,331)

 

 

244,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health & Home:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

284,720

 

 

 -

 

 

 -

 

 

284,720

 

 

251,758

 

 

 -

 

 

 -

 

 

251,758

Trademarks - indefinite

 

 

58,400

 

 

 -

 

 

 -

 

 

58,400

 

 

54,000

 

 

 -

 

 

 -

 

 

54,000

Licenses - finite

 

 

15,300

 

 

 -

 

 

(11,985)

 

 

3,315

 

 

15,300

 

 

 -

 

 

(9,377)

 

 

5,923

Licenses - indefinite

 

 

3,000

 

 

 -

 

 

 -

 

 

3,000

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Other intangibles - finite

 

 

116,330

 

 

 -

 

 

(52,140)

 

 

64,190

 

 

113,727

 

 

 -

 

 

(43,848)

 

 

69,879

Total Health & Home

 

 

477,750

 

 

 -

 

 

(64,125)

 

 

413,625

 

 

434,785

 

 

 -

 

 

(53,225)

 

 

381,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional Supplements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

96,609

 

 

 -

 

 

 -

 

 

96,609

 

 

96,486

 

 

 -

 

 

 -

 

 

96,486

Brand assets - indefinite

 

 

65,500

 

 

 -

 

 

 -

 

 

65,500

 

 

65,500

 

 

 -

 

 

 -

 

 

65,500

Other intangibles - finite

 

 

43,800

 

 

 -

 

 

(8,864)

 

 

34,936

 

 

43,800

 

 

 -

 

 

(4,171)

 

 

39,629

Total Nutritional Supplements

 

 

205,909

 

 

 -

 

 

(8,864)

 

 

197,045

 

 

205,786

 

 

 -

 

 

(4,171)

 

 

201,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beauty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

Trademarks - indefinite

 

 

51,754

 

 

 -

 

 

 -

 

 

51,754

 

 

54,754

 

 

 -

 

 

 -

 

 

54,754

Trademarks - finite

 

 

150

 

 

 -

 

 

(86)

 

 

64

 

 

150

 

 

 -

 

 

(82)

 

 

68

Licenses - finite

 

 

13,696

 

 

 -

 

 

(11,453)

 

 

2,243

 

 

13,696

 

 

 -

 

 

(11,216)

 

 

2,480

Licenses - indefinite

 

 

10,300

 

 

 -

 

 

 -

 

 

10,300

 

 

10,300

 

 

 -

 

 

 -

 

 

10,300

Other intangibles - finite

 

 

46,403

 

 

 -

 

 

(33,190)

 

 

13,213

 

 

47,876

 

 

 -

 

 

(30,602)

 

 

17,274

Total Beauty

 

 

204,144

 

 

(46,490)

 

 

(44,729)

 

 

112,925

 

 

208,617

 

 

(46,490)

 

 

(41,900)

 

 

120,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total goodwill and intangible assets

 

$

1,145,059

 

$

(46,490)

 

$

(130,991)

 

$

967,578

 

$

1,106,274

 

$

(46,490)

 

$

(111,627)

 

$

948,157

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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 2016 through 2021.

 

AMORTIZATION OF INTANGIBLE ASSETS

(in thousands)

 

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the three months ended

November 30, 2015

 

$

6,861

November 30, 2014

 

$

6,853

 

 

 

 

Aggregate Amortization Expense

 

 

 

For the nine months ended

November 30, 2015

 

$

20,883

November 30, 2014

 

$

18,427

 

 

 

 

 

 

Estimated Amortization Expense

 

 

 

For the fiscal years ended

 

 

 

 

February 2016

 

$

27,734

February 2017

 

$

26,511

February 2018

 

$

23,166

February 2019

 

$

18,555

February 2020

 

$

17,138

February 2021

 

$

14,727

 

 

 

 

 

 

Note 9 – Acquisitions

 

Vicks VapoSteam Acquisition - On March 31, 2015, the Company announced the acquisition of the Vicks VapoSteam U.S. liquid inhalant business from The Procter & Gamble Company (“P&G”), which includes a fully paid-up license of P&G’s Vicks VapoSteam trademarks. In a related transaction, the Company acquired a fully paid-up U.S. license of P&G’s Vicks VapoPad trademarks for scent pads. The vast majority of Vicks VapoSteam and VapoPads are used in Vicks humidifiers, vaporizers and other health care devices already marketed by the Company. The aggregate purchase price for the two transactions was approximately $42.75 million financed primarily with borrowings under the Credit Agreement, as defined in Note 10 to these consolidated condensed financial statements. VapoSteam operations are reported in the Health & Home segment.

 

We have completed our analysis of the economic lives of the assets acquired and determined the appropriate allocation of the initial purchase price; however allocated balances are preliminary and may be subject to additional adjustment as we continue to integrate the acquisition. We assigned $7.40 million to trademarks with indefinite economic lives. We assigned $1.20 million to customer relationships and $1.20 million to product formulations and will amortize these assets over expected lives of 19.5 and 20.0 years, respectively. For the customer relationships, we used historical attrition rates to assign an expected life. For product formulations, we used our best estimate of the remaining product life. The trademarks are considered to have indefinite lives that are not subject to amortization. Substantially all the remaining balance of the purchase price was assigned to goodwill, which is expected to be deductible for income tax purposes.The fair values of the intangible assets were estimated by applying income and market approaches. These fair value measurements were based on significant inputs that are not observable in the market. Therefore, they represent Level 3 measurements.

 

Healthy Directions Acquisition - On June 30, 2014, we completed the acquisition of Healthy Directions, LLC and its subsidiaries (“Healthy Directions”), a leader in the premium branded vitamin, mineral and supplement market, for a total cash purchase price of $195.94 million. The purchase price was funded primarily with borrowings under the Credit Agreement. Significant assets acquired include inventory, property and equipment, customer relationships, brand assets, and goodwill. Acquisition-related expenses incurred during fiscal year 2015

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were approximately $3.61 million ($2.31 million after tax). Healthy Directions reports its operations as the Nutritional Supplements segment.

 

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The goodwill recognized is expected to be deductible for income tax purposes. As of February 28, 2015, we completed our analysis of the economic lives of all the assets acquired and determined the appropriate initial allocation of the purchase price. We assigned the acquired brand assets an indefinite economic life and are amortizing the customer relationships over an expected weighted average life of approximately seven years. For the customer relationships, we used historical attrition rates to assign an expected life. Since the brand assets acquired are considered to have an indefinite life, they are not subject to amortization.

 

The following schedule presents the net assets of Healthy Directions as recognized at the acquisition date.

 

HEALTHY DIRECTIONS - NET ASSETS RECORDED UPON ACQUISITION AT JUNE 30, 2014

(in thousands)

 

 

 

 

 

Assets:

    

 

 

Receivables

 

$

257

Inventory

 

 

6,226

Prepaid expenses and other current assets

 

 

1,875

Property and equipment

 

 

5,962

Goodwill

 

 

95,308

Brand assets - indefinite

 

 

65,500

Customer relationships - definite

 

 

43,800

Subtotal - assets

 

 

218,928

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

 

6,479

Accrued expenses

 

 

13,964

Other long-term liabilities

 

 

2,542

Subtotal - liabilities

 

 

22,985

Net assets recorded

 

$

195,943

 

The fair values of the above assets acquired and liabilities assumed were estimated by applying income and market approaches. These fair value measurements are based on significant inputs that are not observable in the market. Therefore, they represent Level 3 measurements. Key assumptions included various discount rates based upon a 14.6 percent weighted average cost of capital, a royalty rate of 5 percent used in the determination of brand assets, and a customer attrition rate of 14 percent per year used in the determination of customer relationship values.

 

 

 

 

 

 

 

 

 

 

 

 

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Note 10 – Debt

We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $650 million as of November 30, 2015. The commitment under the Credit Agreement terminates on January 16, 2020. 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 November 30, 2015, the outstanding revolving loan principal balance was $380.90 million and there were $1.50 million of open letters of credit outstanding against the Credit Agreement. For the fiscal quarter and year-to-date ended November 30, 2015, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.44 to 3.75 percent and 1.43 to 4.00 percent, respectively. For the fiscal quarter and year-to-date ended November 30, 2014, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.90 to 4.38 percent for both periods. As of November 30, 2015, the amount available for borrowings under the Credit Agreement was $267.60 million. However, as of November 30, 2015, our debt agreements effectively limited our ability to incur more than $254.95 million of additional debt from all sources, including the Credit Agreement.

 

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

 

LONG-TERM DEBT

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original

 

 

 

 

 

 

 

 

 

Date

 

Interest

 

 

 

November 30, 

 

February 28, 

 

    

Borrowed

    

Rates

    

Matures

    

2015

    

2015

$37.61 million unsecured loan with the Mississippi Business Finance Corporation (the "MBFC Loan"), interest is set and payable quarterly at a Base Rate, plus a margin of up to 1.00%, or applicable LIBOR plus a margin of up to 2.00%, as determined by the interest rate elected and the Leverage Ratio. Loan subject to holder's call on or after March 1, 2018. Loan can be prepaid without penalty. (1)

 

03/13

 

Floating

    

03/23

 

$

33,807

 

$

35,707

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

 

01/11

 

3.90

%  

01/18

 

 

60,000

 

 

60,000

Credit Agreement

 

01/15

 

Floating

 

01/20

 

 

380,900

 

 

337,500

Total long-term debt

 

 

 

 

 

 

 

 

474,707

 

 

433,207

Less current maturities of long-term debt

 

 

 

 

 

 

 

 

(23,800)

 

 

(21,900)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

$

450,907

 

$

411,307

(1) A $1.90 million principal payment was made on March 1, 2015. The remaining loan balance is payable as follows: $3.80 million on March 1, 2016; $5.70 million on March 1, 2017; $1.90 million annually on March 1, 2018 through 2022; and $14.81 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

 

The fair market value of the fixed rate debt at November 30, 2015, computed using a discounted cash flow analysis and comparable market rates was $61.18 million, compared to the $60 million book value and represents a Level 2 liability. Our other long-term debt has floating interest rates, and its book value approximates its fair value at November 30, 2015.

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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. We were in compliance with the terms of these agreements as of November 30, 2015.

 

Note 11 – Income Taxes

 

Income tax expense for the fiscal quarter and year-to-date ended November 30, 2015 was 11.8 and 14.1 percent of income before income taxes, respectively, compared to 9.2 and 10.7 percent, respectively, for the same periods last year. The year-over-year increase in our effective tax rates was due to shifts in the mix of taxable income in our various tax jurisdictions and a $7 million pre-tax gain from the amendment of a trademark license agreement in the same period last year, which reduced the effective tax rate by 1.2 and 0.8 percentage points for the fiscal quarter and year-to-date ended November 30, 2014, respectively. Income tax expense for the fiscal quarter and year-to-date periods ended November 30, 2015 includes a tax benefit of $2.44 million due to the finalization of certain tax returns, mostly offset by tax expense of $1.98 million related to the provision for an uncertain tax position in a foreign jurisdiction. The year-to-date comparison of effective tax rates was also impacted by a $2.07 million tax benefit recorded in the same period last year related to the resolution of an uncertain tax position.

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Note 12 – 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)

 

 

 

 

 

 

 

 

Fair Values at

 

 

November 30, 2015

 

    

(Level 2) (1)

Assets:

 

 

 

Money market accounts

 

$

356

Foreign currency contracts

 

 

2,369

Total assets

 

$

2,725

 

 

 

 

Liabilities:

 

 

 

Fixed rate debt (2)

 

$

61,179

Floating rate debt

 

 

414,707

Foreign currency contracts

 

 

7

Total liabilities

 

$

475,893

 

 

 

 

 

 

 

 

Fair Values at

 

 

February 28, 2015

 

    

(Level 2) (1)

Assets:

    

 

 

Money market accounts

 

$

1,692

Foreign currency contracts

 

 

129

Total assets

 

$

1,821

 

 

 

 

Liabilities:

    

 

 

Fixed rate debt (2)

 

$

62,006

Floating rate debt

 

 

373,207

Foreign currency contracts

 

 

240

Total liabilities

 

$

435,453

(1)

Our financial assets and liabilities are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable.

 

(2)  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 the 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 2 items.

 

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of their fair market value requires the use of discount rates based upon current market rates of interest for debt with comparable terms. These discount rates are significant other observable market inputs. The fair market value of the fixed rate debt was computed using a discounted cash flow analysis and discount rates of 2.06 percent at November 30, 2015 and 2.05 percent at February 28, 2015. All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

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We use derivatives for hedging purposes. As of November 30, 2015, our derivatives consist of foreign currency contracts and a cross-currency debt swap. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair value hierarchy. See Notes 6, 7 and 13 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, 2015, we recorded a non-cash asset impairment charge of $3.00 million ($2.66 million after tax). The charge related to a trademark in our Beauty segment, which was written down to its estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

Note 13 – Financial Instruments and Risk Management

 

Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the fiscal quarter and year-to-date periods ended November 30, 2015, approximately 16 and 15 percent, respectively, of our net sales revenue was in foreign currencies. During both the fiscal quarter and year-to-date periods ended November 30, 2014, 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, and Venezuelan Bolivars. We make most of our inventory purchases from the Far East and primarily 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 of the balance sheet are recognized in SG&A. For the fiscal quarter and year-to-date ended November 30, 2015, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of ($0.44) and ($2.54) million, respectively, in SG&A, and $0.27 and $0.33 million, respectively, in income tax expense. For the fiscal quarter and year-to-date ended November 30, 2014, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges, of ($2.21) and ($3.34) million, respectively, in SG&A and $0.18 and $0.28 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 and mark-to-market derivatives 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.

 

Chinese Renminbi Currency Exchange Uncertainties - A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2015 and through the end of our first quarter in fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During the second quarter of fiscal year 2016, the Chinese Renminbi devalued by approximately 4.4 percent against the U.S. Dollar. During the third quarter of fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. If China’s currency continues to fluctuate against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. Accordingly, there can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.

 

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. Since that time,

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Venezuela has undergone numerous changes and additions to its currency exchange regimes, but has not eliminated or changed the official rate of 6.30 Bolivars per U.S. Dollar.

 

In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism now known as SICAD, which was made available to certain companies that operate in designated industries. SICAD is being used in limited circumstances, which we believe preclude us from accessing such rates. At November 30, 2015, the SICAD rate was 13.50 Bolivars to the U.S. Dollar.

 

In February 2015, the Venezuelan government unveiled its latest foreign exchange mechanism known as SIMADI, which is the lowest rate in its current three-tier foreign exchange system. SIMADI is a somewhat less restrictive auction system whose value is determined by market forces. We believe a number of circumstances preclude us from accessing SIMADI. At November 30, 2015, the SIMADI rate was approximately 200 Bolivars to the U.S. Dollar.

 

Despite the recent changes made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available to the Company. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD or SIMADI mechanisms, nor do we intend to do so.

 

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 or SIMADI. 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 November 30, 2015 and 2014, sales in Venezuela represented approximately

1.6 and 0.9 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal year-to-date periods ended November 30, 2015 and 2014, sales in Venezuela represented approximately 1.5 and 0.8 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal quarters ended November 30, 2015 and 2014, operating income in Venezuela was approximately $3.12 and $1.19 million, respectively. For the fiscal year-to-date periods ended November 30, 2015 and 2014, operating income in Venezuela was approximately $6.44 and $2.50 million, respectively. At November 30, 2015, we had a U.S. Dollar based net investment in our Venezuelan business of $16.49 million, consisting almost entirely of working capital. A devaluation in the Venezuela official exchange rate could have a material adverse impact on the reported U.S. Dollar value of this investment and the future profitability of our business there.    

 

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict. We cannot assess impacts, if any, such events may have on our Venezuelan business. We continue to closely monitor the applicability and viability of the various exchange mechanisms. 

 

Interest Rate Risk – Interest on our outstanding debt as of November 30, 2015 is both floating and fixed. Fixed rates are in place on $60 million of 3.90% Senior Notes due January 2018, while floating rates are in place on the balance of all other debt outstanding, which totaled $414.71 million as of November 30, 2015. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and the MBFC Loan.

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The fair values of our derivative instruments are as follows:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2015

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

Derivatives designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

Foreign currency contracts - sell Canadian Dollars

 

Cash flow

 

8/2016

 

$

8,250

 

$

387

 

$

 -

 

$

 -

Foreign currency contracts - sell Euro

 

Cash flow

 

2/2017

 

23,250

 

 

1,511

 

 

147

 

 

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

2/2016

 

£

3,000

 

 

-   

 

 

 -

 

 

7

Subtotal

 

 

 

 

 

 

 

 

 

1,898

 

 

147

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated under hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - cross-currency debt swap

 

(1)

 

1/2018

 

$

5,000

 

 

-   

 

 

324

 

 

 -

Total fair value

 

 

 

 

 

 

 

 

$

1,898

 

$

471

 

$

7

(1)   During the fiscal quarter ended November 30, 2015 we entered into a foreign currency contract referred to above as a  “cross-currency debt swap”, which in effect adjusts the currency denomination of $5 million of our 3.90% Senior Notes due January 2018 to the Euro, creating an economic hedge against currency movements. On this contract, we have not elected hedge accounting.

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2015

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

Derivatives designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

Foreign currency contracts - sell Euro

 

Cash flow

 

1/2016

 

10,000

 

$

129

 

$

 -

 

$

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

2/2016

 

£

6,900

 

 

 -

 

 

-   

 

 

240

Total fair value

 

 

 

 

 

 

 

 

$

129

 

$

 -

 

$

240

 

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 November 30, 

 

 

Gain / (Loss)

 

Gain / (Loss) Reclassified

 

 

 

 

Recognized in OCI

 

from Accumulated Other

 

Gain / (Loss) Recognized

 

 

(effective portion)

 

Comprehensive Income (Loss) into Income

 

As Income

 

 

2015

 

2014

    

Location

 

2015

    

2014

 

Location

 

2015

    

2014

Currency contracts - cash flow hedges

 

$

1,841

 

$

301

 

SG&A

 

$

263

 

$

201

 

 

 

$

 -

 

$

 -

Interest rate swaps - cash flow hedges

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

Currency contracts - cross-currency debt swaps

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

SG&A

 

 

324

 

 

 -

Total

 

$

1,841

 

$

301

 

 

 

$

263

 

$

201

 

 

 

$

324

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

Gain / (Loss)

 

Gain / (Loss) Reclassified

 

 

 

 

Recognized in OCI

 

from Accumulated Other

 

Gain / (Loss) Recognized

 

 

(effective portion)

 

Comprehensive Income (Loss) into Income

 

As Income

 

    

2015

 

2014

    

Location

 

2015

    

2014

 

Location

 

2015

    

2014

Currency contracts - cash flow hedges

 

$

2,653

 

$

515

 

SG&A

 

$

503

 

$

(15)

 

 

 

$

 -

 

$

 -

Interest rate swaps - cash flow hedges

 

 

 -

 

 

28

 

Interest expense

 

 

 -

 

 

(1,199)

 

 

 

 

 -

 

 

 -

Currency contracts - cross-currency debt swaps

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

SG&A

 

 

324

 

 

 -

Total

 

$

2,653

 

$

543

 

 

 

$

503

 

$

(1,214)

 

 

 

$

324

 

$

 -

 

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We expect net gains of $1.89 million associated with foreign currency contracts currently reported in accumulated other comprehensive income, to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates change and the underlying contracts settle.

 

Counterparty Credit Risk - Financial instruments, including foreign currency contracts, 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 losses is remote.

 

Note 14 – Repurchase of Helen of Troy Common Stock

 

As of November 30, 2015, we were authorized by our Board of Directors to purchase up to $209.02 million of common stock in the open market or through private transactions. Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all plan participants. In a net 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. These transactions are accounted for by the Company as a purchase and retirement of shares and are included in the table below as common stock received in connection with share-based compensation.

 

The following table summarizes our share repurchase activity for the periods covered below:

 

SHARE REPURCHASES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

 

 

    

2015

    

2014

 

2015

    

2014

 

Common stock repurchased on the open market or through tender offer

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

 

 -

 

 

 -

 

 

556,591

 

 

4,102,143

(2)

Aggregate value of shares (in thousands)

 

$

 -

 

$

 -

 

$

50,000

 

$

273,599

 

Average price per share

 

$

 -

 

$

 -

 

$

89.83

 

$

66.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock received in connection with share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

 

116,012

(1)

 

 -

 

 

117,294

 

 

70,079

(3)

Aggregate value of shares (in thousands)

 

$

6,292

(1)

$

 -

 

$

6,411

 

$

4,686

 

Average price per share

 

$

54.24

(1)

$

 -

 

$

54.66

 

$

66.87

 


(1)

On November 17, 2015, in connection with the settlement of the lawsuit previously discussed in Note 3 to the accompanying consolidated condensed financial statements, the Company issued 276,548 shares of common stock as payment of separation compensation due to our former CEO under his employment and separation agreements. Our former CEO tendered 116,012 shares back to the Company as payment for related federal tax obligations. Under the terms of the settlement, employment and separation agreements, the number of shares issued and tendered was computed based upon a value of $54.24 per share. This was the fair value of the shares on September 4, 2014, the date the compensation payment would have been made, if payment had not been delayed by the associated dispute. The Company previously accrued and disclosed the separation compensation in fiscal year 2014.

(2)

Includes a modified “Dutch auction” tender offer completed on March 14, 2014, resulting in the repurchase of 3,693,816 shares of our outstanding common stock at a total cost of $247.83 million, including tender offer transaction-related costs.

(3)

Includes 68,086 shares of common stock having a market value of $67.10 per share, or $4.57 million in the aggregate, which were tendered by our former CEO as payment for related federal tax obligations arising from the vesting and settlement of performance-based restricted stock units and restricted stock awards. 

 

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Note 15 – Share-Based Compensation Plans

 

We have share-based awards outstanding under several share-based compensation plans. During the fiscal quarter and year-to-date periods ended November 30, 2015, the Company had the following share-based compensation activity:

 

·

We granted options to purchase 4,500 and 167,000 shares of common stock, respectively, to certain officers and employees. For the fiscal year-to-date, the fair values of these options were estimated using the Black-Scholes option pricing model to estimate fair values ranging from $24.34 to $31.41 for grants with terms of four and five years. The following assumptions were used for the grants issued during the fiscal year-to-date: expected lives ranging from 4.05 to 4.35 years; risk-free interest rates ranging from 0.86 to 1.46 percent; zero dividend yield; and expected volatilities ranging from 36.77 to 39.72 percent.

 

·

We issued 1,498 and 4,459 restricted shares, respectively, to non-employee Board members with total grant date fair values of $0.12 and $0.37 million, respectively, and average share prices of $82.04 and $82.64, respectively.

 

·

During the fiscal quarter ended May 31, 2015, we issued 2,000 shares of common stock to our CEO at a fair value of $89.12 per share.

 

·

Employees exercised stock options to purchase 29,602 and 175,056 shares of common stock, respectively.

 

·

During the fiscal quarter ended August 31, 2015, employees purchased 12,155 shares of common stock for $0.79 million through our employee stock purchase plan. 

 

We recorded the following share-based compensation expense in SG&A for the periods covered below:

 

SHARE-BASED PAYMENT EXPENSE

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

 

 

2015

    

2014

 

2015

    

2014

Stock options

    

$

718

    

$

869

 

$

2,055

    

$

2,483

Directors stock compensation

 

 

175

 

 

175

 

 

525

 

 

641

Performance based and other stock awards

 

 

1,368

 

 

336

 

 

3,500

 

 

1,441

Employee stock purchase plan

 

 

 -

 

 

 -

 

 

223

 

 

167

Share-based payment expense

 

 

2,261

 

 

1,380

 

 

6,303

 

 

4,732

Less income tax benefits

 

 

(396)

 

 

(141)

 

 

(989)

 

 

(514)

Share-based payment expense, net of income tax benefits

 

$

1,865

 

$

1,239

 

$

5,314

 

$

4,218

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share impact of share based payment expense:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.04

 

$

0.19

 

$

0.15

Diluted

 

$

0.07

 

$

0.04

 

$

0.18

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 16 – Subsequent Event

 

On January 7, 2016, the Company entered into an Amended and Restated Employment Agreement with Julien Mininberg, the Company’s CEO. The new agreement, among other things, extends the term of Mr. Mininberg’s employment from March 1, 2016 through February 28, 2019.

 

 

 

 

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This management’s discussion and analysis (“MD&A”) contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in Part I, Item 3.“Quantitative and Qualitative Disclosures about Market Risk” and “Information Regarding Forward-Looking Statements” in this report and “Risk Factors” in the Company’s most recent annual report on Form 10-K and its other filings with the Securities and Exchange Commission (the “SEC”). This discussion should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1. of this report.

 

Throughout this MD&A, we refer to certain measures used by management to evaluate financial performance. We also may refer to a number of financial measures that are not defined under GAAP, but have corresponding GAAP-based measures. Where non-GAAP measures appear, we provide tables reconciling these to their corresponding GAAP-based measures and make reference to a discussion of their use. We believe these measures provide investors with important information that is useful in understanding our business results and trends. Please see “Explanation of Certain Terms and Measures Used in MD&A” beginning on page 48 for more information on the use and calculation of certain GAAP-based and non-GAAP financial measures.

 

OVERVIEW

 

We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We operate our business under four segments: Housewares, Health & Home (formerly referred to as “Healthcare / Home Environment”), Nutritional Supplements, and Beauty (formerly referred to as “Personal Care”). Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food and beverage preparation tools and appliances, gadgets, storage containers, cleaning, organization, and baby and toddler care products. The Health & Home segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems, small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, as well as other health products sold directly to consumers. Our Beauty segment 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.

 

The Nutritional Supplements segment sells directly to consumers. Our other segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores. In addition, the Beauty segment sells extensively through beauty supply retailers and wholesalers, and the Health & Home 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 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.

 

Our business is dependent upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy, as approximately 79 percent of our fiscal year 2015 net sales revenue was from U.S. shipments. We believe that domestic macroeconomic conditions continue to improve the prospects for our business. However, we believe consumer sentiment remains cautious.  Consequently, we expect the current holiday retail season to show moderate domestic growth when compared to the prior year, with traditional retailers, our primary sales channel, garnering less of the share of growth and internet channels

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continuing to grow in mid to high single digits, year-over-year. Internationally, the strength of the U.S. Dollar continued to have a negative impact by lowering reported U.S. Dollar consolidated net sales revenue by $8.78 and $25.13 million, respectively, during the fiscal quarter and year-to-date periods ended November 30, 2015, compared to the same periods last year. In addition, Eurozone, and to some extent Latin America, retail economies continue to underperform relative to the U.S. While Chinese currency devaluations may lower product material costs over time for the goods we source from China, we believe there is a  possibility that local commodity and labor inflation could offset any product cost decreases arising from these or any future Chinese currency devaluations.

 

We continue to believe that the growth in the internet as a sales channel is reducing market share in the traditional “brick and mortar” channels. We believe it will become increasingly important to leverage our domestic distribution capabilities to meet the logistical challenge of higher frequency, smaller order size shipments. We also believe our acquisition of Healthy Directions has brought additional internet and direct-to-consumer expertise to our Company, which we hope will provide us with future operational scale to further develop the internet channel across other product lines.

 

Significant Recent Development 

 

·

On November 12, 2015, the Company settled a lawsuit with its former CEO, which resulted in the payment of severance compensation due under his employment and separation agreements. The severance compensation was previously accrued and disclosed in fiscal year 2014 and was paid through the issuance of 276,548 common shares of the Company on November 17, 2015. Our former CEO tendered 116,012 shares back to the Company as payment for related federal income tax withholding obligations. The shares issued and tendered were valued at the September 4, 2014 closing price of $54.24, which was the date that the payment would have been made under the employment and separation agreements, if payment had not been delayed by the dispute. The Company also transferred ownership of a life insurance policy on the lives of its former CEO and his spouse as part of the settlement. As a result of the transfer of the policy and other expenses incurred in connection with the settlement, the Company recorded CEO succession costs of $6.71 million ($4.64 million after tax), or $0.16 per fully diluted share, in the third quarter of fiscal year 2016.

. 

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Financial Performance Highlights

 

Consolidated net sales revenue for the fiscal quarter and year-to-date periods ended November 30, 2015 increased $9.83 and $92.58 million, or 2.3 and 8.7 percent, respectively to $445.50 and $1,159.98 million, respectively, compared to $435.67 and $1,067.40 million, respectively, for the same periods last year. Core business net sales revenue increased $6.91 and $35.32 million, or 1.6 and 3.3 percent, for the fiscal quarter and year-to-date periods ended November 30, 2015, respectively, compared to the same periods last year. Net sales revenue for the fiscal quarter and year-to-date periods ended November 30, 2015 includes the unfavorable impact of net foreign exchange fluctuations of $8.78 and $25.13 million, respectively, compared to the same periods last year, most of which impacted the Health & Home and Beauty segments. Net sales revenue in our Housewares segment increased $1.83 and $9.47 million for the fiscal quarter and year-to-date periods ended November 30, 2015 or 2.1 and 4.3 percent, respectively, compared to the same periods last year. Net sales revenue in our Health & Home segment increased $9.42 and $27.01 million for the fiscal quarter and year-to-date periods ended November 30, 2015, or 5.3 and 6.1 percent, respectively, compared to the same periods last year. Net sales revenue in our Nutritional Supplements segment decreased $0.97 million, or 2.5 percent, for the fiscal quarter ended November 30, 2015, compared to the same period last year. The fiscal quarter ended November 30, 2015 was the Nutritional Supplement segment’s first full fiscal quarter of comparative operating results. Accordingly, no comparable information is provided on a year-to-date basis. The Nutritional Supplements segment contributed net sales revenue of $37.49 and $114.98 million for the fiscal quarter and year-to-date periods ended November 30, 2015, respectively. Net sales revenue in our Beauty segment decreased $0.46 million and increased $4.21 million for the fiscal quarter and year-to-date periods ended November 30, 2015, respectively, for a decrease of 0.3 percent and an increase of 1.3 percent, respectively, compared to the same periods last year.

 

In addition to our net sales revenue performance discussed above, key results for the fiscal quarter and year-to-date ended November 30, 2015 include the following:

 

·

Consolidated gross profit margin decreased 0.6 percentage points to 41.0 percent for the fiscal quarter ended November 30, 2015, compared to 41.6 percent for the same period last year. Consolidated gross profit margin increased 0.1 percentage points to 40.8 percent for the fiscal year-to-date ended November 30, 2015, compared to 40.7 percent for the same period last year.

 

·

Our SG&A ratio increased 1.8 percentage points to 28.5 percent for the fiscal quarter ended November 30, 2015 compared to 26.7 percent for the same period last year. Our SG&A ratio increased 1.4 percentage points to 30.7 percent for the fiscal year-to-date ended November 30, 2015, compared to 29.3 percent for the same period last year.

 

·

Operating income was $55.63 and $114.61 million, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $65.04 and $112.77 million for the same periods last year. Operating income for the year-to-date period ended November 30, 2015 includes non-cash intangible asset impairment charges of $3.00 million, compared to $9.00 million for the same period last year. Operating income for the fiscal quarter and year-to-date ended November 30, 2015 includes CEO succession costs of $6.71 million, with no comparable expense in the same periods last year. 

 

·

Adjusted operating margin decreased 0.8 percentage points to 16.0 percent for the fiscal quarter ended November 30, 2015, compared to 16.8 percent for the same period last year. Adjusted operating margin decreased 0.9 percentage points to 13.0 percent for the year-to-date ended November 30, 2015, compared to 13.9 percent for the same period last year.

 

·

Income tax expense was $6.26 and $15.07 million, or 11.8 and 14.1 percent of income before taxes, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $5.58 and $10.80 million, or 9.2 and 10.7 percent of income before taxes, respectively, for the same periods last year.

 

·

Net income was $46.78 and $91.64 million, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $55.38 and $90.61 million, respectively, for the same periods last year.

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Diluted earnings per share was $1.63 and $3.17, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $1.92 and $3.12, respectively, for the same periods last year.

 

·

Adjusted income was $59.17 and $122.21 million, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $62.56 and $121.87 million, respectively, for the same periods last year. Our adjusted diluted EPS was $2.07 and $4.23, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015, compared to $2.17 and $4.19, respectively, for the same periods last year.

 

Adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS are non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. These measures are discussed further, and reconciled to their applicable GAAP-based measures on pages 32 through 34 for the fiscal quarter and 39 through 42 for the fiscal year-to-date period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 year-over-year percentage change and as a percentage of net sales revenue. We will refer to this table in the discussion of results of operations which follows:

 

SELECTED OPERATING DATA (1) (2)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

 

  

2015

  

2014

  

$ Change

 

% Change

 

 

2015

 

2014

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

$

87,816

 

$

85,984

 

$

1,832

 

2.1

%

 

19.7

%

19.7

%

Health & Home

 

 

186,418

 

 

176,994

 

 

9,424

 

5.3

%

 

41.8

%

40.6

%

Nutritional Supplements

 

 

37,492

 

 

38,462

 

 

(970)

 

(2.5)

%

 

8.4

%

8.8

%

Beauty

 

 

133,777

 

 

134,234

 

 

(457)

 

(0.3)

%

 

30.0

%

30.8

%

Total sales revenue, net

 

 

445,503

 

 

435,674

 

 

9,829

 

2.3

%

 

100.0

%

100.0

%

Cost of goods sold

 

 

262,979

 

 

254,263

 

 

8,716

 

3.4

%

 

59.0

%

58.4

%

Gross profit

 

 

182,524

 

 

181,411

 

 

1,113

 

0.6

%

 

41.0

%

41.6

%

Selling, general and administrative expense

 

 

126,891

 

 

116,368

 

 

10,523

 

9.0

%

 

28.5

%

26.7

%

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

0.0

%

 

0.0

%

0.0

%

Operating income

 

 

55,633

 

 

65,043

 

 

(9,410)

 

(14.5)

%

 

12.5

%

14.9

%

Nonoperating income, net

 

 

142

 

 

87

 

 

55

 

63.2

%

 

0.0

%

0.0

%

Interest expense

 

 

(2,741)

 

 

(4,173)

 

 

1,432

 

(34.3)

%

 

(0.6)

%

(1.0)

%

Total other expense

 

 

(2,599)

 

 

(4,086)

 

 

1,487

 

(36.4)

%

 

(0.6)

%

(0.9)

%

Income before income taxes

 

 

53,034

 

 

60,957

 

 

(7,923)

 

(13.0)

%

 

11.9

%

14.0

%

Income tax expense

 

 

6,256

 

 

5,580

 

 

676

 

12.1

%

 

1.4

%

1.3

%

Net income

 

$

46,778

 

$

55,377

 

$

(8,599)

 

(15.5)

%

 

10.5

%

12.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

 

  

2015

  

2014

  

$ Change

 

% Change

 

 

2015

 

2014

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

 

$

231,850

 

$

222,377

 

$

9,473

 

4.3

%

 

20.0

%

20.8

%

Health & Home

 

 

472,714

 

 

445,701

 

 

27,013

 

6.1

%

 

40.8

%

41.8

%

Nutritional Supplements

 

 

114,980

 

 

63,096

 

 

51,884

 

*

 

 

9.9

%

5.9

%

Beauty

 

 

340,433

 

 

336,227

 

 

4,206

 

1.3

%

 

29.3

%

31.5

%

Total sales revenue, net

 

 

1,159,977

 

 

1,067,401

 

 

92,576

 

8.7

%

 

100.0

%

100.0

%

Cost of goods sold

 

 

686,129

 

 

632,726

 

 

53,403

 

8.4

%

 

59.2

%

59.3

%

Gross profit

 

 

473,848

 

 

434,675

 

 

39,173

 

9.0

%

 

40.8

%

40.7

%

Selling, general and administrative expense

 

 

356,240

 

 

312,906

 

 

43,334

 

13.8

%

 

30.7

%

29.3

%

Asset impairment charges

 

 

3,000

 

 

9,000

 

 

(6,000)

 

(66.7)

%

 

0.3

%

0.8

%

Operating income

 

 

114,608

 

 

112,769

 

 

1,839

 

1.6

%

 

9.9

%

10.6

%

Nonoperating income, net

 

 

233

 

 

234

 

 

(1)

 

(0.4)

%

 

0.0

%

0.0

%

Interest expense

 

 

(8,135)

 

 

(11,588)

 

 

3,453

 

(29.8)

%

 

(0.7)

%

(1.1)

%

Total other expense

 

 

(7,902)

 

 

(11,354)

 

 

3,452

 

(30.4)

%

 

(0.7)

%

(1.1)

%

Income before income taxes

 

 

106,706

 

 

101,415

 

 

5,291

 

5.2

%

 

9.2

%

9.5

%

Income tax expense

 

 

15,066

 

 

10,801

 

 

4,265

 

39.5

%

 

1.3

%

1.0

%

Net income

 

$

91,640

 

$

90,614

 

$

1,026

 

1.1

%

 

7.9

%

8.5

%


(1)

Healthy Directions was acquired on June 30, 2014 and its operations are reported under the Nutritional Supplements segment. Results reported include three-months for each fiscal quarter presented, and nine- and five-months, respectively, for the year-to-date periods ended November 30, 2015 and 2014.

 

(2)

The VapoSteam business was acquired on March 31, 2015 and its operations are reported under the Health & Home segment. Results reported include three- and eight-months, respectively, for the fiscal quarter and year-to-date periods ended November 30, 2015

 

* Calculation is not meaningful or comparable.

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Third Quarter of Fiscal Year 2016 Compared to Third Quarter of Fiscal Year 2015

 

Consolidated net sales revenue:

 

Consolidated net sales revenue for the fiscal quarter ended November 30, 2015 increased $9.83 million to $445.50 million, compared to $435.67 million for the same period last year, an increase of 2.3 percent. Net sales revenue in our Housewares segment increased $1.83 million, or 2.1 percent, compared to the same period last year. Net sales revenue in our Health & Home segment increased $9.42 million, or 5.3 percent, compared to the same period last year, despite an unfavorable impact of $4.93 million from foreign currency fluctuations, or 2.8 percent, compared to the same period last year. Net sales revenue in our Nutritional Supplements segment decreased $0.97 million, or 2.5 percent, compared to the same period last year. Net sales revenue in our Beauty segment decreased $0.46 million, or 0.3 percent, compared to the same period last year. Foreign currency fluctuations reduced U.S. Dollar reported net sales revenue for the Beauty segment by $3.54 million, or 2.6 percent, compared to the same period last year.

 

Impact of acquisitions on net sales revenue:

 

Because we are an acquisition-oriented company, we provide an analysis of our net sales revenue in terms of growth from our core business and growth from acquisitions. Our most recent acquisitions of Healthy Directions and Vicks VapoSteam occurred on June 30, 2014 and March 31, 2015, respectively. For further information about these acquisitions, see Note 9 to the accompanying consolidated condensed financial statements.

 

IMPACT OF ACQUISITIONS ON NET SALES REVENUE

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,

 

 

 

2015

 

2014

 

Prior year's sales revenue, net

 

$

435,674

 

$

380,730

 

Components of sales revenue change, net

 

 

 

 

 

 

 

Core business

 

 

6,905

 

 

16,482

 

Incremental net sales revenue from acquisitions (non-core business):

 

 

 

 

 

 

 

Healthy Directions (three months in fiscal year 2015)

 

 

 -

 

 

38,462

 

Vicks VapoSteam (three months in fiscal year 2016)

 

 

2,924

 

 

 -

 

Change in sales revenue, net

 

 

9,829

 

 

54,944

 

Total sales revenue, net

 

$

445,503

 

$

435,674

 

 

 

 

 

 

 

 

 

Total net sales revenue growth

 

 

2.3

 

14.4

Core business

 

 

1.6

 

4.3

Acquisitions

 

 

0.7

 

10.1

 

Impact of foreign currencies on net sales revenue:

 

During the fiscal quarters ended November 30, 2015 and 2014, approximately 16 and 15 percent, respectively, of our net sales revenue was denominated in foreign currencies. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, and Venezuelan Bolivars. For the fiscal quarter ended November 30, 2015, the impact of net foreign currency exchange rate fluctuations negatively impacted our consolidated U.S. Dollar reported net sales revenue by approximately $8.78 million. In our Beauty segment, where our Canadian and Latin American operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $3.54 million unfavorable impact on U.S. Dollar reported net sales revenue. In our Housewares and Health & Home segments, where our European, Canadian and U.K. operations comprise a high proportion of foreign revenues, foreign exchange fluctuations had unfavorable impacts of $0.31 and $4.93 million, respectively, on U.S. Dollar reported net sales revenue.

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Segment net sales revenue: 

 

Housewares Segment - Net sales revenue in the Housewares segment for the fiscal quarter ended November 30, 2015 increased $1.83 million, or 2.1 percent, to $87.82 million, compared to $85.98 million for the same period last year. Higher average unit selling prices contributed approximately 3.7 percent to the segment’s net sales revenue growth, which was partially offset by an approximate 1.6 percent decrease in unit volumes. The increase in net sales revenue was primarily due to new product introductions, particularly the launches of small kitchen electrics and metal bakeware products, and increases in sales to internet retailers. These net sales revenue increases were partially offset by higher overall promotional program spending to support new product launches, certain promotional programs and associated placement that did not repeat and inventory reductions at a key retailer. We expect year-over-year growth to return to more normalized levels in the mid-single digits for the full fiscal year. In addition to the new launches, the segment continued to experience year-over-year gains from infant and toddler care products and its recently introduced Greensaver storage products designed to prolong the storage life of produce. We expect OXO’s longer-term growth to continue to be driven by new products, category expansion, expanded shelf space and assortments at key traditional and internet retailers, and new distribution gains in international markets.

 

Health & Home Segment - Net sales revenue in the Health & Home segment for the fiscal quarter ended November 30, 2015 increased $9.42 million, or 5.3 percent, to $186.42 million, compared to $176.99 million for the same period last year. Higher unit volumes contributed approximately 1.8 percent to the segment’s growth, and an overall increase in average unit selling prices contributed approximately 3.5 percent, despite the impact of unfavorable foreign currency exchange fluctuations of $4.93 million, or 2.8 percent, compared to last year.  The segment’s largest net sales revenue gains continue to be realized in its healthcare category,  as a result of recent new product introductions, particularly in thermometry and humidification,  which includes the VapoSteam acquisition.  Sales gains were offset somewhat by lower heater sales as a result of warmer fall and early winter temperatures, and lower water filtration sales.  Additionally, because U.S. cough/cold/flu incidence is below historical averages, replenishment orders in the fourth quarter of fiscal year 2016 and the first quarter of fiscal year 2017 could be negatively impacted.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes the operating results of Healthy Directions, which we acquired on June 30, 2014. Net sales revenue for the fiscal quarter ended  November 30, 2015 decreased $0.97 million, or 2.5 percent, to $37.49 million, compared to $38.46 million for the same period last year. Higher unit volumes contributed approximately 1.4 percent to the segment’s growth, offset by an approximate 3.9 percent decrease in average unit selling prices. The decline in sales was driven by an increase in promotional pricing to develop new buyer growth in selected categories, lower average order values and a decline in the print newsletter subscription business, which we have de-emphasized as a growth strategy in the segment’s business model.

 

Beauty Segment - Net sales revenue in the Beauty segment for the fiscal quarter ended November 30, 2015 decreased $0.46 million, or 0.3 percent, to $133.78 million, compared to $134.23 million for the same period last year. Higher unit volumes contributed approximately 3.4 percent to the segment’s growth, which was offset by an approximate 3.7 percent decrease in average unit selling prices. Gains in sales of pedicure appliances and curling, straightening and specialty styling irons were partially offset by declines in personal care sales due to continued competitive pressures and some lost distribution at retail.  In addition, foreign currency fluctuations had the effect of reducing U.S. Dollar reported net sales revenue for the Beauty segment by $3.54 million, or 2.6 percent, compared to the same period last year. Beauty segment net sales revenue includes year-over-year growth of $3.44 million from our operations in Venezuela, which is a highly inflationary economy.  See Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk and Note 13 to the accompanying consolidated condensed financial statements for a discussion of uncertainties related to the Venezuelan economy and currency exchange rates. While we believe we continue to make progress to stabilize recent segment sales declines in the face of foreign currency headwinds, we do not expect meaningful sales growth in this segment for the full fiscal year 2016. 

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Consolidated gross profit margin:

 

Consolidated gross profit as a percentage of net sales revenue for the fiscal quarter ended November 30, 2015 decreased 0.6 percentage points to 41.0 percent, compared to 41.6 percent for the same period last year. The decrease in consolidated gross profit margin is primarily due to the unfavorable impact of foreign currency fluctuations.

 

A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2015 and through the end of our first quarter in fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During the second quarter of fiscal year 2016, the Chinese Renminbi devalued by approximately 4.4 percent against the U.S. Dollar. During the third quarter of fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. If China’s currency continues to fluctuate against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. Accordingly, there can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.

 

Selling, general and administrative expense:

 

Our consolidated SG&A ratio increased 1.8 percentage points to 28.5 percent for fiscal quarter ended November 30, 2015, compared to 26.7 percent for the same period last year. The increase was primarily due to:

 

·

the impact of $6.71 million of CEO succession costs recorded during the third quarter of fiscal year 2016 as result of the lawsuit settlement with our former CEO, which increased the SG&A ratio by 1.5 percentage points;

 

·

the unfavorable comparison resulting from a $7 million gain from the amendment of a trademark license agreement recorded in the third quarter of fiscal year 2015, which decreased the comparative period SG&A ratio by 1.6 percentage points; and

 

·

a $2.22 million decrease in product liability estimates recorded in the third quarter of fiscal year 2015.

 

These factors were partially offset by:

 

·

lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and a $5 million U.S. Dollar to Euro cross-currency debt swap;

 

·

lower outbound freight costs; and

 

·

the impact that higher overall net sales had on operating leverage.

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Operating income by segment:

 

The following table sets forth segment operating income, for the periods covered below:

 

OPERATING INCOME BY SEGMENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

 

  

2015

  

2014

  

$ Change

 

% Change

 

 

2015

 

2014

 

Housewares

 

$

15,536

 

$

18,275

 

$

(2,739)

 

(15.0)

%

 

17.7

%

21.3

%

Health & Home (1) (2)

 

 

18,072

 

 

18,694

 

 

(622)

 

(3.3)

%

 

9.7

%

10.6

%

Nutritional Supplements

 

 

3,034

 

 

6,214

 

 

(3,180)

 

(51.2)

%

 

8.1

%

16.2

%

Beauty

 

 

18,991

 

 

21,860

 

 

(2,869)

 

(13.1)

%

 

14.2

%

16.3

%

Total operating income

 

$

55,633

 

$

65,043

 

$

(9,410)

 

(14.5)

%

 

12.5

%

14.9

%


(1)

The VapoSteam business was acquired on March 31, 2015 and its operations are reported under the Health & Home segment. Results reported include three months for the fiscal quarter ended November 30, 2015, with no comparable results in the same period last year.

 

(2)

Operating Income for the three months ended November 30, 2014 includes a $7 million gain from the amendment of a trademark license agreement.

 

In the discussion that follows, our usage of the terms operating margin, operating expense ratio and operating leverage are further described and explained beginning on page 48. 

 

Housewares Segment - Operating income for the fiscal quarter ended November 30, 2015 decreased $2.74 million, or 15.0 percent, compared to the same period last year. Operating margin decreased 3.6 percentage points to 17.7, compared to 21.3 percent for the same period last year. The decrease in operating margin was due to higher promotional spending, higher media advertising in support of new products and categories, lower margin kitchen electric sales, and CEO succession costs, which had an unfavorable impact of 1.5 percentage points on operating margin.

 

Health & Home Segment - Operating income for the fiscal quarter ended November 30, 2015 decreased $0.62 million, or 3.3 percent, compared to the same period last year. Operating margin decreased 0.9 percentage points to 9.7 percent, compared to 10.6 percent for the same period last year. The decrease in operating margin is primarily due to the unfavorable impact of foreign currency fluctuations on U.S. Dollar reported net sales revenue and CEO succession costs, which had an unfavorable impact of 1.5 percentage points on operating margin. The year-over-year comparison was also negatively impacted by a $7.00 million gain from the amendment of a trademark license agreement recorded in the same period last year. These factors were partially offset by the impact that higher overall net sales had on the segment’s operating leverage. 

 

Nutritional Supplements Segment - Operating income for the fiscal quarter decreased $3.18 million, or 51.2 percent, compared to the same period last year. Operating margin decreased to 8.1 percent, compared to 16.2 percent for the same period last year. The segment’s operating income now includes allocations of shared service and corporate overhead expenses that were not made in fiscal year 2015, the year of acquisition. For the fiscal quarter ended November 30, 2015, these allocations totaled  $1.88 million, which reduced operating margin by 5.0 percentage points. Operating margin was also impacted by CEO succession costs, which had an unfavorable impact of 1.9 percentage points. The remaining decrease is due to the year-over-year reduction in sales and increases in investments to drive new buyer growth and further develop the online sales channel.

 

Beauty Segment - Operating income for the fiscal quarter ended November 30, 2015 decreased $2.87 million to $18.99 million, compared to $21.86 million for the same period last year. Operating margin decreased 2.1 percentage points to 14.2 percent, compared to 16.3 percent for the same period last year. The decrease in operating margin is primarily due to the unfavorable impact of foreign currency fluctuations on U.S. Dollar reported net sales revenue and CEO succession costs, which had an unfavorable impact of 1.4 percentage points on operating margin. Beauty segment operating income includes year-over-year growth of $1.92 million from our operations in Venezuela, which is a highly inflationary economy. See Part 1, Item 3. Quantitative and Qualitative

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Disclosures About Market Risk and Note 13 to the accompanying consolidated condensed financial statements for a discussion of uncertainties related to the Venezuelan economy and currency exchange rates.

 

ADJUSTED OPERATING INCOME AND OPERATING MARGIN

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2015

 

 

 

Housewares

 

 

Health & Home

 

 

Nutritional

Supplements

 

 

Beauty

 

 

Total

 

Operating income, as reported (GAAP)

 

$

15,536

 

17.7

%

 

$

18,072

 

9.7

%

 

$

3,034

 

8.1

%

 

$

18,991

 

14.2

%

 

$

55,633

 

12.5

%

CEO succession costs (1)

 

 

1,348

 

1.5

%

 

 

2,722

 

1.5

%

 

 

704

 

1.9

%

 

 

1,933

 

1.4

%

 

 

6,707

 

1.5

%

Subtotal

 

 

16,884

 

19.2

%

 

 

20,794

 

11.2

%

 

 

3,738

 

10.0

%

 

 

20,924

 

15.6

%

 

 

62,340

 

14.0

%

Amortization of intangible assets (2)

 

 

326

 

0.4

%

 

 

3,532

 

1.9

%

 

 

1,564

 

4.2

%

 

 

1,439

 

1.1

%

 

 

6,861

 

1.5

%

Non-cash share-based compensation (3)

 

 

303

 

0.3

%

 

 

657

 

0.4

%

 

 

398

 

1.1

%

 

 

851

 

0.6

%

 

 

2,209

 

0.5

%

Adjusted operating income (non-GAAP)

 

$

17,513

 

19.9

%

 

$

24,983

 

13.4

%

 

$

5,700

 

15.2

%

 

$

23,214

 

17.4

%

 

$

71,410

 

16.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2014

 

 

 

Housewares

 

 

Health & Home

 

 

Nutritional

Supplements

 

 

Beauty

 

 

Total

 

Operating income, as reported (GAAP)

 

$

18,275

 

21.3

%

 

$

18,694

 

10.6

%

 

$

6,214

 

16.2

%

 

$

21,860

 

16.3

%

 

$

65,043

 

14.9

%

CEO succession costs (1)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

Subtotal

 

 

18,275

 

21.3

%

 

 

18,694

 

10.6

%

 

 

6,214

 

16.2

%

 

 

21,860

 

16.3

%

 

 

65,043

 

14.9

%

Amortization of intangible assets (2)

 

 

338

 

0.4

%

 

 

3,466

 

2.0

%

 

 

1,485

 

3.9

%

 

 

1,564

 

1.2

%

 

 

6,853

 

1.6

%

Non-cash share-based compensation (3)

 

 

111

 

0.1

%

 

 

230

 

0.1

%

 

 

 -

 

 -

%

 

 

986

 

0.7

%

 

 

1,327

 

0.3

%

Adjusted operating income (non-GAAP)

 

$

18,724

 

21.8

%

 

$

22,390

 

12.7

%

 

$

7,699

 

20.0

%

 

$

24,410

 

18.2

%

 

$

73,223

 

16.8

%


In the tables above, footnote references (1) to (3) correspond to the notes beginning on page 33 under the table entitled “Adjusted Income and EPS”.

 

Adjusted operating income and operating margin, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures is furnished on page 42.

 

Interest expense:

 

Interest expense for the fiscal quarter ended November 30, 2015 was $2.74 million, compared to $4.17 million for the same period last year. Interest expense was lower compared to the same period last year principally due to a combination of more favorable interest rates under the Credit Agreement and a reduction in the average debt balance for the fiscal quarter ended November 30, 2015.  

 

Income tax expense:

 

Income tax expense for the fiscal quarter ended November 30, 2015 was 11.8 percent of income before

income taxes, compared to 9.2 percent for the same period last year. The year-over-year increase in our effective tax rate was primarily due to shifts in the mix of taxable income in our various tax jurisdictions and a $7 million pre-tax gain from the amendment of a  trademark license agreement in the same period last year, which reduced the effective tax rate by 1.2 percentage point for the fiscal quarter ended November 30, 2014. Income tax expense for the fiscal quarter ended November 30, 2015 includes a tax benefit of $2.44 million due to the finalization of certain tax returns, mostly offset by tax expense of $1.98 million related to the provision for an uncertain tax position in a foreign jurisdiction. 

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Net income:

 

Net income for the fiscal quarter ended November 30, 2015 decreased by $8.60 million, compared to the same period last year. Our diluted earnings per share decreased $0.29 to $1.63 compared to $1.92 for the same period last year.

 

Adjusted income and EPS:

 

In order to provide a better understanding of the impact of certain items on our net income and EPS, the analysis that follows reports the comparative after tax impact of CEO succession costs, amortization of intangible assets and non-cash share-based compensation on our net income, and basic and diluted EPS for the periods covered below.

 

ADJUSTED INCOME AND EPS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Basic EPS

 

Diluted EPS

 

   

2015

    

2014

   

2015

    

2014

   

2015

   

2014

Net income as reported (GAAP) (4)

 

$

46,778

 

$

55,377

 

$

1.66

 

$

1.95

 

$

1.63

 

$

1.92

CEO succession costs, net of tax (1)

 

 

4,645

 

 

 -

 

 

0.17

 

 

 -

 

 

0.16

 

 

 -

Subtotal

 

 

51,423

 

 

55,377

 

 

1.83

 

 

1.95

 

 

1.80

 

 

1.92

Amortization of intangible assets, net of tax (2)

 

 

5,936

 

 

5,993

 

 

0.22

 

 

0.21

 

 

0.21

 

 

0.21

Non-cash share-based compensation, net of tax (3)

 

 

1,813

 

 

1,187

 

 

0.06

 

 

0.04

 

 

0.06

 

 

0.04

Adjusted income (non-GAAP) (4)

 

$

59,172

 

$

62,557

 

$

2.10

 

$

2.20

 

$

2.07

 

$

2.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in

    computing basic and diluted EPS

 

 

 

 

 

 

 

 

28,129

 

 

28,414

 

 

28,634

 

 

28,824

(1)

CEO succession costs of $6.71 million ($4.64 million after tax) incurred in connection with the settlement of a lawsuit with our former CEO. For additional information see  “-Significant Recent Developments” on page 24.

 

(2)

For the fiscal quarters ended November 30, 2015 and 2014, amortization of intangible assets was $6.86 million ($5.94 million after tax) and $6.85 million ($5.99 million after tax), respectively.

 

(3)

For the fiscal quarters ended November 30, 2015 and 2014, non-cash share based compensation was $2.21 million ($1.81 million after tax) and $1.33 million ($1.19 million after tax), respectively.

 

(4)

The fiscal quarters ended November 30, 2015 and 2014 include net income from our operations in Venezuela of $2.87 and $0.95 million, respectively, or diluted EPS of $0.10 and $0.03, respectively

 

Adjusted income for the fiscal quarter ended November 30, 2015 decreased $3.39 million compared to the same period last year. The decrease in adjusted income was primarily due to:

 

·

the unfavorable impact of foreign currency fluctuations;

 

·

the comparative impact of a $6.98 million after tax gain from the amendment of a trademark license agreement recorded in the same period last year; and

 

·

higher tax expense.

 

These factors were partially offset by:

 

·

higher sales and improved operating leverage;

 

·

the impact of earnings growth from our operations in Venezuela, which is a highly inflationary economy; and 

 

·

lower interest expense.

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Adjusted diluted EPS was $2.07 for the fiscal quarter ended November 30, 2015, compared to $2.17 for the same period last year. Adjusted diluted EPS decreased due to the impact of lower earnings partially offset by slightly lower weighted average diluted shares outstanding for the fiscal quarter ended November 30, 2015 compared to the same period last year. 

 

Adjusted income and EPS, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures is furnished on page 42.

 

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First Nine Months of Fiscal Year 2016 Compared to First Nine Months of Fiscal Year 2015

 

Consolidated net sales revenue:

 

Consolidated net sales revenue for the nine months ended November 30, 2015 increased $92.58 million to $1,159.98 million, compared to $1,067.40 million for the same period last year, an increase of 8.7 percent. Net sales revenue in our Housewares segment increased $9.47 million, or 4.3 percent, compared to the same period last year. Net sales revenue in our Health & Home segment increased $27.01 million, or 6.1 percent, compared to the same period last year, despite an unfavorable impact of $15.78 million from foreign currency fluctuations, or 3.5 percent, compared to the same period last year. The Nutritional Supplements segment contributed net sales revenue of $114.98 million. The fiscal quarter ended November 30, 2015 was the Nutritional Supplement segment’s first full fiscal quarter of comparative operating results, accordingly no comparable information is provided on a year-to-date basis. Net sales revenue in our Beauty segment increased $4.21 million, or 1.3 percent, compared to the same period last year. Foreign currency fluctuations reduced U.S. Dollar reported net sales revenue for the Beauty segment by $8.32 million, or 2.5 percent, compared to the same period last year.

 

Impact of acquisitions on net sales revenue:

 

Because we are an acquisition-oriented company, we provide an analysis of our net sales revenue in terms of growth from our core business and growth from acquisitions. Our most recent acquisitions of Healthy Directions and Vicks VapoSteam occurred on June 30, 2014 and March 31, 2015, respectively. For further information about these acquisitions, see Note 9 to the accompanying consolidated condensed financial statements.

 

IMPACT OF ACQUISITIONS ON NET SALES REVENUE

(in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30,

 

 

 

2015

 

2014

      

Prior year's sales revenue, net

 

$

1,067,401

 

$

1,004,633

 

Components of sales revenue change, net

 

 

 

 

 

 

 

Core business

 

 

35,317

 

 

(328)

 

Incremental net sales revenue from acquisitions (non-core business):

 

 

 

 

 

 

 

Healthy Directions (four months in fiscal year 2016, five months in fiscal year 2015)

 

 

52,885

 

 

63,096

 

Vicks VapoSteam (eight months in fiscal year 2016)

 

 

4,374

 

 

 -

 

Change in sales revenue, net

 

 

92,576

 

 

62,768

 

Total sales revenue, net

 

$

1,159,977

 

$

1,067,401

 

 

 

 

 

 

 

 

 

Total net sales revenue growth

 

 

8.7

 

6.2

Core business

 

 

3.3

 

 -

Acquisitions

 

 

5.4

 

6.2

 

Impact of foreign currencies on net sales revenue:

 

During the nine months ended November 30, 2015 and 2014, approximately 15 percent of our net sales revenue was denominated in foreign currencies for both periods. These transactions were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, and Venezuelan Bolivars. For the nine months ended November 30, 2015, the impact of net foreign currency exchange rate fluctuations negatively impacted our consolidated U.S. Dollar reported net sales revenue by approximately $25.13 million. In our Beauty segment, where our Canadian and Latin American operations comprise a higher proportion of foreign revenues than other regions, foreign exchange fluctuations had a $8.32 million unfavorable impact on U.S. Dollar reported net sales revenue. In our Housewares and Health & Home segments, where our European, Canadian and U.K. operations comprise a high proportion of foreign revenues, foreign exchange fluctuations had unfavorable impacts of $1.03 and $15.78 million, respectively, on U.S. Dollar reported net sales revenue.

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Segment net sales revenue:

 

Housewares Segment - Net sales revenue in the Housewares segment for the nine months ended November 30, 2015 increased $9.47 million, or 4.3 percent, to $231.85 million, compared to $222.38 million for the same period last year. Higher unit volumes contributed approximately 5.7 percent to the segment’s growth, which was partially offset by an approximate 1.4 percent decrease in average unit selling price, largely due to sales mix. The increase in net sales revenue was primarily due to new product introductions, particularly the launches of small kitchen electrics and metal bakeware products, and increases in sales to internet retailers. These net sales revenue increases were partially offset by higher overall promotional program spending, inventory reductions at a key retailer, and lower sales in the club channel.  In addition to the new launches, the segment continued to experience year-over-year gains from infant and toddler care products, growth in hydration category sales, and shipments of its recently introduced Greensaver storage products designed to prolong the storage life of produce. We expect year-over-year growth to remain in the mid-single digits for the full fiscal year. We expect OXO’s longer-term growth to continue to be driven by new products, category expansion, expanded shelf space and assortments at key traditional and internet retailers, and new distribution gains in international markets.

 

Health & Home Segment - Net sales revenue in the Health & Home segment for the nine months ended November 30, 2015 increased $27.01 million, or 6.1 percent, to $472.71 million, compared to $445.70 million for the same period last year. Higher unit volumes contributed approximately 4.7 percent to the segment’s growth, and an increase in the average unit selling price contributed approximately 1.4 percent despite an unfavorable foreign currency impact of $15.78 million, or 3.5 percent, compared to the same period last year.  The segment’s largest net sales revenue gains continue to be realized in its healthcare category, as a result of recent new product introductions, particularly in thermometry and humidification,  which includes the VapoSteam acquisition. In the home environment category, fan shipments achieved high sell-through in the U.S., Canada and Europe due to sustained high summer temperatures. Fan sales gains were offset by declines in air purification and water filtration sales, as well as lower heater sales as a result of warmer fall and early winter temperatures. Additionally, because U.S. cough/cold/flu incidence is below historical averages, replenishment orders in the fourth quarter of fiscal year 2016 and the first quarter of fiscal year 2017 could be negatively impacted.

 

Nutritional Supplements Segment - The Nutritional Supplements segment includes the operating results of Healthy Directions, which we acquired on June 30, 2014. Net sales revenue for the nine months ended November 30, 2015 was $114.98 million, compared to $63.10 million for the five months for which comparable information was reported in the same period last year. The fiscal quarter ended November 30, 2015 was the Nutritional Supplement segment’s first full fiscal quarter of comparative operating results. Accordingly no comparable information is provided on a year-to-date basis for the segment.

 

Beauty Segment - Net sales revenue in the Beauty segment for the nine months ended November 30, 2015 increased $4.21 million, or 1.3 percent, to $340.43 million, compared to $336.23 million for the same period last year. Higher unit volumes contributed approximately 3.7 percent to the segment’s growth, which was partially offset by an approximate 2.6 percent decrease in average unit selling price.  Gains in sales of pedicure appliances, curling, straightening and specialty styling irons were partially offset by declines in personal care sales due to continued competitive pressures and some lost distribution at retail. The segment experienced sales growth despite foreign currency fluctuations, which had the effect of reducing U.S. Dollar reported net sales revenue by $8.32 million, or 2.5 percent, compared to the same period last year. Beauty segment net sales revenue includes year-over-year growth of $8.59 million from our operations in Venezuela, which is a highly inflationary economy.  See Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk and Note 13 to the accompanying consolidated condensed financial statements for a discussion of uncertainties related to the Venezuelan economy and currency exchange rates. While we believe we continue to make progress to stabilize recent segment sales declines in the face of foreign currency headwinds, we do not expect meaningful sales growth in this segment for the full fiscal year 2016.

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Consolidated gross profit margin:

 

Consolidated gross profit as a percentage of net sales revenue for the nine months ended November 30, 2015 increased 0.1 percentage point to 40.8 percent, compared to 40.7 percent for the same period last year. The increase in consolidated gross profit margin is primarily due to the addition of the Nutritional Supplements segment, partially offset by the unfavorable impact of foreign currency fluctuations and a lower margin product and channel sales mix. For the nine months ended November 30, 2015 and 2014, the nine-and five-months of operating results of the Nutritional Supplements segment in each period increased the gross profit margin by 3.9 and 2.0 percentage points, respectively. 

 

A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2015 and through the end of our first quarter in fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During the second quarter of fiscal year 2016, the Chinese Renminbi devalued by approximately 4.4 percent against the U.S. Dollar. During the third quarter of fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. If China’s currency continues to fluctuate against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. Accordingly, there can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.

 

Selling, general and administrative expense:

 

Our consolidated SG&A ratio increased 1.4 percentage points to 30.7 percent for nine months ended November 30, 2015, compared to 29.3 percent for the same period last year. The year-over-year increase was primarily due to:

 

·

the impact of $6.71 million of CEO succession costs recorded during the third quarter of fiscal year 2016  as result of the lawsuit settlement with our former CEO, which increased the SG&A ratio by 0.6 percentage points;  

 

·

the unfavorable comparison resulting from a $7 million gain from the amendment of a trademark license agreement in the third quarter of fiscal year 2015, which decreased the comparative period SG&A ratio by 0.7 percentage points;

 

·

an  additional four months of operating results from the Nutritional Supplements segment, which operates with a higher SG&A ratio than our other segments; and

 

·

proportionally higher investment in advertising, marketing, new products, and channel development as a percentage of net sales revenue.

 

These factors were partially offset by:

 

·

lower year-over-year foreign currency revaluation losses, partially due to cash flow hedges and a $5 million U.S. Dollar to Euro cross-currency debt swap;

 

·

lower outbound freight costs; and

 

·

the impact that higher overall net sales had on operating leverage. 

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Asset impairment charges:

 

We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2016. As a result of our testing of indefinite-lived trademarks, we recorded a non-cash asset impairment charge of $3.00 million ($2.66 million after tax). The charge was related to a trademark in our Beauty segment, which was written down to its estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method. We recorded a similar charge of $9.00 million ($8.16 million after tax) during the first quarter of fiscal year 2015.

Operating income by segment:

 

The following table sets forth segment operating income for the periods covered below:

 

OPERATING INCOME BY SEGMENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

 

  

2015

  

2014

  

$ Change

 

% Change

 

 

2015

 

2014

 

Housewares

 

$

41,861

 

$

45,201

 

$

(3,340)

 

(7.4)

%

 

18.1

%

20.3

%

Health & Home (1) (2)

 

 

31,298

 

 

31,919

 

 

(621)

 

(1.9)

%

 

6.6

%

7.2

%

Nutritional Supplements (3)

 

 

8,623

 

 

6,324

 

 

2,299

 

*

 

 

7.5

%

10.0

%

Beauty

 

 

32,826

 

 

29,325

 

 

3,501

 

11.9

%

 

9.6

%

8.7

%

Total operating income

 

$

114,608

 

$

112,769

 

$

1,839

 

1.6

%

 

9.9

%

10.6

%


(1)

The VapoSteam business was acquired on March 31, 2015 and its operations are reported under the Health & Home segment. Results reported include eight months for the fiscal year-to-date period ended November 30, 2015, with no comparable results in the same period last year.

 

(2)

Operating Income for the year-to-date period ended November 30, 2014 includes a $7 million gain from the amendment of a trademark license agreement.

 

(3)

Healthy Directions was acquired on June 30, 2014 and its operations are reported under the Nutritional Supplements segment. Results reported include nine- and five-months, respectively, for the year-to-date periods ended November 30, 2015 and 2014.

 

* Calculation is not meaningful or comparable.

 

In the discussion that follows, our usage of the terms operating margin, operating expense ratio and operating leverage are further described and explained beginning on page 48.

 

Housewares Segment - Operating income for the nine months ended November 30, 2015 decreased $3.34 million, or 7.4 percent, compared to the same period last year. Operating margin decreased 2.2 percentage points to 18.1 percent, compared to 20.3 percent for the same period last year. The decrease in operating margin was due to higher promotional spending, higher media advertising in support of new products and categories, higher compensation expense incurred to expand into new categories and increase operating capacity, lower margin kitchen electric sales, and CEO succession costs, which had an unfavorable impact of 0.6 percentage points on operating margin.

 

Health & Home Segment - Operating income for the nine months ended November 30, 2015 decreased $0.62 million, or 1.9 percent, compared to the same period last year. Operating margin decreased 0.6 percentage points to 6.6 percent compared to 7.2 percent for the same period last year. The decrease in operating margin is primarily due to the unfavorable impact of foreign currency fluctuations on U.S. Dollar reported net sales and CEO succession costs, which had an unfavorable impact of 0.6 percentage points on operating margin. The year-over-year comparison was also negatively impacted by a $7.00 million gain from the amendment of a trademark license agreement recorded in the same period last year. These factors were partially offset by the impact that higher overall net sales had on the segment’s operating leverage.

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Nutritional Supplements Segment - The Nutritional Supplements segment’s operating income reflects operating results from Healthy Directions, which we acquired on June 30, 2014. Operating income for the nine months ended November 30, 2015 was $8.62 million, resulting in an operating margin of 7.5 percent, compared to an operating margin of 10.0 percent for the five months of operating results included in the same period last year. The decline in operating margin is primarily due to:

 

·

A decline of 3.0 percentage points from an allocation of shared service and corporate overhead expenses that were not made in fiscal year 2015, the year of acquisition;

 

·

An unfavorable impact of 0.6 percentage points from CEO succession costs; and

 

·

Increased investments in promotions, advertising, customer acquisition and online sales channel development.

 

These factors were partially offset by the comparative impact of $3.61 million of acquisition-related expenses recorded in the same period last year, which reduced operating margin by 5.7 percentage points for the nine month period ended November 30, 2014. 

 

Beauty Segment - Operating income for the nine months ended November 30, 2015 increased $3.50 million to $32.83 million, compared to $29.33 million for the same period last year. Operating margin increased 0.9 percentage points to 9.6 percent, compared to 8.7 percent for the same period last year. Operating income includes non-cash intangible asset impairment charges of $3.00 and $9.00 million in the nine months ended November 30, 2015 and 2014, respectively, resulting in a favorable year-over-year impact of 1.8 percentage points for the nine months ended November 30, 2015 compared to the same period last year. The increases in operating margin were partially offset by CEO succession costs of $1.93 million for the nine months ended November 30, 2015, which had an unfavorable impact of 0.6 percentage points on operating margin, and the unfavorable impact of foreign currency fluctuations on U.S. Dollar reported net sales revenue. 

 

ADJUSTED OPERATING INCOME AND OPERATING MARGIN

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 2015

 

 

 

Housewares

 

 

Health & Home

 

 

Nutritional

Supplements

 

 

Beauty

 

 

Total

 

Operating income, as reported (GAAP)

 

$

41,861

 

18.1

%

 

$

31,298

 

6.6

%

 

$

8,623

 

7.5

%

 

$

32,826

 

9.6

%

 

$

114,608

 

9.9

%

Asset impairment charges (1)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

3,000

 

0.9

%

 

 

3,000

 

0.3

%

CEO succession costs (2)

 

 

1,348

 

0.6

%

 

 

2,722

 

0.6

%

 

 

704

 

0.6

%

 

 

1,933

 

0.6

%

 

 

6,707

 

0.6

%

Subtotal

 

 

43,209

 

18.6

%

 

 

34,020

 

7.2

%

 

 

9,327

 

8.1

%

 

 

37,759

 

11.1

%

 

 

124,315

 

10.7

%

Amortization of intangible assets (4)

 

 

976

 

0.4

%

 

 

10,900

 

2.3

%

 

 

4,692

 

4.1

%

 

 

4,315

 

1.3

%

 

 

20,883

 

1.8

%

Non-cash share-based compensation (5)

 

 

934

 

0.4

%

 

 

1,785

 

0.4

%

 

 

974

 

0.8

%

 

 

2,454

 

0.7

%

 

 

6,147

 

0.5

%

Adjusted operating income (non-GAAP)

 

$

45,119

 

19.5

%

 

$

46,705

 

9.9

%

 

$

14,993

 

13.0

%

 

$

44,528

 

13.1

%

 

$

151,345

 

13.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 2014

 

 

 

Housewares

 

 

Health & Home

 

 

Nutritional

Supplements

 

 

Beauty

 

 

Total

 

Operating income, as reported (GAAP)

 

$

45,201

 

20.3

%

 

$

31,919

 

7.2

%

 

$

6,324

 

10.0

%

 

$

29,325

 

8.7

%

 

$

112,769

 

10.6

%

Asset impairment charges (1)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

9,000

 

2.7

%

 

 

9,000

 

0.8

%

Acquisition-related expenses (3)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

3,611

 

5.7

%

 

 

 -

 

 -

%

 

 

3,611

 

0.3

%

Subtotal

 

 

45,201

 

20.3

%

 

 

31,919

 

7.2

%

 

 

9,935

 

15.7

%

 

 

38,325

 

11.4

%

 

 

125,380

 

11.7

%

Amortization of intangible assets (4)

 

 

961

 

0.4

%

 

 

10,403

 

2.3

%

 

 

2,528

 

4.0

%

 

 

4,535

 

1.3

%

 

 

18,427

 

1.7

%

Non-cash share-based compensation (5)

 

 

645

 

0.3

%

 

 

892

 

0.2

%

 

 

 -

 

 -

%

 

 

3,002

 

0.9

%

 

 

4,539

 

0.4

%

Adjusted operating income (non-GAAP)

 

$

46,807

 

21.0

%

 

$

43,214

 

9.7

%

 

$

12,463

 

19.8

%

 

$

45,862

 

13.6

%

 

$

148,346

 

13.9

%


In the tables above, footnote references (1) to (5) correspond to the notes beginning on page 41 under the table entitled “Adjusted Income and EPS.

 

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Adjusted operating income and operating margin, as discussed in the preceding tables, may be considered non-GAAP financial measures as set forth in SEC Regulation G, Rule 100. An explanation of the reasons why the Company believes the non-GAAP financial information is useful and the nature and limitations of the non-GAAP financial measures is furnished on page 42.

 

Interest expense:

 

Interest expense for the nine months ended November 30, 2015 was $8.14 million, compared to $11.59 million for the same period last year. Interest expense was lower compared to the same period last year principally due to a combination of more favorable interest rates under the Credit Agreement and a reduction in the average debt balance for the nine months ended November 30, 2015.

 

Income tax expense:

 

Income tax expense for the nine months ended November 30, 2015 was 14.1 percent of income before income taxes, compared to 10.7 percent for the same period last year. The year-over-year increase in the effective tax rate is due primarily to shifts in the mix of taxable income in our various tax jurisdictions and the comparative impact of a tax benefit of $2.07 million recorded in the same period last year due to the resolution of an uncertain tax position. A $7 million gain from the amendment of a trademark license agreement also decreased the effective tax rate by 0.8 percentage points for the same period last year. Income tax expense for the nine months ended November 30, 2015 includes a tax benefit of $2.44 million due to the finalization of certain tax returns, partially offset by tax expense of $1.98 million related to the provision for an uncertain tax position in a foreign jurisdiction. 

 

Net income:

 

Net income for the nine months ended November 30, 2015 increased by $1.03 million, compared to the same period last year. Our diluted earnings per share increased $0.05 to $3.17 compared to $3.12 for the same period last year.

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Adjusted income and EPS:

 

In order to provide a better understanding of the impact of certain items on our net income and EPS, the analysis that follows reports the comparative after tax impact of asset impairment charges, CEO succession costs, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation on our net income, and basic and diluted EPS for the periods covered below.

 

ADJUSTED INCOME AND EPS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

Basic EPS

 

Diluted EPS

 

   

2015

    

2014

   

2015

    

2014

   

2015

   

2014

Net income as reported (GAAP) (6)

 

$

91,640

 

$

90,614

 

$

3.23

 

$

3.17

 

$

3.17

 

$

3.12

Asset impairment charges, net of tax (1)

 

 

2,656

 

 

8,155

 

 

0.09

 

 

0.28

 

 

0.09

 

 

0.28

CEO succession costs, net of tax (2)

 

 

4,645

 

 

 -

 

 

0.16

 

 

 -

 

 

0.16

 

 

 -

Acquisition-related expenses, net of tax (3)

 

 

 -

 

 

2,306

 

 

 -

 

 

0.08

 

 

 -

 

 

0.08

Subtotal

 

 

98,941

 

 

101,075

 

 

3.49

 

 

3.53

 

 

3.42

 

 

3.48

Amortization of intangible assets, net of tax (4)

 

 

18,108

 

 

16,767

 

 

0.64

 

 

0.59

 

 

0.63

 

 

0.58

Non-cash share-based compensation, net of tax (5)

 

 

5,158

 

 

4,026

 

 

0.18

 

 

0.14

 

 

0.18

 

 

0.14

Adjusted income (non-GAAP) (6)

 

$

122,207

 

$

121,868

 

$

4.31

 

$

4.26

 

$

4.23

 

$

4.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in

    computing basic and diluted EPS

 

 

 

 

 

 

 

 

28,361

 

 

28,630

 

 

28,903

 

 

29,070

(1)

For the nine months ended November 30, 2015 and 2014, non-cash intangible asset impairment charges totaling $3.00 million ($2.66 million after tax) and $9.00 million ($8.16 million after tax), respectively.

 

(2)

CEO succession costs of $6.71 million ($4.64 million after tax) incurred in connection with the settlement of a lawsuit with our former CEO. For additional information, see  “-Significant Recent Developments” on page 24.

 

(3)

Acquisition-related expense of $3.61 million ($2.31 million after tax) incurred in connection with the purchase of Healthy Directions on June 30, 2014.

 

(4)

For the nine months ended November 30, 2015 and 2014, amortization of intangible assets was $20.88 million ($18.11 million after tax) and $18.43 million ($16.77 million after tax), respectively.

 

(5)

For the nine months ended November 30, 2015 and 2014, non-cash share based compensation was $6.15 million ($5.16 million after tax) and $4.54 million ($4.03 million after tax), respectively.

 

(6)

The nine months ended November 30, 2015 and 2014 include net income from our operations in Venezuela of $5.54 and $2.01 million, respectively, or diluted EPS of $0.19 and $0.07, respectively.

 

Adjusted income increased $0.34 million for the nine months ended November 30, 2015 compared to the same period last year. The increase in adjusted income is primarily due to:

 

·

increased net sales revenue;

 

·

improved operating leverage; and

 

·

lower interest expense.

 

These favorable factors were partially offset by:

 

·

the unfavorable impact of foreign currency fluctuations;

 

·

proportionally higher investment in advertising, marketing, new products, and channel development as a percentage of net sales revenue;

 

·

the comparative impact of a $6.98 million after tax gain from the amendment of a trademark license agreement recorded in the same period last year;  

 

·

the impact of earnings growth from our operations in Venezuela, which is a highly inflationary economy; and

 

·

higher tax expense.

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Adjusted diluted EPS was $4.23 for the nine months ended November 30, 2015, compared to $4.19 for the same period last year. Adjusted diluted EPS increased due to the combined impacts of higher earnings and slightly lower weighted average diluted shares outstanding for the nine months ended November 30, 2015 compared to the same period last year. The nine months ended November 30, 2015 includes a weighted average portion of the diluted share impact of 556,591 shares repurchased in the open market in August 2015.

 

The tables referred to on pages 32,  33,  39, and 41 entitled “Adjusted operating income and operating margin” and “Adjusted income and EPS”, respectively, report operating income, operating margin, net income, and EPS without the after tax impact of non-cash asset impairment charges, CEO succession costs, acquisition-related expenses, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. For additional information on these adjusted measures, see “Explanation of Certain Terms and Measures Used in MD&A” on page 48. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The preceding tables reconcile these measures to their corresponding GAAP-based measures presented in our consolidated condensed statements of income. We believe that adjusted operating income, adjusted operating margin, adjusted income and EPS provide useful information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with the Company’s financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on net income and earnings per share. We also believe that these non-GAAP measures facilitate a more direct comparison of the Company’s performance with its competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of the Company’s continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in the Company’s GAAP financial results in the near future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of the Company's activities. The Company’s adjusted operating income, adjusted operating margin, adjusted income and EPS are not prepared in accordance with GAAP, are not an alternative to GAAP financial information and may be calculated differently than non-GAAP financial information disclosed by other companies. Accordingly, undue reliance should not be placed on non-GAAP information.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

The following are selected measures of our liquidity and capital resources for the periods covered below:

 

SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL UTILIZATION (1)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

    

2015

    

2014

 

Accounts Receivable Turnover (Days)

 

 

58.8

 

 

64.4

 

Inventory Turnover (Times)

 

 

2.8

 

 

2.6

 

Working Capital (in thousands)

 

$

386,404

 

$

(63,386)

 

Current Ratio

 

 

2.3:1

 

 

0.9:1

 

Ending Debt to Ending Equity Ratio

 

 

49.0

%  

 

64.7

%  

Return on Average Equity

 

 

14.5

%  

 

11.3

%  


(1)Our computation and use of the measures in this table are described beginning on page 48.

 

Operating Activities:

 

Operating activities provided $72.76 million of cash during the first nine months of fiscal year 2016, compared to $63.47 million of cash provided during the same period last year. The year-over-year increase in operating cash flow was primarily due to slightly higher net income and the timing of fluctuations in working capital components.

 

Accounts receivable increased $66.48 million to $288.98 million as of November 30, 2015, compared to $222.50 million at the end of fiscal year 2015. Accounts receivable turnover decreased to 58.8 days at November 30, 2015, compared to 64.4 days for the same period last year. This calculation is based on a rolling five quarter accounts receivable balance. The improvement in turnover is primarily due to the full period impact of the Nutritional Supplements segment, which collects payment upon shipment.

 

Inventory increased $46.32 million to $339.40 million as of November 30, 2015, compared to $293.08 million at the end of fiscal year 2015.  Inventory turnover improved to 2.8 times at November 30, 2015 compared to 2.6 times for the same period last year.

 

Working capital was $386.40 million at November 30, 2015, compared to $(63.39) million at November 30, 2014. The increase in working capital is primarily due to the payment of current debt maturities totaling $21.90 million and the reclassification of our revolving credit agreement to long-term debt as a result of an amendment that extended the maturity to January 2020. As a result, our current ratio increased to 2.3:1 as of November 30, 2015, compared to 0.9:1 as of November 30, 2014.

 

Investing activities:

 

Investing activities used $55.16 million of cash during the nine months ended November 30, 2015. Highlights of those activities follow:

 

·

We spent $4.33 million on building and improvements, $4.54 million on computers, furniture and other equipment, $2.92 million on tools, molds and other capital asset additions, and $0.61 million on the development of new patents; and

 

·

We paid $42.75 million to acquire the Vicks VapoSteam inhalant business.

 

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Financing activities:

 

Financing activities used $8.75 million of cash during the nine months ended November 30, 2015. Highlights of those activities follow:

 

We had draws of $415.20 million against our credit agreement;

 

We repaid $371.80 million drawn against our credit agreement;

 

We repaid $1.90 million of our long-term debt;

 

Employees exercised options to purchase 175,056 shares of common stock, providing a combined $9.99 million of cash, including related tax benefits;

 

·

Employees purchased 12,155 shares of common stock for $0.79 million through our employee stock purchase plan;

 

·

On November 17, 2015, we issued 276,548 shares of common stock as payment for $15 million in separation compensation due to our former CEO under his employment and separation agreements, previously accrued in fiscal year 2014. Our former CEO tendered back to the Company 116,012 shares as payment for $12.00 million in related federal income tax withholding obligations. Under the terms of the settlement, employment and separation agreements, the number of shares issued and tendered was computed at a value of $54.24 per share. This was the fair value of the shares on September 4, 2014, the date the compensation payment would have been made, if payment had not been delayed by the associated dispute;

 

·

We repurchased and retired 556,591 shares of common stock in the open market at an average price of $89.83 per share for a total purchase price of $50 million; and

 

Share-based compensation provided $0.99 million in tax benefits.

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Revolving Credit Agreement:

 

The Company has a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $650 million as of November 30, 2015. The commitment under the Credit Agreement terminates on January 16, 2020. Borrowings under the Credit Agreement accrue interest at a “Base Rate” plus a margin of zero to 1.00 percent per annum based on the leverage ratio at the time of borrowing. The Base Rate is equal to the highest of the Federal Funds Rate plus 0.50 percent, Bank of America’s prime rate, or the LIBOR rate plus 1.00 percent. Alternatively, if the Company elects, borrowings accrue interest based on the respective one-, two-, three-, or six-month LIBOR rate plus a margin of 1.00 to 2.00 percent per annum based upon the leverage ratio at the time of the borrowing. The Company will incur loan commitment fees under the Credit Agreement at a rate ranging from 0.15 to 0.35 percent per annum on the unused balance of the Credit Agreement. Additionally, the Company will incur letter of credit fees under the Credit Agreement at a rate ranging from 1.00 to 2.00 percent per annum on the face value of any letter of credit. All obligations under the Credit Agreement are unconditionally guaranteed, on a joint and several basis, by the Company and certain of the Company’s subsidiaries.

 

As of November 30, 2015, the outstanding revolving loan principal balance of the Credit Agreement was $380.90 million and there were $1.50 million of open letters of credit outstanding against the Credit Agreement. As of November 30, 2015, the amount available for borrowings under the Credit Agreement was $267.60 million. However, as of November 30, 2015, our debt agreements effectively limited our ability to incur more than $254.95 million of additional debt from all sources, including the Credit Agreement.

 

Other Debt Agreements:

 

In addition to the Credit Agreement, at November 30, 2015, we had an aggregate principal balance of $60 million of 3.90% Senior Notes due January 2018 with equal annual $20 million installments due between January 2016 and January 2018.

 

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, 2015. The remaining loan balance is payable as follows: $3.80 million on March 1, 2016; $5.70 million on March 1, 2017; $1.90 million annually on March 1, 2018 through 2022; and $14.81 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023. The MBFC Loan bears interest at a variable rate as elected by us equal to either (a) a “Base Rate” plus a margin within a range of 0.00 to 1.00 percent, depending upon the leverage ratio or (b) the respective one-, two-, three-, or six-month LIBOR rate plus a margin within a range of 1.00 to 2.00 percent, depending upon the leverage ratio.

 

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 are 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. 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 agreements. Under the terms of our Credit Agreement, 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 Credit Agreement.

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The table below provides the formulas in effect for certain key financial covenants as defined in our debt agreements as of November 30, 2015:

 

 

 

 

 

 

Applicable Financial Covenant

 

Credit Agreement and MBFC Loan

3.90% Senior Notes

 

 

 

 

 

 

 

$500 Million

Minimum Consolidated Net Worth

 

None

+

 

 

 

25% of Fiscal Quarter Net Earnings

 

 

 

After August 31, 2010 (1)

 

 

 

 

 

 

EBIT (2)

EBIT (2)

 

 

÷

÷

Interest Coverage Ratio

 

Interest Expense (2)

Interest Expense (2)

 

 

Minimum Required:  3.00 to 1.00

Minimum Required:  2.50 to 1.00

 

 

Total Current and Long Term Debt (3) 

Total Current and Long Term Debt (3)

 

 

÷

÷

Maximum Leverage Ratio

 

[EBITDA (2) + Pro Forma Effect of

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

 

 

Acquisitions]

 

 

 

Maximum Allowed:  3.25 to 1.00

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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Contractual obligations and commercial commitments:

 

Our contractual obligations and commercial commitments at November 30, 2015, were:

 

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

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2017

 

2018

 

2019

 

2020

 

After

 

    

Total

    

1 year

    

2 years

    

3 years

    

4 years

    

5 years

    

5 years

Fixed rate debt

 

$

60,000

 

$

20,000

 

$

20,000

 

$

20,000

 

$

 -

 

$

 -

 

$

 -

Floating rate debt

 

 

414,707

 

 

3,800

 

 

5,700

 

 

1,900

 

 

1,900

 

 

382,800

 

 

18,607

Long-term incentive plan payouts

 

 

12,609

 

 

6,034

 

 

4,675

 

 

1,900

 

 

 -

 

 

 -

 

 

 -

Interest on fixed rate debt

 

 

2,613

 

 

1,651

 

 

871

 

 

91

 

 

 -

 

 

 -

 

 

 -

Interest on floating rate debt (1)

 

 

25,615

 

 

6,087

 

 

5,996

 

 

5,947

 

 

5,914

 

 

1,045

 

 

626

Open purchase orders

 

 

208,306

 

 

208,306

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Long-term purchase commitments

 

 

1,782

 

 

721

 

 

606

 

 

455

 

 

 -

 

 

 -

 

 

 -

Minimum royalty payments

 

 

67,716

 

 

12,366

 

 

12,327

 

 

12,358

 

 

8,958

 

 

8,785

 

 

12,922

Advertising and promotional

 

 

53,227

 

 

12,181

 

 

6,474

 

 

6,434

 

 

6,543

 

 

6,655

 

 

14,940

Operating leases

 

 

37,357

 

 

6,045

 

 

5,361

 

 

4,889

 

 

3,668

 

 

3,172

 

 

14,222

Capital spending commitments

 

 

4,149

 

 

4,149

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total contractual obligations (2)

 

$

888,081

 

$

281,340

 

$

62,010

 

$

53,974

 

$

26,983

 

$

402,457

 

$

61,317

(1)

We estimate our future obligations for interest on our floating rate debt by assuming the weighted average interest rates in effect on each floating rate debt obligation at November 30, 2015 remain constant into the future. This is an estimate, as actual rates will vary over time. In addition, for the Credit Agreement, we assume that the balance outstanding as of November 30, 2015 remains the same for the remaining term of the agreement. The actual balance outstanding under our Credit Agreement may fluctuate significantly in future periods, depending on the availability of cash flow from operations and future investing and financing considerations. 

 

(2)

In addition to the contractual obligations and commercial commitments in the table above, as of November 30, 2015, we have recorded total provisions for our uncertain tax positions totaling $10.91 million. We are unable to reliably estimate the timing of most of the future payments, if any, related to uncertain tax positions. Therefore, we have excluded these tax liabilities from the table above.

 

Off-Balance Sheet Arrangements:

 

We have no existing activities involving special purpose entities or off-balance sheet financing.

 

Current and Future Capital Needs:

 

Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund our foreseeable short- and long-term liquidity requirements. We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we continue to evaluate acquisition opportunities on a regular basis. We may finance acquisition activity with available cash, the issuance of shares of common stock, additional debt, or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition. The Company may also elect to repurchase additional shares of common stock up to the balance of its current authorization over the next two fiscal years, subject to limitations contained in its debt agreements and based upon its assessment of a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions, financial conditions, any applicable contractual limitations and other factors, including alternative investment opportunities. For additional information, see Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” in this report.

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CRITICAL ACCOUNTING POLICIES

 

The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Critical Accounting Policies” in our annual report on Form 10-K for the year ended February 28, 2015. There have been no material changes to the Company’s critical accounting policies from the information provided in our annual report on Form 10-K.

 

NEW ACCOUNTING GUIDANCE

 

See Note (2) “New Accounting Pronouncements” in the accompanying consolidated condensed financial statements for a discussion of the status and potential impact of any new accounting pronouncements.

 

EXPLANATION OF CERTAIN TERMS AND MEASURES USED IN MD&A

 

Accounts receivable turnover: Twelve month trailing net sales revenue divided by the average of the current and prior four fiscal quarters ending accounts receivable balances. This result is divided into 365 to express turnover in terms of average days outstanding.

 

Adjusted diluted EPS (non-GAAP): Adjusted income divided by the weighted average shares of common stock outstanding plus the effect of diluted securities.

 

Adjusted income (non-GAAP): Net income as reported under GAAP excluding the following items net of their applicable tax effects: non-cash asset impairment charges, CEO succession costs, acquisitionrelated expenses, amortization of intangible assets, and non-cash share-based compensation, as applicable.

 

Adjusted operating income (non-GAAP): Operating income for the Company or a segment as reported under GAAP excluding non-cash asset impairment charges, CEO succession costs, acquisitionrelated expenses, amortization of intangible assets, and non-cash share-based compensation, as applicable.

 

Adjusted operating margin (non-GAAP): Adjusted Operating income for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Core business: Sales, expense or operating income associated with product lines or brands after the first twelve months from the date the product line or brand was acquired. Sales, expense and operating income from developed brands or product lines are always considered core business.

 

Corporate overhead costs: General corporate managerial and related administrative compensation costs, legal, accounting, and regulatory compliance costs together with associated operating overhead that is not directly attributable to any one operating segment, but benefits the Company as a whole. These charges are allocated to each operating segment based upon a number of factors depending on the nature of the expense. Such factors include relative revenues, estimates of relative labor expenditures for each segment, and certain intangible asset levels held by each segment.

 

Current ratio: Current assets divided by current liabilities at the end of a reporting period, expressed as a ratio.

 

Ending debt to equity ratio: Total interest bearing short- and long-term debt divided by shareholder’s equity. We use this as a leverage metric to indicate what proportion of debt and equity we are using to finance assets.

 

Growth from acquisitions:  Net sales revenue growth associated with product lines or brands that we have acquired and operated for less than twelve months during each period presented.

 

Inventory turnover: Twelve month trailing cost of goods sold divided by the average of the current and prior four fiscal quarters ending inventory balances.

 

Operating expense ratio: Total operating expense (SG&A plus asset impairment charges) for the Company or a segment divided by the related net sales revenue for the Company or a segment.

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Operating leverage: The improvement in operating margin that the Company achieves with sales growth, due to the fixed nature of certain operating expenses. 

 

Operating margin: Operating income for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Return on average equity: Twelve month trailing net income divided by the average of the current and prior four fiscal quarters ending stockholders’ equity.

   

Segment operating income: We compute segment operating income based on net sales revenue less cost of goods sold, 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. We then deduct allocations for operational shared services and corporate overhead costs. We do not allocate nonoperating income and expense, including interest or income taxes to operating segments.

 

SG&A ratio: Total SG&A for the Company or a segment divided by the related net sales revenue for the Company or a segment.

 

Working capital: Current assets less current liabilities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Changes in currency exchange rates and interest rates are our primary financial market risks.

 

Foreign Currency Risk:

 

Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During the fiscal quarter and year-to-date periods ended November 30, 2015, approximately 16 and 15 percent of our net sales revenue was in foreign currencies. During both the fiscal quarter and year-to-date periods ended November 30, 2014, 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, and Venezuelan Bolivars. We make most of our inventory purchases from the Far East and primarily 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 of the balance sheet are recognized in SG&A.

 

We identify foreign currency risk by regularly monitoring our foreign currency-denominated transactions and balances. Where operating conditions permit, we 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 historically hedged against certain foreign currency exchange rate risk by using a series of forward contracts designated as cash flow hedges and mark-to-market derivatives 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. For cash flow hedges, a hedging relationship is created 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. To the extent that we forecast the expected foreign currency cash flows from the period we enter into the forward contract 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 also enter into certain foreign currency contracts we refer to as “cross-currency debt swaps.” Cross-currency debt swaps have been used with respect to $5 million of our 3.90% Senior Notes, creating an economic hedge against currency movements. We have elected not to designate these contracts as fair value hedges. Accordingly the net unrealized mark-to-market gain or loss on these derivatives are recognized in SG&A as incurred, and associated net fixed interest payments are recognized as an adjustment to interest expense. 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 earnings. 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. Accordingly, we will always be subject to foreign exchange rate-risk on exposures we have not hedged, and these risks may be material. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes. We expect that as currency market conditions warrant, and our foreign denominated transaction exposure grows, we will continue to execute additional contracts in order to hedge against certain potential foreign exchange losses.

 

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Chinese Renminbi Currency Exchange Uncertainties - A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2015 and through the end of our first quarter in fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During the second quarter of fiscal year 2016, the Chinese Renminbi devalued by approximately 4.4 percent against the U.S. Dollar. During the third quarter of fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. If China’s currency continues to fluctuate against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. Accordingly, there can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, financial condition and results of operations.

 

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. Since that time, Venezuela has undergone numerous changes and additions to its currency exchange regimes, but has not eliminated or changed the official rate of 6.30 Bolivars per U.S. Dollar.

 

In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism now known as SICAD, which was made available to certain companies that operate in designated industries. SICAD is being used in limited circumstances, which we believe preclude us from accessing such rates. At November 30, 2015, the SICAD rate was 13.50 Bolivars to the U.S. Dollar.

 

In February 2015, the Venezuelan government unveiled its latest foreign exchange mechanism known as SIMADI, which is the lowest rate in its current three-tier foreign exchange system. SIMADI is a somewhat less restrictive auction system whose value is determined by market forces. We believe a number of circumstances preclude us from accessing SIMADI. At November 30, 2015, the SIMADI rate was approximately 200 Bolivars to the U.S. Dollar.

 

Despite the recent changes made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available to the Company. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD or SIMADI mechanisms, nor do we intend to do so.

 

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 or SIMADI. 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 November 30, 2015 and 2014, sales in Venezuela represented approximately

1.6 and 0.9 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal year-to-date periods ended November 30, 2015 and 2014, sales in Venezuela represented approximately 1.5 and 0.8 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal quarters ended November 30, 2015 and 2014, operating income in Venezuela was approximately $3.12 and $1.19 million, respectively. For the fiscal year-to-date periods ended November 30, 2015 and 2014, operating income in Venezuela was approximately $6.44 and $2.50 million, respectively.  At November 30, 2015, we had a U.S. Dollar based net investment in our Venezuelan business of $16.49 million, consisting almost entirely of working capital. A devaluation in the Venezuela official exchange rate could have a material adverse impact on the reported U.S. Dollar value of this investment and the future profitability of our business there.    

 

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict. We cannot assess the impacts, if any, such events may have on our Venezuelan business. We continue to closely monitor the applicability and viability of the various exchange mechanisms.

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Interest Rate Risk:

 

Interest on our outstanding debt as of November 30, 2015 is both floating and fixed. Fixed rates are in place on $60 million of 3.90% Senior Notes due January 2018, while floating rates are in place on the balance of all other debt outstanding, which totaled $414.71 million as of November 30, 2015. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and the MBFC Loan.

 

The fair values of our derivative instruments are as follows:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2015

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

Derivatives designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

Foreign currency contracts - sell Canadian Dollars

 

Cash flow

 

8/2016

 

$

8,250

 

$

387

 

$

 -

 

$

 -

Foreign currency contracts - sell Euro

 

Cash flow

 

2/2017

 

23,250

 

 

1,511

 

 

147

 

 

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

2/2016

 

£

3,000

 

 

-   

 

 

 -

 

 

7

Subtotal

 

 

 

 

 

 

 

 

 

1,898

 

 

147

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated under hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - cross-currency debt swap

 

(1)

 

1/2018

 

$

5,000

 

 

-   

 

 

324

 

 

 -

Total fair value

 

 

 

 

 

 

 

 

$

1,898

 

$

471

 

$

7

 


 

 

(1)

During the fiscal quarter ended November 30, 2015 we entered into a foreign currency contract referred to above as a “cross-currency debt swap”, which in effect adjusts the currency denomination of $5 million of our 3.90% Senior Notes due January 2018 to the Euro, creating an economic hedge against currency movements. On this contract, we have not elected hedge accounting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2015

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

Designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

Foreign currency contracts - sell Euro

 

Cash flow

 

1/2016

 

10,000

 

$

129

 

$

 -

 

$

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

2/2016

 

£

6,900

 

 

 -

 

 

-   

 

 

240

Total fair value

 

 

 

 

 

 

 

 

$

129

 

$

 -

 

$

240

 

 

Counterparty Credit Risks:

 

Financial instruments, including foreign currency contracts, 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.

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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 (the "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 Part 1, Item 1A. “Risk Factors” of our annual report on Form 10-K for the year ended February 28, 2015 and risks otherwise described from time to time in our SEC reports as filed. Such risks, uncertainties and other important factors include, among others:

 

·

the retention and recruitment of key personnel;

 

·

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

 

·

our relationships with key customers and licensors;

 

·

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

 

·

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

 

·

expectations regarding our recent and future acquisitions, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses;

 

·

foreign currency exchange rate fluctuations;

 

·

disruptions in U.S., Eurozone, Venezuela, and other international credit markets;

 

·

risks associated with weather conditions;

 

·

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;

 

·

risks to the Nutritional Supplements segment associated with the availability, purity and integrity of materials used in the manufacture of vitamins, minerals and supplements;

 

·

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

 

·

the geographic concentration and peak season capacity of certain U.S. distribution facilities increases our exposure to significant shipping disruptions and added shipping and storage costs;

 

·

difficulties encountered during the transition of certain businesses to our distribution facilities could interrupt our logistical systems and cause shipping disruptions;

 

·

our projections of product demand, sales and net income are highly subjective in nature and future sales and net income could vary in a material amount from such projections;

 

·

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

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·

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

 

·

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

 

·

increased product liability and reputational risks associated with the formulation and distribution of vitamins, minerals and supplements;

 

·

the risks associated with potential adverse publicity and negative public perception regarding the use of vitamins, minerals and supplements;

 

·

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

 

·

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

 

·

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

 

·

the risks associated with information security breaches;

 

·

the increased complexity of compliance with a number of new government regulations as a result of adding vitamins, minerals and supplements to the Company’s portfolio of products;

 

·

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

 

·

the risks of potential changes in laws, including tax laws, health insurance laws and new regulations related to conflict minerals along with the costs and 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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ITEM 4. CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

 

Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), maintains disclosure controls and procedures as defined in Rules 13a-15(e) under the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

 

Our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended November 30, 2015. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of November 30, 2015, the end of the period covered by this quarterly report on Form 10-Q.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

In connection with the evaluation described above, we identified no change in our internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act that occurred during our fiscal quarter ended November 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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.

 

 

ITEM 1A. RISK FACTORS

 

The ownership of our common stock involves a number of risks and uncertainties. When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. “Risk Factors” of our annual report on Form 10-K for the fiscal year ended February 28, 2015. Since the filing of our annual report on Form 10-K, there have been no material changes in our risk factors from those disclosed therein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

As of November 30, 2015, we were authorized by our Board of Directors to purchase up to $209.02 million of common stock in the open market or through private transactions. Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all plan participants. In a net 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. These transactions are accounted for by the Company as a purchase and retirement of shares and are included in the table below as common stock received in connection with share-based compensation.

 

The following table summarizes our share repurchase activity for the periods covered below:

ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED NOVEMBER 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

Total Number of
Shares Purchased

   

Average Price
Paid per Share

 

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

 

 

Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
(in thousands)

September 1 through September 30, 2015

    

 

 -

    

$

 -

    

 

 -

    

$

215,309

October 1 through October 31, 2015

 

 

 -

 

 

 -

 

 

 -

 

 

215,309

November 1 through November 30, 2015 (1)

 

 

116,012

 

 

54.24

 

 

116,012

 

 

209,017

   Total

 

 

116,012

 

$

54.24

 

 

116,012

 

 

 

 


(1)

On November 17, 2015, in connection with the settlement of the lawsuit previously discussed in Note 3 to the accompanying consolidated condensed financial statements, the Company issued 276,548 shares of common stock as payment of separation compensation due to our former CEO under his employment and separation agreements. Our former CEO tendered 116,012 shares back to the Company as payment for related federal tax obligations. For additional information, see “-Unregistered Sales of Equity Securities,” below.

 

Unregistered Sales of Equity Securities

 

On November 17, 2015, in connection with the settlement of the dispute previously discussed in Note 3 to the accompanying consolidated condensed financial statements, the Company issued 276,548 shares of common stock as payment of separation compensation due to our former CEO, Gerald J. Rubin, under his employment and separation agreements. Our former CEO tendered 116,012 shares back to the Company as payment for related federal tax obligations, which resulted in a net issuance of 160,536 shares of common stock to our former CEO. The issuance of shares of our common stock was made in reliance upon an exemption from the registration requirements of the Securities Act provided by Regulation D. Our former CEO made representations to us as to his accredited investor status. Under the terms of the settlement, employment and separation agreements, the number of shares issued and tendered was computed based upon a value of $54.24 per share (or $15 million). This was the fair value of the shares on September 4, 2014, the date the compensation payment would have been paid, if payment had not been delayed by the associated dispute.

 

 

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ITEM 5. OTHER INFORMATION

 

Amended and Restated Employment Agreement

 

On January 7, 2016, Helen of Troy Nevada Corporation, a Nevada corporation and a wholly-owned subsidiary of  Helen of Troy Limited (“the Company”), and the Company entered into an Amended and Restated Employment Agreement with Julien Mininberg (the “Employment Agreement”), effective March 1, 2016. The Employment Agreement amends and restates the Employment Agreement previously entered into by the Company, Helen of Troy Nevada Corporation and Mr. Mininberg dated as of January 14, 2014 (as amended, the “Prior Agreement”). Pursuant to the Employment Agreement, Mr. Mininberg will continue to serve as the Company’s Chief Executive Officer for a fixed term through February 28, 2019, subject to earlier termination by either party.   

 

Compensation

 

Base Salary. The Employment Agreement provides that Mr. Mininberg is eligible to receive an annual base salary of $950,000.

   

Annual Incentive Bonus. The Employment Agreement provides that with respect to fiscal year 2017, and for each annual performance period commencing thereafter during the term of the Employment Agreement, Mr. Mininberg will be eligible for an annual performance bonus (the “Fiscal APB”) payable in cash under the Helen of Troy Limited 2011 Annual Incentive Plan or any successor plan (the “2011 Bonus Plan”) or any successor plan, targeted at 200% of Mr. Mininberg’s base salary, with the opportunity to earn up to $3,050,000 and a threshold achievement payout of 100% of his base salary, subject to the adjustments and  limitations set forth in the Employment Agreement and the 2011 Bonus Plan. The Fiscal APB will be based on the achievement of performance goals and other terms of the Fiscal APB determined at the sole discretion of the Compensation Committee. If the threshold is not achieved for the applicable performance period, no Fiscal APB will be earned or payable and Mr. Mininberg will not be entitled to a bonus with respect to any performance measure if the threshold amount associated with such performance measure is not achieved. Mr. Mininberg will also continue to be entitled to receive any award previously granted pursuant to the 2011 Bonus Plan, subject to the terms and conditions of the Prior Agreement which will be deemed to remain in effect for that purpose. In the event the threshold, target and maximum opportunity or amount of any Fiscal APB exceeds the limitations set forth in the Employment Agreement, the Company has agreed to use its commercially reasonable efforts to seek the approval of the Company’s shareholders at an annual general meeting to approve an amendment to the 2011 Bonus Plan to enable the award of such Fiscal APB.

 

Long-Term Incentive Compensation. With respect to fiscal year 2017, and for each performance period commencing thereafter during the term of the Employment Agreement, Mr. Mininberg will be eligible to receive a long-term performance bonus (the “Fiscal LTPB) in the form of an equity incentive award, pursuant to Helen of Troy Limited 2008 Stock Incentive Plan or any successor plan (the “2008 Stock Plan”). Pursuant to the Employment Agreement, this award will be in the form of a grant of both time-vesting restricted stock units (“RSUs”) and performance-based RSUs. In any year in which Mr. Mininberg receives a Fiscal LTPB, 25% of the target award will be granted in the form of time-based RSUs that will vest in three equal installments on successive anniversary dates of the grant over the three-year period that commences with the date of the grant, and 75% of the target award will be granted in the form of performance-based RSUs. The total target equity award for each Fiscal LTPB will be the lesser of $3,200,000 or the value of the common shares that may be granted to a participant under the 2008 Stock Plan (the “Maximum Grant Amount”), subject to the limitations set forth in the Employment Agreement and the 2008 Stock Plan. The performance-based RSU grant will be targeted at the difference of the Maximum Grant Amount less the fair market value of the time-vested RSUs (with a threshold award of 50% and a maximum award of 200% of the target performance-based RSUs granted under the 2008 Stock Plan). The Fiscal LTPB will be based on the achievement of performance goals and other terms of the Fiscal LTPB determined at the sole discretion of the Compensation Committee. Mr. Mininberg will not be entitled to a bonus with respect to any performance measure if the threshold amount associated with such

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performance measure is not achieved. Mr. Mininberg will also continue to be entitled to receive any common shares settled pursuant to any grant of RSUs pursuant to the 2008 Stock Plan prior to the effective date of the Employment Agreement, subject to the terms and conditions of the Prior Agreement which will be deemed to remain in effect for that purpose. In the event there are not a sufficient number of common shares under the 2008 Stock Plan to cause the grant of RSUs under any Fiscal LTPB, the Company has agreed to use its commercially reasonable efforts to seek the approval of the Company’s shareholders at an annual general meeting to approve an amendment to the 2008 Stock Plan to enable the award of such Fiscal LTPB.

   

Other Benefits. Under the Employment Agreement, Mr. Mininberg will continue to be eligible to participate in all existing benefit plans and perquisites generally available to the registrant’s senior executives.  Under the Employment Agreement, Mr. Mininberg is entitled to participate in various benefit plans available to all employees of the Company, such as a 401k plan (including matching contributions), group medical, group life and group dental insurance, as well as vacation and paid holidays. In addition, the Employment Agreement provides that the Company must pay or reimburse Mr. Mininberg for reasonable travel and other expenses incurred by him in performing his obligations under the Employment Agreement. The Employment Agreement also provides that Mr. Mininberg will be required to have an annual physical at the Company’s expense.  

 

Employment Termination

 

The Employment Agreement provides for certain payments and benefits upon Mr. Mininberg’s termination of employment, as described below:

 

·

Death or Disability. If Mr. Mininberg’s employment is terminated by reason of death or disability, then he (or his estate) will be entitled to receive (1) any portion of unpaid base salary earned but not yet paid to him as of the date of termination, (2) any unpaid incentive payment earned by Mr. Mininberg with respect to any award under the 2011 Bonus Plan or the 2008 Stock Plan and vested prior to the effective date of termination, (3) a pro rata bonus for the year in which his death or disability occurred, as determined by the Compensation Committee in its reasonable discretion, and (4) any death or disability benefits under the life insurance and disability programs of the Company and its subsidiaries to which he is entitled.

·

Termination by Company For Cause or by Mr. Mininberg Other Than For Good Reason. If Mr. Mininberg’s employment is terminated for cause by the Company or other than for good reason by Mr. Mininberg, then he will be entitled to receive (1) any portion of unpaid base salary earned but not yet paid to him as of the date of termination and (2) any unpaid incentive payment earned by Mr. Mininberg with respect to any award under the 2011 Bonus Plan or the 2008 Stock Plan and vested prior to the effective date of termination.

·

Termination by Mr. Mininberg For Good Reason or by Company Other Than For Cause (Not in Connection With a Change of Control). If Mr. Mininberg’s employment is terminated by Mr. Mininberg for good reason or by the Company other than for cause, then he will be entitled to receive: (1) any portion of unpaid base salary or other benefit earned but not yet paid to him as of the date of termination (including any unpaid cash or equity incentive payment earned under the 2011 Bonus Plan or the 2008 Stock Plan and vested prior to the effective date of such termination), (2) a cash payment equal to two times Mr. Mininberg’s then-applicable base salary payable in twenty-four (24) equal installments, (3) a pro rata bonus under the 2011 Bonus Plan for the year in which the termination occurred, as determined by the Compensation Committee in its reasonable discretion, (4) a pro rata portion of any installment of time-vesting RSUs that would have vested as of the anniversary of the grant date that immediately follows the date of termination, (5) to the extent permitted by benefit plans of the Company and its subsidiaries, and applicable law, the continuation of health insurance benefits under COBRA for Mr. Mininberg and his family for a maximum of 18 months after the date of termination or until Mr. Mininberg is covered by or eligible for coverage another health insurance policy, if that occurs earlier than 18 months, and (6) an additional cash payment, if applicable, to achieve an aggregate payment amount or value equal to $4,000,000, to the extent the aggregate amount or value of the payments upon

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termination of employment by Mr. Mininberg for good reason or by the Company other than for cause is less than $4,000,000. All payments and benefits due to Mr. Mininberg, other than any portion of unpaid base salary and any payment or benefit otherwise required by any rule or regulation issued by any state or federal governmental agency, will be contingent upon Mr. Mininberg’s execution of a general release of all claims to the maximum extent permitted by law against the Company, its affiliates and their respective and former directors, employees and agents pursuant to the Employment Agreement.

 

·

Termination by Mr. Mininberg for Good Reason or by Company Other Than For Cause (In Connection With a Change of Control). Under the Employment Agreement, if Mr. Mininberg’s employment is terminated by Mr. Mininberg for good reason or by the Company other than for cause within six months prior to, on, or within eighteen months following a change of control, then he will be entitled to receive: (1) any portion of unpaid base salary or other benefit earned but not yet paid to him as of the date of termination (including any unpaid cash or equity incentive payment earned under the 2011 Bonus Plan or the 2008 Stock Plan and vested prior to the effective date of such termination), (2) a lump sum cash payment equal to two times: (A) Mr. Mininberg’s then-applicable base salary at the time of the change of control or the date of termination of employment, whichever is higher, plus (b) an amount equal to the target annual incentive under the 2011 Bonus Plan for the performance period in which his employment terminated, payable in a lump sum (3) a pro rata bonus under the 2011 Bonus Plan for the year in which the termination occurred, as determined by the Compensation Committee in its reasonable discretion, (4) accelerated vesting of all unvested, time-vesting RSUs issued pursuant to the 2008 Stock Plan as of the date of termination, (5) accelerated vesting at target of all outstanding, unearned, performance-based RSUs issued pursuant to the 2008 Stock Plan as of the date of termination, (6)  to the extent permitted by benefit plans of the Company and its subsidiaries, and applicable law, the continuation of health insurance benefits under COBRA for Mr. Mininberg and his family for a maximum of 18 months after the date of termination or until Mr. Mininberg is covered by or eligible for coverage another health insurance policy, if that occurs earlier than 18 months, and (7) an additional cash payment, if applicable, to achieve an aggregate payment amount or value equal to $4,000,000, to the extent the aggregate amount or value of the payments upon termination of employment by Mr. Mininberg for good reason or by the Company other than for cause is less than $4,000,000.  In the event any outstanding equity awards issued pursuant to the 2008 Stock Plan are not assumed in connection with a change of control, such awards will immediately vest in accordance with the terms of the 2008 Stock Plan. All payments and benefits due to Mr. Mininberg, other than any portion of unpaid base salary and any payment or benefit otherwise required by any rule or regulation issued by any state or federal governmental agency, will be contingent upon Mr. Mininberg’s execution of a general release of all claims to the maximum extent permitted by law against the Company, its affiliates and their respective and former directors, employees and agents pursuant to the Employment Agreement.

 

In the event that Mr. Mininberg is a specified employee (as defined within Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”)) at the time of his termination of employment, any amounts that are not otherwise exempt from Section 409A may be delayed for a six month period following such a termination.

 

The Prior Agreement did not contain the provision of any payment or vesting of awards that are linked to a change of control of the Company.  Generally, a change of control will have the same meaning under the Employment Agreement as defined under the 2008 Stock Plan.  There were no material changes to the definitions of “good reason” and “cause” from the Prior Agreement except that the Employment Agreement includes the non-renewal by the Company of employment in a written agreement with substantially similar terms relating to base salary, termination payments and annual and long-term incentive bonus opportunities under the Employment Agreement on or before six months prior to the last day of the term of the Employment Agreement as an event constituting “good reason.” 

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Restrictive Covenants

 

In consideration for the payment and benefits provided under the Employment Agreement, Mr. Mininberg will be subject to reasonable and necessary restrictive covenants to protect the Company, including restrictions on post-termination disclosure of confidential information, competitive activity and solicitation of the Company’s employees, for the eighteen-month period immediately following the date of termination of Mr. Mininberg’s employment with the Company for any reason.  The Prior Agreement provided that Mr. Mininberg was subject to substantially similar restrictive covenants for a twelve-month period following the date of his termination. 

 

The foregoing description of the Employment Agreement is a summary and is qualified in its entirety by reference to the text of the Employment Agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1  and incorporated herein by reference.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

n

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ITEM 6.

EXHIBITS

 

 

 

(a)

Exhibits

 

 

 

 

 

4.1

Registration Rights (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3, File No. 33-208470, filed with the Securities and Exchange Commission on December 11, 2015).

 

 

 

 

 

 

10.1*

Amended and restated Employment Agreement among Helen of Troy Nevada Corporation, Helen of Troy Limited and Julien Mininberg, dated January 7, 2016.

 

 

 

 

 

 

31.1*

Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

31.2*

Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

32**

Joint certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

101.INS *

XBRL Instance Document

 

 

101.SCH *

XBRL Taxonomy Extension Schema

 

 

101.CAL *

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF *

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB *

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE *

XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

 

 

†     Management contracts or compensatory plans or arrangements 

 

 

 

 

 

*     Filed herewith.

 

 

 

 

 

**   Furnished herewith.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

  HELEN OF TROY LIMITED

 

  (Registrant)

 

 

 

 

Date:    January 11, 2016

  /s/ Julien R. Mininberg

 

  Julien R. Mininberg

 

  Chief Executive Officer,

  Director and Principal Executive Officer

 

 

 

 

 

 

Date:    January 11, 2016

  /s/ Brian L. Grass

 

  Brian L. Grass

 

  Chief Financial Officer

 

  and Principal Financial Officer

 

 

 

 

Date:    January 11, 2016

  /s/ Richard J. Oppenheim

 

  Richard J. Oppenheim

 

  Financial Controller

 

  and Principal Accounting Officer

 

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Index to Exhibits

 

 

 

4.1

Registration Rights (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3, File No. 33-208470, filed with the Securities and Exchange Commission on December 11, 2015).

 

 

10.1*

Amended and restated Employment Agreement among Helen of Troy Nevada Corporation, Helen of Troy Limited and Julien Mininberg, dated January 7, 2016.

 

 

31.1*

Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32**

Joint Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS *

XBRL Instance Document

101.SCH *

XBRL Taxonomy Extension Schema

101.CAL *

XBRL Taxonomy Extension Calculation Linkbase

101.DEF *

XBRL Taxonomy Extension Definition Linkbase

101.LAB *

XBRL Taxonomy Extension Label Linkbase

101.PRE *

XBRL Taxonomy Extension Presentation Linkbase

 

 

Management contracts or compensatory plans or arrangements

 

 

*

Filed herewith.

 

 

**

Furnished herewith.

 

 

 

 

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