hele_Current folio_Taxonomy2016

Table of Contents

 

 

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, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

Accelerated filer 

Non-accelerated filer

Smaller reporting company 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes     No

 

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 4, 2018

Common Shares, $0.10 par value, per share

 

26,968,072 shares

 

 

 

 

 

 


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

FORM 10Q

TABLE OF CONTENTS

 

 

 

 

 

PAGE 

 

 

 

PART 1. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

2

 

 

 

 

Note 1   - Basis of Presentation and Related Information

6

 

Note 2   - New Accounting Pronouncements

7

 

Note 3   - Supplemental Balance Sheet Information

8

 

Note 4   - Acquisitions

9

 

Note 5   - Goodwill and Intangible Assets

10

 

Note 6   - Share-Based Compensation Plans

13

 

Note 7   - Repurchase of Helen of Troy Common Stock

14

 

Note 8   - Restructuring Plan

14

 

Note 9   - Commitments and Contingencies

15

 

Note 10 - Long-Term Debt

15

 

Note 11 - Fair Value

17

 

Note 12 - Financial Instruments and Risk Management

18

 

Note 13 - Comprehensive Income (Loss)

20

 

Note 14 - Segment Information

21

 

Note 15 - Income Taxes

22

 

Note 16 - Earnings Per Share

22

 

Note 17 - Subsequent Events

23

 

 

 

Item 2. 

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

24

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

48

 

 

 

PART 2. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

50

 

 

 

Item 1A. 

Risk Factors

50

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 6. 

Exhibits

52

 

 

 

 SIGNATURES

53

 

1


 

Table of Contents

PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28,

(in thousands, except shares and par value)

    

2017

    

2017

Assets

 

 

 

 

 

 

Assets, current:

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,157

 

$

23,087

Receivables - principally trade, less allowances of $9,624 and $5,656

 

 

302,390

 

 

229,928

Inventory

 

 

285,594

 

 

289,122

Prepaid expenses and other current assets

 

 

13,505

 

 

11,699

Income taxes receivable

 

 

 -

 

 

2,242

Total assets, current

 

 

622,646

 

 

556,078

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $118,485 and $106,561

 

 

132,989

 

 

134,935

Goodwill

 

 

602,320

 

 

698,929

Other intangible assets, net of accumulated amortization of $184,937 and $165,388

 

 

369,201

 

 

419,489

Deferred tax assets, net

 

 

44,590

 

 

1,955

Other assets, net of accumulated amortization of $1,999 and $1,930

 

 

3,149

 

 

1,710

Total assets

 

$

1,774,895

 

$

1,813,096

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

 

Accounts payable, principally trade

 

$

109,196

 

$

111,763

Accrued expenses and other current liabilities

 

 

174,532

 

 

153,200

Income taxes payable

 

 

54,538

 

 

 -

Long-term debt, current maturities

 

 

20,860

 

 

24,404

Total liabilities, current

 

 

359,126

 

 

289,367

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

 

405,331

 

 

461,211

Deferred tax liabilities, net

 

 

8,153

 

 

20,091

Other liabilities, noncurrent

 

 

17,875

 

 

21,661

Total liabilities

 

 

790,485

 

 

792,330

 

 

 

 

 

 

 

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; 26,960,863 and 27,028,665 shares

 

 

 

 

 

 

issued and outstanding

 

 

2,696

 

 

2,703

Additional paid in capital

 

 

228,143

 

 

218,760

Accumulated other comprehensive income (loss)

 

 

(1,338)

 

 

1,173

Retained earnings

 

 

754,909

 

 

798,130

Total stockholders' equity

 

 

984,410

 

 

1,020,766

Total liabilities and stockholders' equity

 

$

1,774,895

 

$

1,813,096

 

See accompanying notes to consolidated condensed financial statements.

 

 

2


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

 

(in thousands, except per share data)

 

2017

    

2016

    

2017

    

2016

 

Sales revenue, net

 

$

453,045

 

$

444,414

 

$

1,191,112

 

$

1,160,522

 

Cost of goods sold

 

 

251,271

 

 

250,199

 

 

664,956

 

 

650,912

 

Gross profit

 

 

201,774

 

 

194,215

 

 

526,156

 

 

509,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

133,894

 

 

130,896

 

 

387,332

 

 

378,506

 

Asset impairment charges

 

 

82,227

 

 

 -

 

 

136,297

 

 

7,400

 

Restructuring charges

 

 

1,283

 

 

 -

 

 

1,283

 

 

 -

 

Operating income (loss)

 

 

(15,630)

 

 

63,319

 

 

1,244

 

 

123,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income, net

 

 

34

 

 

106

 

 

281

 

 

343

 

Interest expense

 

 

(3,619)

 

 

(3,625)

 

 

(11,327)

 

 

(11,142)

 

Income (loss) before income taxes

 

 

(19,215)

 

 

59,800

 

 

(9,802)

 

 

112,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

46,625

 

 

4,928

 

 

60,188

 

 

16,625

 

Deferred

 

 

(35,404)

 

 

(2,740)

 

 

(54,355)

 

 

(8,713)

 

Net income (loss)

 

$

(30,436)

 

$

57,612

 

$

(15,635)

 

$

104,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.12)

 

$

2.10

 

$

(0.58)

 

$

3.79

 

Diluted

 

$

(1.12)

 

$

2.07

 

$

(0.58)

 

$

3.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in

 

 

 

 

 

 

 

 

 

 

 

 

 

computing net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,113

 

 

27,484

 

 

27,140

 

 

27,700

 

Diluted

 

 

27,113

 

 

27,802

 

 

27,140

 

 

28,058

 

 

See accompanying notes to consolidated condensed financial statements.

 

3


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

2017

 

2016

 

 

Before

 

Tax (Expense)

 

Net of

 

Before

 

Tax (Expense)

 

Net of

(in thousands)

 

Tax

 

Benefit

 

Tax

 

Tax

 

Benefit

 

Tax

Income (loss)

 

$

(19,215)

   

$

(11,221)

   

$

(30,436)

   

$

59,800

 

$

(2,188)

 

$

57,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

753

 

 

(290)

 

 

463

 

 

 -

 

 

 -

 

 

 -

Subtotal

 

 

753

 

 

(290)

 

 

463

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

2,928

 

 

(725)

 

 

2,203

 

 

2,049

 

 

(370)

 

 

1,679

Settlements reclassified to income

 

 

(1,328)

 

 

271

 

 

(1,057)

 

 

(522)

 

 

73

 

 

(449)

Subtotal

 

 

1,600

 

 

(454)

 

 

1,146

 

 

1,527

 

 

(297)

 

 

1,230

Total other comprehensive income

 

 

2,353

 

 

(744)

 

 

1,609

 

 

1,527

 

 

(297)

 

 

1,230

Comprehensive income (loss)

 

$

(16,862)

 

$

(11,965)

 

$

(28,827)

 

$

61,327

 

$

(2,485)

 

$

58,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

2017

 

2016

 

 

Before

 

Tax (Expense)

 

Net of

 

Before

 

Tax (Expense)

 

Net of

(in thousands)

 

Tax

 

Benefit

 

Tax

 

Tax

 

Benefit

 

Tax

Income (loss)

 

$

(9,802)

   

$

(5,833)

   

$

(15,635)

   

$

112,905

 

$

(7,912)

 

$

104,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

753

 

 

(290)

 

 

463

 

 

 -

 

 

 -

 

 

 -

Subtotal

 

 

753

 

 

(290)

 

 

463

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

(1,275)

 

 

75

 

 

(1,200)

 

 

2,319

 

 

(412)

 

 

1,907

Settlements reclassified to income

 

 

(2,208)

 

 

434

 

 

(1,774)

 

 

(505)

 

 

20

 

 

(485)

Subtotal

 

 

(3,483)

 

 

509

 

 

(2,974)

 

 

1,814

 

 

(392)

 

 

1,422

Total other comprehensive income (loss)

 

 

(2,730)

 

 

219

 

 

(2,511)

 

 

1,814

 

 

(392)

 

 

1,422

Comprehensive income (loss)

 

$

(12,532)

 

$

(5,614)

 

$

(18,146)

 

$

114,719

 

$

(8,304)

 

$

106,415

 

See accompanying notes to consolidated condensed financial statements.

 

4


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

(in thousands)

2017

  

2016

  

Cash provided by operating activities:

 

 

 

 

 

  

Net income (loss)

$

(15,635)

  

$

104,993

  

Adjustments to reconcile net income (loss) to net cash  provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

32,362

  

 

33,323

  

Amortization of financing costs

 

976

  

 

876

  

Provision for doubtful receivables

 

2,076

  

 

1,489

  

Non-cash share-based compensation

 

11,130

  

 

11,661

  

Non-cash intangible asset impairment charges

 

136,297

  

 

7,400

  

Gain (loss) on the sale or disposal of property and equipment

 

(10)

  

 

167

  

Deferred income taxes and tax credits

 

(54,355)

  

 

(8,769)

  

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

 

 

  

 

 

  

Receivables

 

(74,538)

  

 

(66,005)

  

Inventories

 

3,528

  

 

7,001

  

Prepaid expenses and other current assets

 

(2,850)

  

 

(2,134)

  

Other assets and liabilities, net

 

(1,532)

  

 

(3,772)

  

Accounts payable

 

(2,532)

  

 

29,004

  

Accrued expenses and other current liabilities

 

19,075

  

 

22,410

  

Accrued income taxes

 

53,637

  

 

1,496

  

Net cash provided by operating activities

 

107,629

  

 

139,140

  

 

 

 

  

 

 

  

Cash used in investing activities:

 

 

  

 

 

  

Capital and intangible asset expenditures

 

(19,854)

  

 

(14,989)

  

Proceeds from the sale of property and equipment

 

13

 

 

32

  

Payments to acquire businesses, net of cash acquired

 

 -

  

 

(209,258)

  

Net cash used in investing activities

 

(19,841)

  

 

(224,215)

  

 

 

 

  

 

 

  

Cash used in financing activities:

 

 

  

 

 

  

Proceeds from line of credit

 

389,500

  

 

328,600

  

Repayment of line of credit

 

(444,200)

  

 

(380,600)

  

Repayment of long-term debt

 

(5,700)

  

 

(3,800)

  

Payment of financing costs

 

 -

  

 

(89)

  

Proceeds from share issuances under share-based compensation plans

 

6,670

  

 

7,451

  

Payment of tax obligations resulting from cashless share award settlements

 

(6,830)

  

 

(507)

  

Payments for repurchases of common stock

 

(29,158)

  

 

(75,000)

  

Net cash used in financing activities

 

(89,718)

  

 

(123,945)

  

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Net decrease in cash and cash equivalents

 

(1,930)

  

 

(209,020)

  

Cash and cash equivalents, beginning balance

 

23,087

  

 

225,800

  

Cash and cash equivalents, ending balance

$

21,157

  

$

16,780

  

 

See accompanying notes to consolidated condensed financial statements.

 

5


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

NOVEMBER 30, 2017

Note 1 - Basis of Presentation and Related Information

In this quarterly report on Form 10-Q and the accompanying consolidated condensed financial statements and notes thereto, 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. 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. As of November 30, 2017, we had four segments: Housewares, Health & Home, Nutritional Supplements, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation tools and storage containers; cleaning, bath and garden tools and accessories; infant and toddler care products; and insulated beverage and food containers. The Health & Home segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. The Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, topical skin products and other health products sold directly to consumers, which was divested on December 20, 2017 (see Note 17 to these consolidated condensed financial statements). 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 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, 2017 and February 28, 2017, 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, 2017, and our other reports on file with the Securities and Exchange Commission (the “SEC”).

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.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated condensed financial statements and accompanying notes. Actual results may differ materially from those estimates.

Our consolidated condensed financial statements are prepared in United States (“U.S.”) Dollars. All intercompany accounts and transactions are eliminated in consolidation.

6


 

Table of Contents

We have reclassified, combined or separately disclosed certain amounts in the prior years’ consolidated condensed financial statements and accompanying footnotes to conform to the current year’s presentation.

 

Note 2 – New Accounting Pronouncements

Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging –Targeted Improvements to Accounting for Hedging Activities (Topic 815), which amends and simplifies hedge accounting with the intent of better aligning financial reporting for hedging relationships with an entity's risk management activities. The ASU is effective February 1, 2019. We are currently evaluating the effect this new accounting guidance may have on our consolidated financial position, results of operations and cash flows.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We do not expect the adoption of ASU 2017-09 to have a material effect on our consolidated financial position, results of operations and cash flows.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra–Entity Asset Transfers of Assets Other Than Inventory. ASU 2016-16 amends accounting guidance for intra-entity transfers of assets other than inventory to require the recognition of taxes when the transfer occurs. The amendment will be effective for us in fiscal 2019. A modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment consisting of the net impact from (1) the write-off of any unamortized expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any valuation allowance. The new guidance does not include any specific new disclosure requirements. The new guidance may impact our effective tax rate, after adoption. We are currently evaluating the impact this guidance may have on our consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 will require lessees to recognize on their balance sheets “right-of-use assets” and corresponding lease liabilities, measured on a discounted basis over the lease term. Virtually all leases will be subject to this treatment except leases that meet the definition of a “short-term lease.” For expense recognition, the dual model requiring leases to be classified as either operating or finance leases has been retained from the prior standard. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Classification will use criteria very similar to those applied in current lease accounting, but without explicit bright lines. The new lease guidance will essentially eliminate off-balance sheet financing. The guidance is effective for us in fiscal 2020. The new standard must be adopted using a modified retrospective transition and requires the new guidance to be applied at the beginning of the earliest comparative period presented. We are currently evaluating the effect this new accounting guidance may have on our consolidated financial position, results of operations and 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

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customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We plan to adopt the new standard on March 1, 2018.  If changes in policy or practice are required, we can adopt either retrospectively or as a cumulative effect adjustment as of the date of adoption. We continue to make progress in our assessment and implementation of the new standard. Our implementation approach has included a survey of revenue recognition policies and practices across each of our global reporting units, and a detailed study of the various types of commercial arrangements that we have with our customers to assess conformance of our current accounting practices with the new standard.  While our completion of this assessment is ongoing, based on progress to date, we expect the new standard to primarily impact qualitative disclosure rather than materially effecting our accounting policies or practices. This is because our revenue is primarily generated from the sale of non-customized finished product to customers. Such sales contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer. The accounting for these transactions is largely not impacted by the new standard.

Unless otherwise discussed above, 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.

Adopted

In January 2017, the FASB, issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance provides for a single-step quantitative test to identify and measure impairment, requiring an entity to recognize an impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. We adopted the new guidance in the first quarter of fiscal 2018, applying it on a prospective basis. The application of this guidance has not had a material impact on our financial position, results of operations or cash flows.

 

Note 3 – Supplemental Balance Sheet Information

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

Useful Lives

 

November 30, 

 

February 28,

(in thousands)

 

(Years)

 

2017

    

2017

Land

 

 

 -

 

 

$

12,800

 

$

12,800

Building and improvements

 

3

 -

40

 

 

109,108

 

 

109,026

Computer, furniture and other equipment

 

3

 -

15

 

 

89,838

 

 

81,122

Tools, molds and other production equipment

 

1

 -

10

 

 

33,792

 

 

31,157

Construction in progress

 

 

 -

 

 

 

5,936

 

 

7,391

Property and equipment, gross

 

 

 

 

 

 

251,474

 

 

241,496

Less accumulated depreciation

 

 

 

 

 

 

(118,485)

 

 

(106,561)

Property and equipment, net

 

 

 

 

 

$

132,989

 

$

134,935

 

 

 

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28,

(in thousands)

    

2017

    

2017

Accrued compensation, benefits and payroll taxes

 

$

31,311

 

$

34,917

Accrued sales returns, discounts and allowances

 

 

32,050

 

 

27,377

Accrued warranty returns

 

 

23,653

 

 

21,766

Accrued advertising

 

 

30,134

 

 

23,747

Accrued legal fees and settlements

 

 

17,282

 

 

16,908

Accrued royalties

 

 

10,599

 

 

9,553

Accrued property, sales and other taxes

 

 

9,509

 

 

6,564

Accrued freight and duty

 

 

5,480

 

 

3,454

Accrued product liability

 

 

2,224

 

 

2,141

Derivative liabilities, current

 

 

2,305

 

 

47

Liability for uncertain tax positions

 

 

1,024

 

 

 -

Other

 

 

8,961

 

 

6,726

Total accrued expenses and other current liabilities

 

$

174,532

 

$

153,200

 

OTHER LIABILITIES, NONCURRENT

 

 

 

 

 

 

 

 

 

November 30, 

 

February 28,

(in thousands)

    

2017

    

2017

Deferred compensation liability

 

$

5,988

 

$

6,560

Liability for uncertain tax positions

 

 

3,467

 

 

6,611

Other liabilities

 

 

8,420

 

 

8,490

Total other liabilities, noncurrent

 

$

17,875

 

$

21,661

 

 

Note 4 – Acquisitions

Hydro Flask Acquisition  - On March 18, 2016, we completed the acquisition of all membership units of Steel Technology, LLC, doing business as Hydro Flask. Hydro Flask is a leading designer, distributor and marketer of high performance insulated stainless steel food and beverage containers for active lifestyles. The aggregate purchase price for the transaction was approximately $209.3 million, net of cash acquired. Significant assets acquired include receivables, inventory, prepaid expenses, property and equipment, trade names, technology assets, customer relationships, and goodwill. Acquisition-related expenses, incurred during fiscal 2016, were approximately $0.7 million (before and after tax).

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill, which is not expected to be deductible for income tax purposes. We completed our analysis of the economic lives of all the assets acquired and determined the appropriate fair values of the acquired assets. We assigned $59.0 million to trade names with indefinite economic lives. We assigned $10.3 million to technology assets and $14.2 million to customer relationships and are amortizing these assets over expected lives of 10 and 24 years, respectively. For technology assets, we considered the average life cycle of the underlying products, which range from 7 - 15 years, and the overall average life of the associated patent portfolio. For the customer relationships, we used historical attrition rates to assign an expected life.

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The following schedule presents the net assets of Hydro Flask recorded at the acquisition date, excluding cash acquired:

HYDRO FLASK - NET ASSETS RECORDED UPON ACQUISITION AT MARCH 18, 2016

(in thousands)

 

 

 

 

Assets:

    

 

 

Receivables

 

$

7,955

Inventory

 

 

6,243

Prepaid expenses and other current assets

 

 

336

Property and equipment

 

 

1,108

Goodwill

 

 

116,053

Trade names - indefinite

 

 

59,000

Technology assets - definite

 

 

10,300

Customer relationships - definite

 

 

14,200

Subtotal - assets

 

 

215,195

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

 

2,275

Accrued expenses

 

 

3,662

Subtotal - liabilities

 

 

5,937

Net assets recorded

 

$

209,258

The fair values of the above assets acquired and liabilities assumed were estimated by applying income and market approaches. Key assumptions include various discount rates based upon a 12.3% weighted average cost of capital; royalty rates used in the determination of trade names and technology asset values of 6% and 2%, respectively; and a customer attrition rate used in the determination of customer relationship values of approximately 4% per year.

 

Note 5 – Goodwill and Intangible Assets

Impairment Testing in Fiscal 2018

Nutritional Supplements

During the third quarter of fiscal 2018, we continued to evaluate strategic alternatives for our Nutritional Supplements segment, including a transaction to divest the business. Over the short-term, certain of these alternatives may have a disproportionate impact on our income relative to the cost savings or generate other charges or losses.

During the third quarter of fiscal 2018, we received new information regarding the potential fair value of our Nutritional Supplements segment that we concluded should be considered when determining if impairments of our long-lived assets, including goodwill, had occurred.  Consequently, we performed interim impairment testing. As a result of our testing, we recorded pre-tax non-cash asset impairment charges totaling $82.2 million, consisting of $70.6 million to the segment’s goodwill and $11.6 million to the segment’s indefinite-lived brand assets.

During the second quarter of fiscal 2018, we performed additional impairment testing for our Nutritional Supplements segment due to a revised financial projection. As a result of our testing, we recorded pre-tax non-cash asset impairment charges totaling $18.1 million to the segment’s indefinite-lived brand assets.

During the first quarter of fiscal 2018, we received information regarding the potential fair value of our Nutritional Supplements segment that we concluded should be considered when determining if impairments of our long-lived assets, including goodwill, had occurred.  Consequently, we performed

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interim impairment testing. As a result of our testing, we recorded pre-tax non-cash asset impairment charges totaling $32.0 million, consisting of $6.0 million to the segment’s indefinite-lived brand assets and $26.0 million to the segment’s goodwill.

Beauty

In our Beauty segment, we performed interim impairment testing in the first quarter of fiscal 2018 for a certain brand due to a revised financial projection. As a result of our testing, we recorded a pre-tax non-cash asset impairment charge of $4.0 million.  

The fair values used in our impairment tests were determined using a weighted average of various valuation methods including estimated future discounted cash flows and other market data. The valuation techniques utilized assumptions we believed to be appropriate in the circumstances; however, future circumstances attributable to a strategic change in our business could result in changes to those assumptions and other charges or losses relating our segments may be recorded and could be material. For example, if we determine that a divestiture is a probable outcome of our strategic reviews, we may need to perform additional impairment tests that may include future offer values. We are unable to project the amount of any expense, charge or loss that may be incurred in future periods.

Impairment Testing in Fiscal 2017

Our annual impairment testing for goodwill and indefinite-lived intangible assets had historically occurred in the first quarter of our fiscal year. In December 2016, we elected to change our annual impairment testing to the fourth quarter of our fiscal year. Accordingly, for fiscal 2017 we completed impairment tests during the first and fourth fiscal quarters. As a result of our testing of indefinite-lived trademarks in the fourth quarter, we recorded non-cash asset impairment charges of $5.0 million ($3.2 million after tax). As a result of our testing of indefinite-lived trademarks in the first quarter, we recorded non-cash asset impairment charges of $7.4 million ($5.1 million after tax). The charges in both quarters were related to certain brand assets and trademarks in our Beauty and Nutritional Supplements segments, which were written down to their estimated fair values, determined on the basis of our estimated future discounted cash flows using the relief from royalty valuation method. The fair values used for our impairment testing in fiscal 2017 were estimated using a weighted average approach, which heavily weighted a valuation derived from a discounted cash flow model based on the Company’s estimates of future cash flows and based on management’s intentions with respect to the business.

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The following table summarizes the carrying amounts and associated accumulated amortization for all intangible assets by operating segment as of the end of the periods shown:

GOODWILL AND INTANGIBLE ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2017

 

February 28, 2017

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

(in thousands)

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

Amount

 

Impairments

 

Amortization

 

Value

Housewares:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Goodwill

 

 

$

282,056

 

$

 -

 

$

 -

 

$

282,056

 

$

282,056

 

$

 -

 

$

 -

 

$

282,056

Trademarks - indefinite

 

 

 

134,200

 

 

 -

 

 

 -

 

 

134,200

 

 

134,200

 

 

 -

 

 

 -

 

 

134,200

Other intangibles - finite

 

 

 

40,751

 

 

 -

 

 

(17,074)

 

 

23,677

 

 

40,393

 

 

 -

 

 

(15,476)

 

 

24,917

Total Housewares

 

 

 

457,007

 

 

 -

 

 

(17,074)

 

 

439,933

 

 

456,649

 

 

 -

 

 

(15,476)

 

 

441,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health & Home:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

284,913

 

 

 -

 

 

 -

 

 

284,913

 

 

284,913

 

 

 -

 

 

 -

 

 

284,913

Trademarks - indefinite

 

 

 

54,000

 

 

 -

 

 

 -

 

 

54,000

 

 

54,000

 

 

 -

 

 

 -

 

 

54,000

Licenses - finite

 

 

 

15,300

 

 

 -

 

 

(15,300)

 

 

 -

 

 

15,300

 

 

 -

 

 

(15,300)

 

 

 -

Licenses - indefinite

 

 

 

7,400

 

 

 -

 

 

 -

 

 

7,400

 

 

7,400

 

 

 -

 

 

 -

 

 

7,400

Other intangibles - finite

 

 

 

117,473

 

 

 -

 

 

(74,400)

 

 

43,073

 

 

116,982

 

 

 -

 

 

(66,027)

 

 

50,955

Total Health & Home

 

 

 

479,086

 

 

 -

 

 

(89,700)

 

 

389,386

 

 

478,595

 

 

 -

 

 

(81,327)

 

 

397,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional Supplements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

96,609

 

 

(96,609)

 

 

 -

 

 

 -

 

 

96,609

 

 

 -

 

 

 -

 

 

96,609

Brand assets - indefinite

 

 

 

20,432

 

 

 -

 

 

 -

 

 

20,432

 

 

56,020

 

 

 -

 

 

 -

 

 

56,020

Other intangibles - finite

 

 

 

52,180

 

 

 -

 

 

(22,095)

 

 

30,085

 

 

44,180

 

 

 -

 

 

(16,715)

 

 

27,465

Total Nutritional Supplements

 

 

 

169,221

 

 

(96,609)

 

 

(22,095)

 

 

50,517

 

 

196,809

 

 

 -

 

 

(16,715)

 

 

180,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beauty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

Trademarks - indefinite

 

 

 

41,854

 

 

 -

 

 

 -

 

 

41,854

 

 

45,854

 

 

 -

 

 

 -

 

 

45,854

Trademarks - finite

 

 

 

150

 

 

 -

 

 

(96)

 

 

54

 

 

150

 

 

 -

 

 

(92)

 

 

58

Licenses - indefinite

 

 

 

10,300

 

 

 -

 

 

 -

 

 

10,300

 

 

10,300

 

 

 -

 

 

 -

 

 

10,300

Licenses - finite

 

 

 

13,696

 

 

 -

 

 

(12,087)

 

 

1,609

 

 

13,696

 

 

 -

 

 

(11,849)

 

 

1,847

Other intangibles - finite

 

 

 

46,402

 

 

 -

 

 

(43,885)

 

 

2,517

 

 

46,402

 

 

 -

 

 

(39,929)

 

 

6,473

Total Beauty

 

 

 

194,243

 

 

(46,490)

 

 

(56,068)

 

 

91,685

 

 

198,243

 

 

(46,490)

 

 

(51,870)

 

 

99,883

Total goodwill and intangible assets

$

1,299,557

 

$

(143,099)

 

$

(184,937)

 

$

971,521

 

$

1,330,296

 

$

(46,490)

 

$

(165,388)

 

$

1,118,418

 

The following table summarizes the amortization expense attributable to intangible assets recorded in SG&A in the consolidated condensed statements of operations for the periods shown below, as well as our estimated amortization expense for fiscal 2018 through 2023.

AMORTIZATION OF INTANGIBLE ASSETS

 

 

 

 

 

Aggregate Amortization Expense (in thousands)

 

 

 

For the three months ended

November 30, 2017

 

$

6,430

November 30, 2016

 

 

7,199

 

 

 

 

Aggregate Amortization Expense (in thousands)

 

 

 

For the nine months ended

November 30, 2017

 

$

19,578

November 30, 2016

 

 

21,625

 

 

 

 

 

Estimated Amortization Expense (in thousands)

 

 

 

Fiscal 2018

 

$

26,095

Fiscal 2019

 

 

20,604

Fiscal 2020

 

 

19,516

Fiscal 2021

 

 

16,926

Fiscal 2022

 

 

6,450

Fiscal 2023

 

 

4,280

 

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Note 6 – Share-Based Compensation Plans  

We have equity awards outstanding under several share-based compensation plans. During the three- and nine-months ended November 30, 2017, we had the following share-based compensation activity:

·

We issued 1,351 and 4,279 shares, respectively, to non-employee Board members with a total grant date fair value of $0.1 and $0.4 million, respectively, and average share prices of $90.80 and $94.26, respectively.

·

We granted time-vested restricted stock units (“RSUs”) that may be settled for 5,437 and 78,352 shares, respectively, of common stock with average fair values at the grant dates of $93.75  and $89.22 per unit, respectively.

·

We granted performance-based restricted stock units (“PSUs”) for 3,795 and 70,329 shares, respectively, of common stock with average fair values at the grant dates of $92.20 and $91.54 per unit, respectively.

·

Employee RSUs for 1,115 and 35,250 shares vested and settled with a total fair value at settlement of $0.1 and $3.5 million and an average share price of $91.97 and $98.13, respectively.

·

Employees exercised stock options to purchase 7,148 and 110,552 shares of common stock, respectively.

During the three months ended May 31, 2017, employee PSUs for 149,884 shares vested and settled with a total fair value at settlement of $14.3 million, and an average share price of $95.55.

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

SHARE-BASED COMPENSATION EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

November 30, 

 

November 30, 

(in thousands, except per share data)

 

2017

 

2016

 

2017

    

2016

Stock options

 

$

327

      

$

629

      

$

1,289

      

$

2,036

Directors stock compensation

 

 

175

 

 

175

 

 

575

 

 

525

Performance based and other stock awards

 

 

4,202

 

 

2,151

 

 

9,141

 

 

8,998

Employee stock purchase plan

 

 

 -

 

 

 -

 

 

297

 

 

258

Share-based compensation expense

 

 

4,704

 

 

2,955

 

 

11,302

 

 

11,817

Less income tax benefits

 

 

(781)

 

 

(706)

 

 

(1,862)

 

 

(2,920)

Share-based compensation expense, net of income tax benefits

 

$

3,923

 

$

2,249

 

$

9,440

 

$

8,897

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share impact of share-based compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

0.08

 

$

0.35

 

$

0.32

Diluted

 

$

0.14

 

$

0.08

 

$

0.35

 

$

0.32

 

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Note 7 – Repurchase of Helen of Troy Common Stock

On May 10, 2017, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The new authorization is effective for a period of three years and replaced our existing repurchase authorization, of which approximately $82 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of November 30, 2017, our repurchase authorization allowed for the purchase of $364.9 million of common stock. 

Our current equity-based compensation plans include provisions that allow for the “net exercise” of share settled awards 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. Net exercises are treated as purchases and retirements of shares.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

(in thousands, except per share data)

    

2017

    

2016

 

2017

    

2016

 

Common stock repurchased on the open market or through tender offer:

 

 

 

 

 

 

 

 

 

 

Number of shares

      

 

311,100

      

 

922,731

 

 

311,100

      

 

922,731

 

Aggregate value of shares

 

$

29,158

 

$

75,000

 

$

29,158

 

$

75,000

 

Average price per share

 

$

93.72

 

$

81.28

 

$

93.72

 

$

81.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock received in connection with share-based compensation:

 

 

 

 

 

 

 

 

 

 

Number of shares

 

 

299

 

 

961

 

 

72,864

 

 

6,235

 

Aggregate value of shares

 

$

27

 

$

83

 

$

7,000

 

$

590

 

Average price per share

 

$

91.94

 

$

85.97

 

$

96.07

 

$

94.60

 

 

 

Note 8 – Restructuring Plan

On October 5, 2017, the Company announced that it had approved a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance of the Beauty and Nutritional Supplements segments. Project Refuel includes a reduction-in-force and the elimination of certain contracts. Following the divestiture of the Nutritional Supplements segment, as discussed in Note 17 to these consolidated condensed financial statements, the Company is targeting total annualized profit improvements of approximately $8.0 million over the duration of the plan.  The Company estimates the plan to be completed by the first quarter of fiscal 2020, and expects to incur total restructuring charges in the range of approximately $3.2 to $4.8 million over the same period. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically. Restructuring charges also include amounts recognized as incurred.

During the three- and nine-months ended November 30, 2017, the Company incurred $1.3 million of pre-tax restructuring costs, of which $1.2 million pertained to employee severance and termination benefits in its Beauty segment and $0.1 million pertained to contract termination costs in its Nutritional Supplements segment. There were no restructuring costs during the comparable three- and nine-months ended November 30, 2016. As of November 30, 2017, the Beauty segment had made cash

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restructuring payments of $0.5 million and had a remaining liability of $0.7 million, and the Nutritional Supplements segment had a remaining liability of $0.1 million.

 

Note 9 – Commitments and Contingencies

Thermometer Patent Litigation – In January 2016, a jury ruled against the Company in a case that involved claims by Exergen Corporation. The case involved the alleged patent infringement related to two forehead thermometer models sold by our subsidiary, Kaz USA, Inc., in the United States. As a result of the jury verdict, we recorded a charge in fiscal 2016, including legal fees and other related expenses, of $17.8 million (before and after tax). In June 2016, certain post-trial motions were concluded with Exergen Corporation being awarded an additional $1.5 million of pre-judgment compensation. We accrued this additional amount in May 2016. In July 2016, we appealed the judgment to the United States Court of Appeals for the Federal Circuit. The Company continues to vigorously pursue its appellate rights and defend against the underlying judgment.

Other Matters – We are involved in various other legal claims and proceedings in the normal course of operations, including from time to time inquiries and audits from various taxing authorities. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity, although the estimation of certain loss contingencies inherently involves some amount of uncertainty.

Product Warranties – Most of 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 our historical experience and believe that this is 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 shown:

ACCRUAL FOR WARRANTY RETURNS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

(in thousands)

 

2017

    

2016

    

2017

 

2016

Beginning balance

 

$

22,094

 

$

19,459

 

$

21,766

 

$

20,622

Additions to the accrual

 

 

14,473

 

 

14,858

 

 

40,655

 

 

43,052

Reductions of the accrual - payments and credits issued

 

 

(12,914)

 

 

(12,457)

 

 

(38,768)

 

 

(41,814)

Ending balance

 

$

23,653

 

$

21,860

 

$

23,653

 

$

21,860

Notes 3, 10, 11 and 12 to these consolidated condensed financial statements provide additional information regarding certain of our significant commitments and contingencies.

 

Note 10 – Long-Term Debt

We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provided for an unsecured total revolving commitment of $1 billion as of November 30, 2017. The commitment under the Credit Agreement terminates on December 7, 2021. 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, 2017, the outstanding revolving loan principal balance was $386.0 million and the face amount of outstanding letters of credit was $7.6 million. For the three- and nine-months ended November 30, 2017, borrowings under the Credit Agreement incurred interest charges at rates ranging from 2.5% to 4.5% and 2.3% to 4.8%, respectively. For the three- and nine-months ended November 30, 2016, borrowings under the Credit Agreement incurred interest charges

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at rates ranging from 2.0% to 4.3% and 1.9% to 4.3%, respectively. As of November 30, 2017, the amount available for borrowings under the Credit Agreement was $606.4 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur. As of November 30, 2017, these covenants effectively limited our ability to incur more than $348.2 million of additional debt from all sources, including our Credit Agreement. The following table summarizes our long-term debt as of the end of the periods shown:

LONG-TERM DEBT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

Interest

 

 

 

November 30, 

 

February 28, 

(dollars in thousands)

    

Borrowed

    

Rates

    

Matures

    

2017

    

2017

Mississippi Business Finance Corporation Loan (the "MBFC Loan")(1)

 

03/13

 

Floating

    

03/23

 

$

24,215

 

$

29,903

Senior Notes(2)

 

01/11

 

3.9

%  

01/18

 

 

19,976

 

 

19,763

Credit Agreement(3)

 

01/15

 

Floating

 

12/21

 

 

382,000

 

 

435,949

Total long-term debt

 

 

 

 

 

 

 

 

426,191

 

 

485,615

Less current maturities of long-term debt

 

 

 

 

 

 

 

 

(20,860)

 

 

(24,404)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

$

405,331

 

$

461,211

_____________________

(1)

The MBFC Loan is unsecured with an original balance of $37.6 million and interest set and payable quarterly at a Base Rate, plus a margin of up to 1.0%, or applicable LIBOR plus a margin of up to 2.0%, as determined by the interest rate elected and the Leverage Ratio. The loan is subject to holder's call on or after March 1, 2018. The loan can be prepaid without penalty.  The remaining principal balance of the MBFC Loan is payable as follows: $1.9 million annually on March 1, 2018 through 2022; and $14.8 million on March 1, 2023.  Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

(2)

$100 million unsecured Senior Notes at a fixed interest rate of 3.9% payable semi-annually. Annual principal payments of $20 million began in January 2014. Prepayment of the notes are subject to a "make whole" premium.

(3)

Floating interest rates are hedged with and interest rate swap to effectively fix interest rates on $100 million of the outstanding principal balance under the Credit Agreement.  Notes 11 and 12 to these consolidated condensed financial statements provide additional information regarding the interest rate swap.

The fair market value of the fixed rate debt at November 30, 2017, computed using a discounted cash flow analysis and comparable market rates was $20.0 million, approximately equal to the $20.0 million book value. Our other long-term debt has floating interest rates, and its book value approximates its fair value at November 30, 2017.

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. We were in compliance with the terms of these agreements as of November 30, 2017.

 

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Note 11 – Fair Value

We classify our various assets and liabilities recorded or reported at fair value under a hierarchy prescribed by GAAP that prioritizes inputs to fair value measurement techniques into three broad levels:

Level 1:

Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2:

Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3:

Unobservable inputs that reflect the reporting entity’s own assumptions.

Assets and liabilities subject to classification are classified upon acquisition. When circumstances dictate the transfer of an asset or liability to a different level, our policy is to recognize the transfer at the beginning of the reporting period in which the event resulting in the transfer occurred.

The following tables present the fair value of our financial assets and liabilities measured on a recurring basis as of the end of the periods shown:

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

 

 

 

 

 

 

Fair Values at

 

 

November 30, 2017

(in thousands)

    

(Level 2)(1)

Assets:

 

 

 

Money market accounts

 

$

496

Interest rate swap and foreign currency contracts

 

 

1,023

Total assets

 

$

1,519

 

 

 

 

Liabilities:

 

 

 

Fixed rate debt(2)

 

$

20,035

Floating rate debt

 

 

406,215

Foreign currency contracts

 

 

2,815

Total liabilities

 

$

429,065

 

 

 

 

 

 

 

 

Fair Values at

 

 

February 28, 2017

(in thousands)

    

(Level 2)(1)

Assets:

    

 

 

Money market accounts

 

$

2,711

Foreign currency contracts

 

 

2,167

Total assets

 

$

4,878

 

 

 

 

Liabilities:

 

 

 

Fixed rate debt(2)

 

$

20,105

Floating rate debt

 

 

465,852

Foreign currency contracts

 

 

47

Total liabilities

 

$

486,004

_____________________

(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 balance sheets at the undiscounted value of remaining principal payments due.

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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 use derivatives for hedging purposes and our derivatives are primarily interest rate swaps, foreign currency contracts and cross-currency debt swaps. See Notes 3, 12 and 13 to these consolidated condensed financial statements for more information on our hedging activities.

We classify our fixed and floating rate debt as Level 2 items because the estimation of the fair market value of these financial assets requires the use of a discount rate based upon current market rates of interest for obligations with comparable remaining terms. Such comparable rates are considered 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 0.3% at November 30, 2017 and 1.8% at February 28, 2017. All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

Our other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 items. These assets are measured at fair value on a non-recurring basis as part of our impairment testing. Note 5 to these consolidated condensed financial statements contains additional information regarding impairment testing and related intangible asset impairments.

 

Note 12 – Financial Instruments and Risk Management

Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. During both the three- and nine-months ended November 30, 2017 and 2016, approximately 12% of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. 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 operations, 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 three- and nine-months ended November 30, 2017, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $(2.2) and $(1.5) million, respectively, in SG&A, and $(0.1) and $(0.7) million, respectively, in income tax expense. For the three- and nine-months ended November 30, 2016, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $(0.1) and $(0.6) million, respectively, in SG&A, and $(0.2) million and $(0.1) million, respectively, in income tax expense.

We hedge 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 manage 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.

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Interest Rate Risk - Interest on our outstanding debt as of November 30, 2017 is both floating and fixed. Fixed rates are in place on $20 million of Senior Notes at 3.9% and floating rates are in place on the balance of all other debt outstanding, which totaled $410.3 million as of November 30, 2017. If short-term interest rates increase, we will incur higher interest rates on any future outstanding balances of floating rate debt.

Borrowings under the Credit Agreement accrue interest (at the Company’s election) based on either a base rate, plus a margin of up to 1.00%, or the applicable LIBOR plus a margin of up to 2.00%, in each case, as determined by the Company’s leverage ratio, calculated pursuant to the Company’s Credit Agreement.  During September 2017, the Company effectively converted $100 million of the outstanding principal balance under the Credit Agreement to fixed rate debt using an interest rate swap. The swap converted the total aggregate notional principal from floating LIBOR interest rate payments to fixed interest rate payments at rates ranging from approximately 1.5% to 2.1% for annual periods through December 2021, as compared to the one-month LIBOR rate of approximately 1.4% as of November 30, 2017. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. Therefore, the swap is considered 100 percent effective.

The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:

FAIR VALUES OF DERIVATIVE INSTRUMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2017

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

                        

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

Other

(in thousands)

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

 

Liabilities,

Derivatives designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

    

Non-current

Foreign currency contracts - sell Euro

 

Cash flow

 

12/2018

 

32,250

 

$

 -

 

$

 2

 

$

1,381

 

$

 -

Foreign currency contracts - sell Canadian Dollars

 

Cash flow

 

12/2018

 

$

27,750

 

 

252

 

 

16

 

 

 -

 

 

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

01/2019

 

£

20,400

 

 

 -

 

 

 -

 

 

765

 

 

32

Foreign currency contracts - sell Mexican Pesos

 

Cash flow

 

05/2018

 

$

45,000

 

 

 -

 

 

 -

 

 

159

 

 

 -

Interest rate swap

 

Cash flow

 

12/2021

 

$

100,000

 

 

134

 

 

619

 

 

 -

 

 

 -

Subtotal

 

 

 

 

 

 

 

 

 

386

 

 

637

 

 

2,305

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated under hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - cross-currency debt swaps - Euro

 

(1)

 

4/2020

 

$

5,280

 

 

 -

 

 

 -

 

 

 -

 

 

65

Foreign currency contracts - cross-currency debt swaps - Pound

 

(1)

 

4/2020

 

$

6,395

 

 

 -

 

 

 -

 

 

 -

 

 

413

Subtotal

 

 

 

 

 

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

478

Total fair value

 

 

 

 

 

 

 

 

$

386

 

$

637

 

$

2,305

 

$

510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2017

 

 

 

 

 

 

 

 

 

Prepaid

 

 

 

Accrued

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

Expenses

 

                        

 

 

 

 

Final

 

 

 

 

and Other

 

 

 

and Other

 

Other

 

 

 

 

Settlement

 

Notional

 

Current

 

Other

 

Current

 

Liabilities,

Derivatives designated as hedging instruments

    

Hedge Type

    

Date

    

Amount

    

Assets

    

Assets

    

Liabilities

    

Non-current

Foreign currency contracts - sell Euro

 

Cash flow

 

2/2018

 

27,500

 

$

727

 

$

 -

 

$

 -

 

$

 -

Foreign currency contracts - sell Canadian Dollars

 

Cash flow

 

6/2018

 

$

26,000

 

 

155

 

 

32

 

 

 -

 

 

 -

Foreign currency contracts - sell Pounds

 

Cash flow

 

2/2018

 

£

13,500

 

 

548

 

 

 -

 

 

 -

 

 

 -

Foreign currency contracts - sell Mexican Pesos

 

Cash flow

 

2/2018

 

$

59,600

 

 

 -

 

 

 -

 

 

47

 

 

 -

Subtotal

 

 

 

 

 

 

 

 

 

1,430

 

 

32

 

 

47

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated under hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts - cross-currency debt swap - Euro

 

(1)

 

1/2018

 

$

10,000

 

 

705

 

 

 -

 

 

 -

 

 

 -

Total fair value

 

 

 

 

 

 

 

 

$

2,135

 

$

32

 

$

47

 

$

 -

_____________________

(1)

These are foreign currency contracts for which we have not elected hedge accounting.  We refer to them as “cross-currency debt swaps”. They, in effect, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements. 

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The following table summarizes the pre-tax effect of derivative instruments for the periods shown:

PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

Gain (Loss)

 

Gain (Loss)  Reclassified from

 

 

 

 

Recognized in OCI

 

 Accumulated Other Comprehensive

 

Gain (Loss) Recognized

 

 

(effective portion)

 

Income (Loss) into Income

 

As Income

(in thousands)

 

2017

 

2016

    

Location

 

2017

    

2016

 

Location

 

2017

    

2016

Currency contracts - cash flow hedges

 

$

2,928

 

$

2,049

 

SG&A

 

$

1,328

 

$

522

 

 

 

$

 -

 

$

 -

Interest rate swaps - cash flow hedges

 

 

753

 

 

 -

 

Interest expense

 

 

 -

 

 

 -

 

Interest expense

 

 

(48)

 

 

 -

Cross-currency debt swaps - principal

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

SG&A

 

 

(419)

 

 

493

Cross-currency debt swaps - interest

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

Interest Expense

 

 

74

 

 

 -

Total

 

$

3,681

 

$

2,049

 

 

 

$

1,328

 

$

522

 

 

 

$

(393)

 

$

493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

Gain (Loss)

 

Gain (Loss) Reclassified from

 

 

 

 

Recognized in OCI

 

 Accumulated Other Comprehensive

 

Gain (Loss) Recognized

 

 

(effective portion)

 

Income (Loss) into Income

 

As Income

(in thousands)

    

2017

 

2016

    

Location

 

2017

    

2016

 

Location

 

2017

    

2016

Currency contracts - cash flow hedges

 

$

(1,275)

 

$

2,319

 

SG&A

 

$

2,208

 

$

505

 

 

 

$

 -

 

$

 -

Interest rate swaps - cash flow hedges

 

 

753

 

 

 -

 

Interest expense

 

 

 -

 

 

 -

 

Interest expense

 

 

(48)

 

 

 -

Cross-currency debt swaps - principal

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

SG&A

 

 

(1,183)

 

 

528

Cross-currency debt swaps - interest

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

Interest Expense

 

 

74

 

 

35

Total

 

$

(522)

 

$

2,319

 

 

 

$

2,208

 

$

505

 

 

 

$

(1,157)

 

$

563

We expect pre-tax net losses of $2.1 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 vary and the underlying contracts settle.

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

 

Note 13 – Comprehensive Income (Loss) 

The changes in accumulated other comprehensive income (loss) by component and related tax effects for the  fiscal 2018 year-to-date are as follows:

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT

 

 

 

 

 

 

 

 

 

 

 

Unrealized Holding Gains (Losses) on Cash Flow Hedges

(in thousands)

 

Interest Rate Swaps(1)

    

 

Foreign Currency Contracts(2)

    

 

Total

Balance at February 28, 2017

$

 -

 

$

1,173

 

$

1,173

Other comprehensive income (loss) before reclassification

 

753

 

 

(1,275)

 

 

(522)

Amounts reclassified out of accumulated other comprehensive income (loss)

 

 -

 

 

(2,208)

 

 

(2,208)

Tax effects

 

(290)

 

 

509

 

 

219

Other comprehensive income (loss)

 

463

 

 

(2,974)

 

 

(2,511)

Balance at November 30, 2017

$

463

 

$

(1,801)

 

$

(1,338)

_____________________

(1)

Includes net deferred tax benefits of $0.3 million at November 30, 2017.

(2)

Balances at November 30, 2017 and February 28, 2017 include net deferred tax benefit (expense) of $0.3 and $(0.2) million, respectively.

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Note 14 – Segment Information

The following tables present segment information for the periods shown:

THREE MONTHS ENDED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Nutritional

 

 

 

 

 

 

November 30, 2017

    

Housewares

    

Health & Home

    

Supplements

 

    

Beauty

    

Total

Sales revenue, net

 

$

128,017

 

$

190,975

 

$

29,336

 

 

$

104,717

 

$

453,045

Asset impairment charges

 

 

 -

 

 

 -

 

 

82,227

 

 

 

 -

 

 

82,227

Restructuring charges

 

 

 -

 

 

 -

 

 

118

 

 

 

1,165

 

 

1,283

Operating income (loss)

 

 

29,982

 

 

27,897

 

 

(83,521)

 

 

 

10,012

 

 

(15,630)

Capital and intangible asset expenditures

 

 

565

 

 

171

 

 

1,802

 

 

 

502

 

 

3,040

Depreciation and amortization

 

 

1,444

 

 

4,232

 

 

2,374

 

 

 

2,710

 

 

10,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

 

November 30, 2016

    

Housewares

    

Health & Home

    

Supplements

 

    

Beauty

    

Total

Sales revenue, net

 

$

124,723

 

$

179,842

 

$

32,163

 

 

$

107,686

 

$

444,414

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Restructuring charges

 

 

 -

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Operating income (loss)

 

 

29,223

 

 

20,155

 

 

(80)

 

 

 

14,021

 

 

63,319

Capital and intangible asset expenditures

 

 

1,100

 

 

1,492

 

 

1,558

 

 

 

624

 

 

4,774

Depreciation and amortization

 

 

1,429

 

 

5,221

 

 

2,108

 

 

 

2,467

 

 

11,225

 

NINE MONTHS ENDED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Nutritional

 

 

 

 

 

 

November 30, 2017

    

Housewares(1)

    

Health & Home

    

Supplements

 

    

Beauty

    

Total

Sales revenue, net

 

$

341,165

 

$

489,102

 

$

92,212

 

 

$

268,633

 

$

1,191,112

Asset impairment charges

 

 

 -

 

 

 -

 

 

132,297

 

 

 

4,000

 

 

136,297

Restructuring charges

 

 

 -

 

 

 -

 

 

118

 

 

 

1,165

 

 

1,283

Operating income (loss)

 

 

71,601

 

$

50,187

 

$

(138,413)

 

 

$

17,869

 

 

1,244

Capital and intangible asset expenditures

 

 

1,166

 

 

1,381

 

 

14,561

 

 

 

2,746

 

 

19,854

Depreciation and amortization

 

 

4,290

 

 

12,553

 

 

7,223

 

 

 

8,296

 

 

32,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

 

November 30, 2016

    

Housewares(1)

    

Health & Home

    

Supplements

 

    

Beauty

    

Total

Sales revenue, net

 

$

315,302

 

$

470,650

 

$

101,215

 

 

$

273,355

 

$

1,160,522

Asset impairment charges

 

 

 -

 

 

 -

 

 

5,000

 

 

 

2,400

 

 

7,400

Restructuring charges

 

 

 -

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Operating income (loss)

 

 

68,956

 

 

39,156

 

 

(6,581)

 

 

 

22,173

 

 

123,704

Capital and intangible asset expenditures

 

 

3,938

 

 

3,526

 

 

3,665

 

 

 

3,860

 

 

14,989

Depreciation and amortization

 

 

4,200

 

 

15,738

 

 

6,242

 

 

 

7,143

 

 

33,323

_____________________

(1)

The nine months ended November 30, 2017 includes a full nine months of operating results for Hydro Flask compared to eight and one-half months for the nine months ended November 30, 2016.

 

We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, restructuring charges, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income (loss) is directly associated with the segment, plus shared service and corporate overhead expenses that are allocable to the segment. We do not allocate nonoperating income and expense, including interest or income taxes, to operating segments.

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Note 15 – Income Taxes

Due to the Company’s organization in Bermuda and the ownership structure of its foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.

For the three months ended November 30, 2017, income tax expense as a percentage of pre-tax loss was (58.4)%, compared to expense of 3.7% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income, as opposed to the periods in which the charges were incurred. 

For the nine months ended November 30, 2017, income tax expense as a percentage of pre-tax loss was (59.5)% compared to expense of 7.0% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income as opposed to the periods in which the charges were incurred. As a result, the expected tax benefit from impairment charges of $52.8 million will be recognized entirely in the fourth quarter of fiscal 2018 relative to pre-tax income. Income taxes for the nine months ended November 30, 2017 also included:

·

$2.6 million in excess tax benefits from share-based compensation settlements and exercises; and

·

$2.8 million of tax benefits related to the resolution of uncertain tax positions.

Income taxes for the nine months ended November 30, 2016 included tax benefits of $1.4 million related the resolution of uncertain tax positions, $1.6 million in excess tax benefits from share-based compensation settlements and exercises, and $1.2 million in tax benefits due to the finalization of certain tax returns.

 

Note 16 – 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 options to purchase common stock and issued and contingently issuable unvested restricted share units (“RSUs”) and performance-based restricted share units (“PSUs”). Due to the net loss for the three and nine months ended November 30, 2017, 154,255 and 164,017 incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, respectively, because their effect would be anti-dilutive.  Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive. See Note 6 to these consolidated condensed financial statements for more information regarding share-based compensation awards.

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The following table presents our basic and diluted shares for the periods shown:

WEIGHTED AVERAGE DILUTED SECURITIES

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

Nine Months Ended November 30, 

(in thousands)

    

2017

    

2016

    

2017

    

2016

Weighted average shares outstanding, basic

 

27,113

 

27,484

 

27,140

 

27,700

Incremental shares from share-based compensation arrangements

 

 -

 

318

 

 -

 

358

Weighted average shares outstanding, diluted

 

27,113

 

27,802

 

27,140

 

28,058

 

 

 

 

 

 

 

 

 

Dilutive securities, stock options

 

222

 

325

 

236

 

401

Dilutive securities, unvested or unsettled stock awards

 

82

 

163

 

100

 

163

Antidilutive securities

 

354

 

149

 

344

 

142

 

 

 

 

 

 

 

Note 17 – Subsequent Events

Divestiture of the Nutritional Supplements Segment

 

On December 20, 2017, the Company completed the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The purchase price from the sale is comprised of $46 million in cash, paid at closing, and a supplemental payment with a target value of $25 million, payable on or before August 1, 2019. The final amount of the supplemental payment may be adjusted up or down based on the performance of Healthy Directions through February 28, 2018.  The final purchase price is also subject to a customary working capital adjustment. The transaction is not reflected in our consolidated condensed financial statements as of and for the period ended November 30, 2017.

 

Tax Reform

 

The Tax Cuts and Jobs Act was signed into law in December 2017, which represents significant U.S. federal tax reform legislation that includes a permanent reduction to the U.S. federal corporate income tax rate. The permanent reduction to the federal corporate income tax rate will have the effect of a one-time impact to the value of our deferred tax assets and liabilities. Additionally, we expect that the tax reform legislation will subject certain of our cumulative foreign earnings and profits to U.S. income taxes through a deemed repatriation. We are reviewing the recently enacted tax reform’s effects on our deferred tax assets and the taxation of certain foreign earnings and profits, and we expect to recognize the impact in the fourth quarter of fiscal 2018.

 

 

 

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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 for the fiscal year ended February 28, 2017 (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 MD&A, we refer to our Leadership Brands, which are brands that have number-one and number-two positions in their respective categories and include OXO®, Honeywell®, Braun®, PUR®, Hydro Flask®, Vicks®, and Hot Tools®.

Throughout 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 refer 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.

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 leading global consumer products company offering creative products and solutions for our customers through a diversified portfolio of well-recognized and widely-trusted brands. We have built leading market positions through new product innovation, product quality and competitive pricing. We operate in four segments consisting of Housewares, Health & Home, Nutritional Supplements, and Beauty. In fiscal 2015, we launched a transformational strategy to improve the performance of our business segments and strengthen our shared service capabilities. We believe we continue to make progress on achieving our strategic objectives.

Significant Trends Impacting the Business

Sale of the Nutritional Supplements Business

On December 20, 2017, the Company completed the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The purchase price from the sale is comprised of $46 million in cash, paid at closing, and a supplemental payment with a target value of $25 million, payable on or before August 1, 2019. The final amount of the supplemental payment may be adjusted up or down based on the performance of Healthy Directions through February 28, 2018.  As a result, at this time, we are unable to accurately determine the amount of the supplemental payment the Company will receive. The final purchase price is also subject to a customary working capital adjustment. The transaction is not reflected in our consolidated condensed financial statements as of and for the period ended November 30, 2017. 

 

During the third quarter of fiscal 2018, we received information regarding the potential fair value of our Nutritional Supplements business that we concluded should be considered when determining if impairments of our long-lived assets, including goodwill, had occurred.  As a result of our testing, we recorded pre-tax non-cash asset impairment charges totaling $82.2 million, consisting of $70.6 million to the segment’s goodwill and $11.6 million to the segment’s indefinite-lived brand assets.

 

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In the first and second quarters of fiscal 2018, we recorded pre-tax non-cash asset impairment charges related to the Nutritional Supplements segment totaling $32.0 million and $18.1 million, respectively. For additional information regarding impairment testing and related intangible asset impairments, see Note 5 to the accompanying consolidated condensed financial statements.

The fair values used in our impairment tests were determined using a weighted average of various valuation methods including estimated future discounted cash flows and other market data. The valuation techniques utilized assumptions we believe to be appropriate in the circumstances; however, future circumstances attributable to a strategic change in the Nutritional Supplements segment, such as the sale of the business, could result in changes to those assumptions and other charges or losses relating to the segment may be recorded and could be material.

Restructuring Plan

On October 5, 2017, the Company announced that it had approved a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance of the Beauty and Nutritional Supplements segments. Project Refuel includes a reduction-in-force and the elimination of certain contracts. Following the divestiture of the Nutritional Supplements segment, as discussed in Note 17 to the accompanying  consolidated condensed financial statements, the Company is targeting total annualized profit improvements of approximately $8.0 million over the duration of the plan. The Company estimates the plan to be completed by the first quarter of fiscal 2020, and expects to incur total restructuring charges in the range of approximately $3.2 to $4.8 million over the same period. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically. Restructuring charges also include amounts recognized as incurred. For the three- and nine-months ended November 30, 2017, the Company incurred $1.3 million of pre-tax restructuring costs, of which $1.2 million related to employee severance and termination benefits and $0.1 million related to contract termination costs. 

 

Tax Reform

 

The Tax Cuts and Jobs Act was signed into law in December 2017, which represents significant U.S. federal tax reform legislation that includes a permanent reduction to the U.S. federal corporate income tax rate. The permanent reduction to the federal corporate income tax rate will have the effect of a one-time impact to the value of our deferred tax assets and liabilities. Additionally, we expect that the tax reform legislation will subject certain of our cumulative foreign earnings and profits to U.S. income taxes through a deemed repatriation. We are reviewing the recently enacted tax reform’s effects on our deferred tax assets and the taxation of certain foreign earnings and profits, and we expect to recognize the impact in the fourth quarter of fiscal 2018.

Foreign Currency Exchange Rate Fluctuations 

Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates from transactions that are denominated in a currency other than our reporting currency (the U.S. Dollar). The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso. For the three months ended November 30, 2017, changes in foreign currency exchange rates had a favorable impact on consolidated U.S. dollar reported net sales revenue of approximately $2.8 million, or 0.6%.  For the nine months ended November 30, 2017, net foreign currency exchange rate fluctuations had a favorable impact on our consolidated U.S. dollar reported net sales revenue of approximately $1.1 million, or 0.1%.

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Table of Contents

Consumer Spending and Changes in Shopping Preferences

Our business depends 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 81%, 80% and 79% of our consolidated net sales were from U.S. shipments in fiscal 2017, 2016 and 2015, respectively. Additionally, the shift in consumer shopping preferences to online or multichannel shopping experiences has shifted the concentration of our sales. For fiscal 2017, 2016 and 2015, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 13%, 10% and 9%, respectively, of our total consolidated net sales revenue for each fiscal year and grew over 30% in fiscal 2017. For the third quarter and first nine months of fiscal 2018, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 17% and 16% respectively of our total consolidated net sales revenue and grew approximately 19% and 21%, respectively, compared to the same periods last year. With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers. 

Variability of the Cough/Cold/Flu Season 

Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. For the 2016-2017 season, fall and winter weather was mild and reports of cough/cold/flu incidence were below the 2015-2016 season, which was a below average season. We expect that the weakness in the 2016-2017 cough/cold/flu season will have an unfavorable impact on initial replenishment of affected categories during fiscal 2018, due to high retail inventory levels.

Third Quarter Fiscal 2018 Financial Results

·

Consolidated net sales revenue increased 1.9%, or $8.6 million, to $453.0 million for the three months ended November 30, 2017, compared to $444.4 million for the same period last year.

·

Consolidated operating loss was $(15.6) million for the three months ended November 30, 2017, compared to operating income of $63.3 million in the same period last year. Consolidated operating income for the three months ended November 30, 2017 includes a pre-tax non-cash asset impairment charge of $82.2 million and pre-tax restructuring charges of $1.3 million associated with Project Refuel. There were no comparable charges in the same period last year.

·

Consolidated adjusted operating income increased 7.5%, or $5.5 million, to $79.0 million for the three months ended November 30, 2017, compared to $73.4 million in the same period last year. Consolidated adjusted operating margin increased 0.9 percentage points to 17.4% of consolidated net sales revenue in the three months ended November 30, 2017, compared to 16.5% in the same period last year.

·

Net loss was $(30.4) million for the three months ended November 30, 2017, compared to net income of $57.6 million for the same period last year. Diluted loss per share was $(1.12) for the three months ended November 30, 2017, compared to diluted earnings per share of $2.07 in the same period last year.

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Table of Contents

·

Adjusted income increased 4.3% to $68.8 million in the three months ended November 30, 2017, compared to $66.0 million in the same period last year. Adjusted diluted earnings per share increased 6.3% to $2.52 in the three months ended November 30, 2017, compared to $2.37 in the same period last year.

Year-To-Date Fiscal 2018 Financial Results

·

Consolidated net sales revenue increased 2.6%, or $30.6 million, to $1,191.1 million for the nine months ended November 30, 2017, compared to $1,160.5 million for the same period last year.

·

Consolidated operating income was $1.2 million for the nine months ended November 30, 2017, compared to operating income of $123.7 million in the same period last year. Consolidated operating income for the nine months ended November 30, 2017 includes: (i) pre-tax non-cash asset impairment charges of $136.3 million; (ii) a $3.6 million charge related to the bankruptcy of Toys “R” Us (“TRU”); and (iii) pre-tax restructuring charges of $1.3 million associated with Project Refuel. The nine months ended November 30, 2016 includes pre-tax non-cash impairment charges of $7.4 million.  

·

Consolidated adjusted operating income increased 4.4%, or $7.3 million to $173.1 million for the nine months ended November 30, 2017, compared to $165.9 million in the same period last year. Consolidated adjusted operating margin increased 0.2 percentage points to 14.5% of consolidated net sales revenue for the nine months ended November 30, 2017, compared to 14.3% in the same period last year.

·

Net loss was $(15.6) million for the nine months ended November 30, 2017, compared to net income of $105.0 million for the same period last year. Diluted loss per share was $(0.58) for the nine months ended November 30, 2017, compared to diluted earnings per share of $3.74 in the same period last year.

·

Adjusted income increased 9.0% to $151.5 million for the nine months ended November 30, 2017, compared to $138.9 million  in the same period last year. Adjusted diluted earnings per share increased 12.1% to $5.55 for the nine months ended November 30, 2017, compared to $4.95 in the same period last year.

Adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted earnings per share as discussed above are nonGAAP financial measures and are discussed further, and reconciled to their applicable GAAPbased measures in each respective section below. 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 in the section below entitled, “Explanation of Non-GAAP Financial Measures”.

 

 

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Table of Contents

RESULTS OF OPERATIONS

The following tables set 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

(In thousands)

  

2017

  

2016

  

$ Change

 

% Change

 

 

2017

 

2016

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares

    

$

128,017

    

$

124,723

    

$

3,294

    

2.6

%

    

28.3

%

28.1

%

Health & Home

 

 

190,975

 

 

179,842

 

 

11,133

 

6.2

%

 

42.2

%

40.5

%

Nutritional Supplements

 

 

29,336

 

 

32,163

 

 

(2,827)

 

(8.8)

%

 

6.5

%

7.2

%

Beauty

 

 

104,717

 

 

107,686

 

 

(2,969)

 

(2.8)

%

 

23.1

%

24.2

%

Total sales revenue, net

 

 

453,045

 

 

444,414

 

 

8,631

 

1.9

%

 

100.0

%

100.0

%

Cost of goods sold

 

 

251,271

 

 

250,199

 

 

1,072

 

0.4

%

 

55.5

%

56.3

%

Gross profit

 

 

201,774

 

 

194,215

 

 

7,559

 

3.9

%

 

44.5

%

43.7

%

Selling, general and administrative expense

 

 

133,894

 

 

130,896

 

 

2,998

 

2.3

%

 

29.6

%

29.5

%

Asset impairment charges

 

 

82,227

 

 

 -

 

 

82,227

 

*

 

 

18.1

%

 -

%

Restructuring charges

 

 

1,283

 

 

 -

 

 

1,283

 

*

 

 

0.3

%

 -

%

Operating income (loss)

 

 

(15,630)

 

 

63,319

 

 

(78,949)

 

(124.7)

%

 

(3.4)

%

14.2

%

Nonoperating income, net

 

 

34

 

 

106

 

 

(72)

 

(67.9)

%

 

 -

%

 -

%

Interest expense

 

 

(3,619)

 

 

(3,625)

 

 

 6

 

(0.2)

%

 

(0.8)

%

(0.8)

%

Total other expense

 

 

(3,585)

 

 

(3,519)

 

 

(66)

 

1.9

%

 

(0.8)

%

(0.8)

%

Income (loss) before income taxes

 

 

(19,215)

 

 

59,800

 

 

(79,015)

 

(132.1)

%

 

(4.2)

%

13.5

%

Income tax expense

 

 

11,221

 

 

2,188

 

 

9,033

 

*

 

 

2.5

%

0.5

%

Net income (loss)

 

$

(30,436)

 

$

57,612

 

$

(88,048)

 

(152.8)

%

 

(6.7)

%

13.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

 

 

 

 

 

% of Sales Revenue, net

 

 

  

2017

  

2016

  

$ Change

 

% Change

 

 

2017

 

2016

 

Sales revenue by segment, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares(1)

    

$

341,165

    

$

315,302

    

$

25,863

    

8.2

%

    

28.6

%

27.2

%

Health & Home

 

 

489,102

 

 

470,650

 

 

18,452

 

3.9

%

 

41.1

%

40.6

%

Nutritional Supplements

 

 

92,212

 

 

101,215

 

 

(9,003)

 

(8.9)

%

 

7.7

%

8.7

%

Beauty

 

 

268,633

 

 

273,355

 

 

(4,722)

 

(1.7)

%

 

22.6

%

23.6

%

Total sales revenue, net

 

 

1,191,112

 

 

1,160,522

 

 

30,590

 

2.6

%

 

100.0

%

100.0

%

Cost of goods sold

 

 

664,956

 

 

650,912

 

 

14,044

 

2.2

%

 

55.8

%

56.1

%

Gross profit

 

 

526,156

 

 

509,610

 

 

16,546

 

3.2

%

 

44.2

%

43.9

%

Selling, general and administrative expense

 

 

387,332

 

 

378,506

 

 

8,826

 

2.3

%

 

32.5

%

32.6

%

Asset impairment charges

 

 

136,297

 

 

7,400

 

 

128,897

 

*

 

 

11.4

%

0.6

%

Restructuring charges

 

 

1,283

 

 

 -

 

 

1,283

 

*

 

 

0.1

%

 -

%

Operating income

 

 

1,244

 

 

123,704

 

 

(122,460)

 

(99.0)

%

 

0.1

%

10.7

%

Nonoperating income, net

 

 

281

 

 

343

 

 

(62)

 

(18.1)

%

 

 -

%

 -

%

Interest expense

 

 

(11,327)

 

 

(11,142)

 

 

(185)

 

1.7

%

 

(1.0)

%

(1.0)

%

Total other expense

 

 

(11,046)

 

 

(10,799)

 

 

(247)

 

2.3

%

 

(0.9)

%

(0.9)

%

Income (loss) before income taxes

 

 

(9,802)

 

 

112,905

 

 

(122,707)

 

(108.7)

%

 

(0.8)

%

9.7

%

Income tax expense

 

 

5,833

 

 

7,912

 

 

(2,079)

 

(26.3)

%

 

0.5

%

0.7

%

Net income (loss)

 

$

(15,635)

 

$

104,993

 

$

(120,628)

 

(114.9)

%

 

(1.3)

%

9.0

%

_____________________

(1)

The nine months ended November 30, 2017 includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.

* Calculation is not meaningful

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Comparison of Third Quarter Fiscal 2018 to Third Quarter Fiscal 2017

Consolidated and Segment Net Sales

The following table summarizes the impact that core business, foreign exchange and acquisitions, as applicable, had on our net sales revenue by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

(in thousands)

 

Housewares

 

 

Health & Home

 

 

Nutritional Supplements

 

 

Beauty

 

 

Total

 

Fiscal 2017 sales revenue, net

$

124,723

 

$

179,842

 

$

32,163

 

$

107,686

 

$

444,414

 

Core business

 

3,074

 

 

9,323

 

 

(2,827)

 

 

(3,731)

 

 

5,839

 

Impact of foreign currency

 

220

 

 

1,810

 

 

 -

 

 

762

 

 

2,792

 

Change in sales revenue, net

 

3,294

 

 

11,133

 

 

(2,827)

 

 

(2,969)

 

 

8,631

 

Fiscal 2018 sales revenue, net

$

128,017

 

$

190,975

 

$

29,336

 

$

104,717

 

$

453,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales revenue growth

 

2.6

%

 

6.2

%

 

(8.8)

%

 

(2.8)

%

 

1.9

%

Core business

 

2.5

%

 

5.2

%

 

(8.8)

%

 

(3.5)

%

 

1.3

%

Impact of foreign currency

 

0.2

%

 

1.0

%

 

 -

%

 

0.7

%

 

0.6

%

_____________________

In the above table, core business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the impact that foreign currency had on reported net sales. Net sales revenue from internally developed brands or product lines is considered core business activity.

Consolidated Net Sales Revenue

Consolidated net sales revenue increased $8.6 million, or 1.9%, to $453.0 million for the three months ended November 30, 2017, compared to $444.4 million for the same period last year. The growth was primarily driven by new product introductions, online customer growth, incremental distribution, growth in international sales, and a favorable impact from foreign currency, partially offset by:

·

a decline in the Nutritional Supplements segment of $2.8 million, or 8.8%;

·

a decline in our Beauty segment of $3.0 million or 2.8%, primarily attributable to the personal care category; and

·

the impact of lower store traffic and soft consumer spending at traditional brick and mortar retail.

Segment Net Sales Revenue 

Housewares

Net sales revenue in the Housewares segment increased $3.3 million, or 2.6%, to $128.0 million for the three months ended November 30, 2017, compared to $124.7 million for same period last year. The growth was primarily driven by an increase in online sales, incremental distribution with existing customers, international growth, and new product introductions for both the Hydro Flask and OXO brands. These factors were partially offset by the unfavorable impact of lower store traffic and soft consumer spending at traditional brick and mortar retail, and the unfavorable comparative impact of strong sales into the club channel in the same period last year.

Health & Home

Net sales revenue in the Health & Home segment increased $11.1 million, or 6.2%, to $191.0 million for the three months ended November 30, 2017, compared to $179.8 million for the same period last year. The growth was primarily driven by online sales, expanded international distribution, and incremental distribution with existing customers. Segment net sales also benefitted from the favorable impact of net

29


 

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foreign currency fluctuations of approximately $1.8 million, or 1.0%. These factors were partially offset by lower royalty revenue and lower store traffic at traditional brick and mortar retail outlets.

Nutritional Supplements

Net sales revenue in the Nutritional Supplements segment decreased $2.8 million, or 8.8%, to $29.3 million for the three months ended November 30, 2017, compared to $32.2 million for the same period last year. The decrease was primarily driven by a decline in auto-delivery revenue resulting primarily from the transition to new order management and customer relationship management systems, partially offset by increases in direct mail and third-party retail sales.

Beauty

Net sales revenue in the Beauty segment decreased 2.8% to $104.7 million for the three months ended November 30, 2017, compared to $107.7 million for the same period last year. Solid growth in both retail and professional appliance sales, particularly to online retail customers, was offset by declines in the personal care category. Segment net sales benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.8 million, or 0.7%.

Gross Profit Margin

Consolidated gross profit as a percentage of net sales revenue for the three months ended November 30, 2017 increased 0.8% percentage points to 44.5%, compared to 43.7% for the same period last year. The increase in consolidated gross profit margin was primarily due to favorable product mix, growth in our Leadership Brands and the favorable impact of net foreign currency fluctuations, partially offset by the unfavorable impact that the revenue declines in the Nutritional Supplements segment and the personal care category had on consolidated gross profit margin.

Selling, General and Administrative Expense (“SG&A”)

Our consolidated SG&A ratio, defined as consolidated SG&A expense as a percent of consolidated net sales, increased 0.1% percentage points to 29.6% for the three months ended November 30, 2017, compared to 29.5% for the same period last year. The increase in consolidated SG&A ratio was primarily due to:

·

higher incentive compensation expense; and

·

the unfavorable comparative impact of foreign currency revaluations year-over-year.

These factors were partially offset by:

·

lower advertising expense;

·

a decline in product liability expense;

·

improved distribution and logistics efficiency and lower outbound freight costs; and

·

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

Asset Impairment Charges

As previously discussed under the heading “Significant Trends Impacting the Business”, we performed interim impairment testing in the third quarter of fiscal 2018. As a result of our testing, we recorded pre-tax non-cash asset impairment charges of $82.2  million in our Nutritional Supplements segment, of

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which $70.6 million relates to the segment’s goodwill and $11.6 million relates to the segment’s indefinite-lived brand assets.

Operating Income (Loss), Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment

In order to provide a better understanding of the comparative impact of certain items on operating income, the tables that follow report the comparative before tax impact of noncash asset impairment charges, restructuring charges, amortization of intangible assets, and noncash sharebased compensation, as applicable, on operating income (loss) and operating margin for each segment and in total for the periods covered below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2017

 

(In thousands)

 

Housewares

 

 

Health & Home

 

 

Nutritional
Supplements

 

 

Beauty

 

 

Total

 

Operating income (loss), as reported (GAAP)

 

$

29,982

 

23.4

%

 

$

27,897

 

14.6

%

 

$

(83,521)

 

(284.7)

%

 

$

10,012

 

9.6

%

 

$

(15,630)

 

(3.4)

%

Asset impairment charges

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

82,227

 

280.3

%

 

 

 -

 

 -

%

 

 

82,227

 

18.1

%

Restructuring charges(1)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

118

 

0.4

%

 

 

1,165

 

1.1

%

 

 

1,283

 

0.3

%

Subtotal

 

 

29,982

 

23.4

%

 

 

27,897

 

14.6

%

 

 

(1,176)

 

(4.0)

%

 

 

11,177

 

10.7

%

 

 

67,880

 

15.0

%

Amortization of intangible assets

 

 

489

 

0.4

%

 

 

2,797

 

1.5

%

 

 

1,770

 

6.0

%

 

 

1,374

 

1.3

%

 

 

6,430

 

1.4

%

Non-cash share-based compensation

 

 

1,527

 

1.2

%

 

 

1,632

 

0.9

%

 

 

467

 

1.6

%

 

 

1,025

 

1.0

%

 

 

4,651

 

1.0

%

Adjusted operating income (non-GAAP)

 

$

31,998

 

25.0

%

 

$

32,326

 

16.9

%

 

$

1,061

 

3.6

%

 

$

13,576

 

13.0

%

 

$

78,961

 

17.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2016

 

(In thousands)

 

Housewares

 

 

Health & Home

 

 

Nutritional

Supplements

 

 

Beauty

 

 

Total

 

Operating income (loss), as reported (GAAP)

 

$

29,223

 

23.4

%

 

$

20,155

 

11.2

%

 

$

(80)

 

(0.2)

%

 

$

14,021

 

13.0

%

 

$

63,319

 

14.2

%

Amortization of intangible assets

 

 

658

 

0.5

%

 

 

3,546

 

2.0

%

 

 

1,571

 

4.9

%

 

 

1,424

 

1.3

%

 

 

7,199

 

1.6

%

Non-cash share-based compensation

 

 

671

 

0.5

%

 

 

872

 

0.5

%

 

 

369

 

1.1

%

 

 

991

 

0.9

%

 

 

2,903

 

0.7

%

Adjusted operating income (non-GAAP)

 

$

30,552

 

24.5

%

 

$

24,573

 

13.7

%

 

$

1,860

 

5.8

%

 

$

16,436

 

15.3

%

 

$

73,421

 

16.5

%

_____________________

(1)

Charges incurred in conjunction with the Company’s restructuring plan for the three months ended November 30, 2017, with no comparable charges in the same period last year.

Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures. 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 in the section below entitled, “Explanation of Non-GAAP Financial Measures”.

Consolidated

Consolidated operating loss was $(15.6) million, or (3.4)% of net sales, compared to $63.3 million, or 14.2% of net sales, for the same period last year. The three months ended November 30, 2017 includes pre-tax non-cash asset impairment charges of $82.2 million in our Nutritional Supplements segment and pre-tax restructuring charges of $1.3 million related to Project Refuel, with no comparable charges in the same period last year. These items unfavorably impacted the year-over-year comparison of operating margin by 18.4 percentage points. The remaining increase in consolidated operating margin primarily reflects:

·

a higher mix of Leadership Brand sales at a higher operating margin;

·

lower marketing and advertising expense;

·

a decline in product liability expense;

·

improved distribution and logistics efficiency and lower outbound freight costs; and

·

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

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These factors were partially offset by:

·

higher incentive compensation expense; and

·

the unfavorable comparative impact of foreign currency revaluations year-over-year.

Consolidated adjusted operating income increased 7.5% to $79.0 million, or 17.4% of net sales, compared to $73.4 million, or 16.5% of net sales, in the same period last year.

Housewares

The Housewares segment’s operating income was $30.0 million, or 23.4% of segment net sales, compared to $29.2 million, or 23.4% of segment net sales, for the same period last year. The segment operating margin was unchanged, reflecting lower incentive compensation expense and the favorable impact of increased operating leverage from net sales growth, offset by higher marketing, advertising and new product development expense.

Segment adjusted operating income increased 4.7% to $32.0 million, or 25.0% of segment net sales, compared to $30.6 million, or 24.5% of segment net sales, in the same period last year.

Health & Home

The Health & Home segment’s operating income was $27.9 million, or 14.6% of segment net sales, compared to $20.2 million, or 11.2% of segment net sales, in the same period last year. The 3.4 percentage point increase in segment operating margin is primarily due to:

·

a decline in product liability expense;

·

lower legal fee expense;

·

improved distribution and logistics efficiency and lower outbound freight costs;

·

a decrease in marketing, advertising and new product development expense;

·

increased operating leverage from net sales growth; and

·

the favorable impact of net foreign currency fluctuations on net sales.

Segment adjusted operating income increased 31.6% to $32.3 million, or 16.9% of segment net sales, compared to $24.6 million, or 13.7% of segment net sales, in the same period last year.

Nutritional Supplements 

The Nutritional Supplements segment’s operating loss was $(83.5) million for the three months ended November 30, 2017, compared to an operating loss of $(0.1) million in the same period last year. The increase in the segment operating loss is primarily due to:

·

the impact of pre-tax non-cash asset impairment charges of $82.2 million recorded during the three months ended November 30, 2017, with no comparable charges in the same period last year;

·

higher promotion, advertising and customer acquisition costs as a percentage of sales;

·

pre-tax restructuring charges of $0.1 million associated with Project Refuel; and

·

the net sales decline and its unfavorable impact on operating leverage.

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Segment adjusted operating income was $1.1 million compared to $1.9 million in the same period last year.

Beauty:

The Beauty segment’s operating income was $10.0 million, or 9.6% of segment net sales, for the three months ended November 30, 2017, compared to $14.0 million, or 13.0% of segment net sales, in the same period last year. The decrease in operating margin is primarily due to pre-tax restructuring charges of $1.2 million associated with Project Refuel, higher incentive compensation expense and the net sales decline in the personal care category and its unfavorable impact on sales mix and operating leverage. These factors were partially offset by:

·

lower media advertising expense; and

·

improved distribution and logistics efficiency and lower outbound freight costs.

Segment adjusted operating income decreased 17.4% to $13.6 million, or 13.0% of segment net sales, compared to $16.4 million, or 15.3% of segment net sales, in the same period last year.

Interest Expense

Interest expense was $3.6 million for both the three months ended November 30, 2017 and 2016. Lower average levels of debt held during the three months ended November 30, 2017, were offset by higher overall average interest rates.

Income Tax Expense

The year-over-year comparison of our effective tax rates is impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.

For the three months ended November 30, 2017, income tax expense as a percentage of pretax loss was (58.4)%, compared to income tax expense of 3.7% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income, as opposed to the periods in which the charges were incurred. As a result, the expected tax benefit from impairment charges of $52.8 million will be recognized entirely in the fourth quarter of fiscal 2018, relative to pre-tax income. 

Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP)

In order to provide a better understanding of the impact of certain items on our net income (loss) and earnings (loss) per share, the analysis that follows reports the comparative after tax impact of noncash asset impairment charges, restructuring charges, amortization of intangible assets, and noncash sharebased compensation, as applicable.

33


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2017

 

 

 

Income (Loss)

 

Diluted Earnings (Loss) Per Share

(in thousands, except per share data)

   

Before tax

 

Tax

 

Net of Tax

 

Before tax

 

Tax

 

Net of Tax

As reported (GAAP)

 

$

(19,215)

 

$

11,221

 

$

(30,436)

 

$

(0.71)

 

$

0.41

 

$

(1.12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

82,227

 

 

(6,380)

 

 

88,607

 

 

3.02

 

 

(0.23)

 

 

3.25

Restructuring charges(1)

 

 

1,283

 

 

69

 

 

1,214

 

 

0.05

 

 

 -

 

 

0.04

Subtotal

 

 

64,295

 

 

4,910

 

 

59,385

 

 

2.36

 

 

0.18

 

 

2.18

Amortization of intangible assets

 

 

6,430

 

 

853

 

 

5,577

 

 

0.24

 

 

0.03

 

 

0.20

Non-cash share-based compensation

 

 

4,651

 

 

781

 

 

3,870

 

 

0.17

 

 

0.03

 

 

0.14

Adjusted (non-GAAP)

 

$

75,376

 

$

6,544

 

$

68,832

 

$

2.76

 

$

0.24

 

$

2.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share, as reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,113

Adjusted diluted earnings per share (non-GAAP)

 

 

 

 

 

 

 

 

27,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2016

 

 

 

Income

 

Diluted Earnings Per Share

(in thousands, except per share data)

   

Before tax

 

Tax

 

Net of Tax

 

Before tax

 

Tax

 

Net of Tax

As reported (GAAP)

 

$

59,800

 

$

2,188

 

$

57,612

 

$

2.15

 

$

0.08

 

$

2.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restructuring charges(1)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Subtotal

 

 

59,800

 

 

2,188

 

 

57,612

 

 

2.15

 

 

0.08

 

 

2.07

Amortization of intangible assets

 

 

7,199

 

 

1,009

 

 

6,190

 

 

0.26

 

 

0.04

 

 

0.22

Non-cash share-based compensation

 

 

2,903

 

 

706

 

 

2,197

 

 

0.10

 

 

0.02

 

 

0.08

Adjusted (non-GAAP)

 

$

69,902

 

$

3,903

 

$

65,999

 

$

2.51

 

$

0.14

 

$

2.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share, as reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,802

Adjusted diluted earnings per share (non-GAAP)

 

 

 

 

 

 

 

 

27,802

_________________

(1)

Charges incurred in conjunction with the Company’s restructuring plan for the three months ended November 30, 2017, with no comparable charges in the same period last year.

Adjusted income and adjusted diluted earnings per share may be considered non-GAAP financial measures. 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 in the section below entitled, “Explanation of Non-GAAP Financial Measures”.

Net loss was $(30.4) million for the three months ended November 30, 2017 compared to net income of $57.6 million for the same period last year. Diluted loss per share was $(1.12) for the three months ended November 30, 2017 compared to diluted earnings per share of $2.07 for the same period last year.

Adjusted income increased $2.8 million, or 4.3%, to $68.8 million for the three months ended November 30, 2017 compared to $66.0 million the same period last year. Adjusted diluted earnings per share increased 6.3% to $2.52 for the three months ended November 30, 2017 compared to $2.37 for the same period last year. Adjusted diluted earnings per share increased primarily due to the impact of higher adjusted operating income for our Housewares and Health & Home segments, and lower weighted average diluted shares outstanding compared to the same period last year.

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Table of Contents

Comparison of First Nine Months of Fiscal 2018 to First Nine Months of Fiscal 2017

 

Consolidated and Segment Net Sales

 

The following table summarizes the impact that core business, foreign exchange and acquisitions, as applicable, had on our net sales revenue by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

(in thousands)

 

Housewares

 

 

Health & Home

 

 

Nutritional Supplements

 

 

Beauty

 

 

Total

 

Fiscal 2017 sales revenue, net

$

315,302

 

$

470,650

 

$

101,215

 

$

273,355

 

$

1,160,522

 

Core business

 

20,043

 

 

17,364

 

 

(9,003)

 

 

(5,025)

 

 

23,379

 

Impact of foreign currency

 

(328)

 

 

1,088

 

 

 -

 

 

303

 

 

1,063

 

Acquisitions(1)

 

6,148

 

 

 -

 

 

 -

 

 

 -

 

 

6,148

 

Change in sales revenue, net

 

25,863

 

 

18,452

 

 

(9,003)

 

 

(4,722)

 

 

30,590

 

Fiscal 2018 sales revenue, net

$

341,165

 

$

489,102

 

$

92,212

 

$

268,633

 

$

1,191,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales revenue growth

 

8.2

%

 

3.9

%

 

(8.9)

%

 

(1.7)

%

 

2.6

%

Core business

 

6.4

%

 

3.7

%

 

(8.9)

%

 

(1.8)

%

 

2.0

%

Impact of foreign currency

 

(0.1)

%

 

0.2

%

 

0.0

%

 

0.1

%

 

0.1

%

Acquisitions

 

1.9

%

 

0.0

%

 

0.0

%

 

0.0

%

 

0.5

%

_____________________

(1)

Includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.

In the above table, core business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the impact that foreign currency had on reported net sales. Net sales revenue from internally developed brands or product lines is considered core business activity.

Consolidated Net Sales Revenue

Consolidated net sales revenue increased $30.6 million, or 2.6%, to $1,191.1 million for the nine months ended November 30, 2017, compared to $1,160.5 million for the same period last year. The growth was primarily driven by:

·

a core business increase of $23.4 million, or 2.0%, primarily due to new product introductions, online customer growth, incremental distribution and growth in international sales;

·

growth from acquisitions of $6.1 million, or 0.5%; and

·

the favorable impact from foreign currency fluctuations of approximately $1.1 million, or 0.1%. 

These factors were partially offset by:

·

a decline in the Nutritional Supplements segment of $9.0 million;

·

a decline in the personal care category within Beauty; and

·

the impact of lower store traffic and soft consumer spending at traditional brick and mortar retail.

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Segment Net Sales Revenue 

Housewares

Net sales revenue in the Housewares segment increased $25.9 million, or 8.2%, to $341.2 million for the nine months ended November 30, 2017, compared to $315.3 million for same period last year. The growth was primarily driven by:

·

a core business increase of $20.0 million, or 6.4%, due to an increase in online sales, incremental distribution with existing customers, expanded international and U.S. distribution, and new product introductions for both the Hydro Flask and OXO brands; and

·

growth from acquisitions of $6.1 million, or 1.9%, representing an incremental half month of operating results from Hydro Flask, compared to the same period last year.

These factors were partially offset by:

·

lower store traffic and soft consumer spending at traditional brick and mortar retail;

·

the unfavorable comparative impact of retail pipeline fill and strong sales into the club channel in the prior year period; and

·

the unfavorable impact of net foreign currency fluctuations of approximately $0.3 million, or 0.1%.

Health & Home

Net sales revenue in the Health & Home segment increased $18.5 million, or 3.9%, to $489.1 million for the nine months ended November 30, 2017, compared to $470.7 million for the same period last year. The growth was primarily driven by an increase in online sales, incremental distribution and shelf space gains with existing customers, growth in international sales, and the favorable impact of net foreign currency fluctuations of approximately $1.1 million, or 0.2%, partially offset by lower sales into the club channel and lower royalty revenue. 

Nutritional Supplements

Net sales revenue in the Nutritional Supplements segment decreased $9.0 million, or 8.9%, to $92.2 million for the nine months ended November 30, 2017, compared to $101.2 million for the same period last year. The change was primarily driven by a decline in auto-delivery revenue resulting primarily from the transition to new order management and customer relationship management systems, partially offset by increases in direct mail and third-party retail sales.

Beauty

Net sales revenue in the Beauty segment decreased $4.7 million, or 1.7%, to $268.6 million for the nine months ended November 30, 2017, compared to $273.4 million for the same period last year. The change was primarily driven by a decline in the personal care category and a decrease in international sales, partially offset by the favorable impact of net foreign currency fluctuations of approximately $0.3 million, or 0.1%. These factors were partially offset by solid growth in both retail and professional appliance sales, particularly to online retail customers.

Gross Profit Margin

Consolidated gross profit as a percentage of net sales revenue for the nine months ended November 30, 2017 was 44.2% compared to 43.9%  for the same period last year. The increase is

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primarily due to the favorable impact from growth in our Leadership Brands, a higher margin mix and the favorable impact of net foreign currency fluctuations, which was partially offset by the unfavorable impact from sales declines in the Nutritional Supplements segment and personal care category.

Selling, General and Administrative Expense

Our consolidated SG&A ratio, decreased 0.1% percentage points to 32.5% for the nine months ended November 30, 2017, compared to 32.6% for the same period last year. The decrease in consolidated SG&A ratio was primarily due to:

·

the favorable comparative impact of a $1.5 million patent litigation charge in the same period last year;

·

improved distribution and logistics efficiency and lower outbound freight expense; and

·

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

These factors were partially offset by a $3.6 million charge related to the bankruptcy of TRU and higher overall marketing, advertising and new product development expense in support of our Leadership Brands. 

Asset Impairment Charges

As previously discussed under the heading “Significant Trends Impacting the Business”, for the nine months ended November 30, 2017, we recorded non-cash asset impairment charges totaling $136.3 million to certain goodwill and intangible assets as further discussed below.

We performed interim impairment testing in the first quarter of fiscal 2018 in connection with our continuing evaluation of strategic alternatives for the Nutritional Supplements segment. We performed interim impairment testing in the second quarter of fiscal 2018 as the result of a revised financial projection for the segment. As a result of our testing, we recorded non-cash asset impairment charges totaling $50.1 million for the six months ended August 31, 2017. During the third quarter of fiscal 2018, we performed interim impairment testing due to the receipt of new information regarding the potential fair value of the business. As a result, we recorded a pre-tax asset impairment charge of $70.6 million to the segment’s goodwill and $11.6 million to the segment’s indefinite-lived brand assets.

We also performed interim impairment testing in the first quarter of fiscal 2018 for a certain brand in our Beauty segment as a result of a revised financial projection. As a result of our testing, we recorded a non-cash impairment charge of $4.0 million.

Operating Income (Loss), Operating Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin (non-GAAP) by Segment

In order to provide a better understanding of the comparative impact of certain items on operating income (loss), the tables that follow report the comparative before tax impact of noncash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and noncash sharebased compensation, as applicable, on operating income (loss) and operating margin for each segment and in total for the periods covered below.

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Nine Months Ended November 30, 2017

 

(In thousands)

 

Housewares(2)

 

 

Health & Home

 

 

Nutritional
Supplements

 

 

Beauty

 

 

Total

 

Operating income (loss), as reported (GAAP)

 

$

71,601

 

21.0

%

 

$

50,187

 

10.3

%

 

$

(138,413)

 

(150.1)

%

 

$

17,869

 

6.7

%

 

$

1,244

 

0.1

%

Asset impairment charges

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

132,297

 

143.5

%

 

 

4,000

 

1.5

%

 

 

136,297

 

11.4

%

Restructuring charges(1)

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

118

 

0.4

%

 

 

1,165

 

1.1

%

 

 

1,283

 

0.3

%

TRU bankruptcy charge

 

 

956

 

0.3

%

 

 

2,640

 

0.5

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

3,596

 

0.3

%

Subtotal

 

 

72,557

 

21.3

%

 

 

52,827

 

10.8

%

 

 

(5,998)

 

(6.5)

%

 

 

23,034

 

8.6

%

 

 

142,420

 

12.0

%

Amortization of intangible assets

 

 

1,618

 

0.5

%

 

 

8,373

 

1.7

%

 

 

5,380

 

5.8

%

 

 

4,207

 

1.6

%

 

 

19,578

 

1.6

%

Non-cash share-based compensation

 

 

3,579

 

1.0

%

 

 

3,792

 

0.8

%

 

 

980

 

1.1

%

 

 

2,779

 

1.0

%

 

 

11,130

 

0.9

%

Adjusted operating income (non-GAAP)

 

$

77,754

 

22.8

%

 

$

64,992

 

13.3

%

 

$

362

 

0.4

%

 

$

30,020

 

11.2

%

 

$

173,128

 

14.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 2016

 

(In thousands)

 

Housewares

 

 

Health & Home

 

 

Nutritional
Supplements

 

 

Beauty

 

 

Total

 

Operating income (loss), as reported (GAAP)

 

$

68,956

 

21.9

%

 

$

39,156

 

8.3

%

 

$

(6,581)

 

(6.5)

%

 

$

22,173

 

8.1

%

 

$

123,704

 

10.7

%

Asset impairment charges

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

5,000

 

4.9

%

 

 

2,400

 

0.9

%

 

 

7,400

 

0.6

%

Patent litigation charge

 

 

 -

 

 -

%

 

 

1,468

 

0.3

%

 

 

 -

 

 -

%

 

 

 -

 

 -

%

 

 

1,468

 

0.1

%

Subtotal

 

 

68,956

 

21.9

%

 

 

40,624

 

8.6

%

 

 

(1,581)

 

(1.6)

%

 

 

24,573

 

9.0

%

 

 

132,572

 

11.4

%

Amortization of intangible assets

 

 

1,986

 

0.6

%

 

 

10,626

 

2.3

%

 

 

4,713

 

4.7

%

 

 

4,300

 

1.6

%

 

 

21,625

 

1.9

%

Non-cash share-based compensation

 

 

2,404

 

0.8

%

 

 

3,787

 

0.8

%

 

 

1,734

 

1.7

%

 

 

3,736

 

1.4

%

 

 

11,661

 

1.0

%

Adjusted operating income (non-GAAP)

 

$

73,346

 

23.3

%

 

$

55,037

 

11.7

%

 

$

4,866

 

4.8

%

 

$

32,609

 

11.9

%

 

$

165,858

 

14.3

%

_____________________

(1)

Charges incurred in conjunction with the Company’s restructuring plan for the nine-months ended November 30, 2017 with no comparable charges in the same period last year.

(2)

Includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.

Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures. 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 in the section below entitled, “Explanation of Non-GAAP Financial Measures”.

Consolidated

Consolidated operating income was $1.2 million, or 0.1% of net sales, compared to consolidated operating income of $123.7 million, or 10.7% of net sales, for the same period last year. The nine months ended November 30, 2017 includes: (i) pre-tax non-cash asset impairment charges totaling $136.3 million; (ii) a $3.6 million charge related to the TRU bankruptcy; and (iii) pre-tax restructuring charges of $1.3 million associated with Project Refuel. The nine months ended November 30, 2016 includes pre-tax non-cash asset impairment charges of $7.4 million and a patent litigation charge of $1.5 million. The effect of these items in both years unfavorably impacted the year-over-year comparison of operating margin by a combined 11.3 percentage points. The remaining improvement in consolidated operating margin primarily reflects:

·

a higher mix of Leadership Brand sales at a higher operating margin;

·

the favorable comparative impact of a $1.5 million patent litigation charge in the same period last year;

·

improved distribution and logistics efficiency and lower outbound freight costs; and

·

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

These factors were partially offset by higher marketing, advertising and new product development expense in support of our Leadership Brands.

Consolidated adjusted operating income increased 4.4% to $173.1 million, or 14.5% of net sales, compared to $165.9 million, or 14.3% of net sales, in the same period last year.

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Housewares

The Housewares segment’s operating income was $71.6 million, or 21.0% of segment net sales, compared to $69.0 million, or 21.9% of segment net sales, for the same period last year. The 0.9 percentage point decrease in segment operating margin is primarily due to:

·

higher marketing, advertising and new product development expense; and

·

a $1.0 million charge related to the bankruptcy of TRU.

These factors were partially offset by the favorable margin impact from growth in the Hydro Flask business, improved distribution and logistics efficiency coupled with lower outbound freight costs, and the impact of increased operating leverage from overall sales growth.

Segment adjusted operating income increased 6.0% to $77.8 million, or 22.8% of segment net sales, compared to $73.3 million, or 23.3% of segment net sales, in the same period last year.

Health & Home

The Health & Home segment’s operating income was $50.2 million, or 10.3% of segment net sales, compared to $39.2 million, or 8.3% of segment net sales, in the same period last year. The 2.0 percentage point increase in segment operating margin is primarily due to:

·

lower legal fee expense;

·

lower amortization expense;

·

the comparative impact of a $1.5 million patent litigation charge in the same period last year;

·

improved distribution and logistics efficiency and lower outbound freight costs;

·

lower royalty expense; and

·

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

These factors were partially offset by:

·

an increase in new product development expense;

·

a $2.6 million charge related to the bankruptcy of TRU; and

·

an increase in product liability expense.

Segment adjusted operating income increased 18.1% to $65.0 million, or 13.3% of segment net sales, compared to $55.0 million, or 11.7% of segment net sales, in the same period last year.

Nutritional Supplements  

The Nutritional Supplements segment’s operating loss was $(138.4) million, or (150.1)% of segment net sales, for the nine months ended November 30, 2017, compared to an operating loss of $6.6 million, or (6.5)% of segment net sales, in the same period last year. The increase in the segment operating loss is primarily due to:

·

pre-tax non-cash asset impairment charges of $132.3 million recorded during the nine months ended November 30, 2017, compared to $5.0 million recorded in the same period last year;

·

pre-tax restructuring charges of $0.1 million related to Project Refuel;

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·

higher promotion, advertising and customer acquisition costs; and

·

the net sales decline and its unfavorable impact on operating leverage.

These factors were partially offset by lower personnel expense and lower royalty expense.

Segment adjusted operating income was $0.4 million, or 0.4% of segment net sales, compared to segment adjusted operating income of $4.9 million, or 4.8% of segment net sales in the same period last year. 

Beauty

The Beauty segment’s operating income was $17.9 million, or 6.7% of segment net sales, for the nine months ended November 30, 2017, compared to operating income of $22.2 million, or 8.1% of segment net sales, in the same period last year. The 1.4 percentage point decrease in segment operating margin is primarily due to:

·

pre-tax non-cash asset impairment charges of $4.0 million, recorded during the nine months ended November 30, 2017, compared to $2.4 million recorded in the same period last year;

·

pre-tax restructuring charges of $1.2 million related to Project Refuel; and 

·

the net sales decline in the personal care category and its unfavorable impact on gross margin mix and operating leverage.

These factors were partially offset by the favorable impact of new product introductions in the appliance category, lower media advertising expense, improved distribution and logistics efficiency coupled with lower outbound freight costs and the favorable impact of foreign currency fluctuations.

Segment adjusted operating income decreased 7.9% to $30.0 million, or 11.2% of segment net sales, compared to $32.6 million, or 11.9% of segment net sales, in the same period last year.

Interest Expense

Interest expense was $11.3 million for the nine months ended November 30, 2017 compared to $11.1 million in the same period last year.  The increase in interest expense is due to higher overall average interest rates, partially offset by lower average levels of debt held during the nine months ended November 30, 2017.

Income Tax Expense

The year-over-year comparison of our effective tax rates is impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.

For the nine months ended November 30, 2017, income tax expense as a percentage of pre-tax loss was (59.5)%, compared to expense of 7.0% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income, as opposed to the periods in which the charges were incurred. As a result, the expected tax benefit from impairment charges of $52.8 million will be recognized entirely in the fourth quarter of fiscal 2018, relative to pre-tax income.

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Income taxes for the nine-months ended November 30, 2017 also included:

·

$2.6 million in excess tax benefits from share-based compensation settlements and exercises; and

·

$2.8 million of tax benefits related to the resolution of uncertain tax positions.

Income taxes for the nine months ended November 30, 2016 included tax benefits of $1.4 million related to the resolution of uncertain tax positions and $1.3 million in excess tax benefits from share-based compensation settlements and exercises.

Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP)

In order to provide a better understanding of the impact of certain items on our net income (loss) and earnings (loss) per share, the analysis that follows reports the comparative after tax impact of noncash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and noncash sharebased compensation, as applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 2017

 

 

 

Income (Loss)

 

Diluted Earnings (Loss) Per Share

(in thousands, except per share data)

   

Before tax

 

Tax

 

Net of Tax

 

Before tax

 

Tax

 

Net of Tax

As reported (GAAP)

 

$

(9,802)

 

$

5,833

 

$

(15,635)

 

$

(0.36)

 

$

0.21

 

$

(0.58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

136,297

 

 

 3

 

 

136,294

 

 

4.99

 

 

 -

 

 

4.99

Restructuring charges(1)

 

 

1,283

 

 

69

 

 

1,214

 

 

0.05

 

 

 -

 

 

0.04

Patent litigation charge

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

TRU bankruptcy charge

 

 

3,596

 

 

204

 

 

3,392

 

 

0.13

 

 

0.01

 

 

0.12

Subtotal

 

 

131,374

 

 

6,109

 

 

125,265

 

 

4.81

 

 

0.22

 

 

4.59

Amortization of intangible assets

 

 

19,578

 

 

2,625

 

 

16,953

 

 

0.72

 

 

0.10

 

 

0.62

Non-cash share-based compensation

 

 

11,130

 

 

1,862

 

 

9,268

 

 

0.41

 

 

0.07

 

 

0.34

Adjusted (non-GAAP)

 

$

162,082

 

$

10,596

 

$

151,486

 

$

5.94

 

$

0.39

 

$

5.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share, as reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,140

Adjusted diluted earnings per share (non-GAAP)

 

 

 

 

 

 

 

 

27,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 2016

 

 

 

Income

 

Diluted Earnings Per Share

(in thousands, except per share data)

 

Before tax

 

Tax

 

Net of Tax

 

Before tax

 

Tax

 

Net of Tax

As reported (GAAP)

 

$

112,905

 

$

7,912

 

$

104,993

 

$

4.02

 

$

0.28

 

$

3.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

7,400

 

 

2,303

 

 

5,097

 

 

0.26

 

 

0.08

 

 

0.18

Restructuring charges(1)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Patent litigation charge

 

 

1,468

 

 

 4

 

 

1,464

 

 

0.05

 

 

 -

 

 

0.05

TRU bankruptcy charge

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Subtotal

 

 

121,773

 

 

10,219

 

 

111,554

 

 

4.34

 

 

0.36

 

 

3.98

Amortization of intangible assets

 

 

21,625

 

 

3,005

 

 

18,620

 

 

0.77

 

 

0.11

 

 

0.66

Non-cash share-based compensation

 

 

11,661

 

 

2,920

 

 

8,741

 

 

0.42

 

 

0.11

 

 

0.31

Adjusted (non-GAAP)

 

$

155,059

 

$

16,144

 

$

138,915

 

$

5.53

 

$

0.58

 

$

4.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share, as reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,058

Adjusted diluted earnings per share (non-GAAP)

 

 

 

 

 

 

 

 

28,058

__________________

(1) Charges incurred in conjunction with the Company’s restructuring plan for the nine months ended November 30, 2017, with no comparable charges in the same period last year.

Adjusted income and adjusted diluted earnings per share may be considered non-GAAP financial measures. 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 in the section below entitled, “Explanation of Non-GAAP Financial Measures”.

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Consolidated net loss was $(15.6) million for the nine months ended November 30, 2017 compared to net income of $105.0 million for the same period last year. Diluted loss per share was $(0.58) for the nine months ended November 30, 2017 compared to diluted earnings per share of $3.74 for the same period last year.

Adjusted income increased $12.6 million, or 9.0%, to $151.5 million for the nine months ended November 30, 2017 compared to $138.9 million in the same period last year. Adjusted diluted earnings per share increased 12.1% to $5.55 for the nine months ended November 30, 2017 compared to $4.95 for the same period last year. Adjusted diluted earnings per share increased primarily due to the impact of higher adjusted operating income in the Housewares and Health & Home segments, and lower weighted average diluted shares outstanding for the nine months ended November 30, 2017 compared to the same period last year.

Explanation of Non-GAAP Financial Measures

In the tables above, under the headings “Operating Income, Operating Margin, Adjusted Operating Income (non-GAAP) and Adjusted Operating Margin (non-GAAP) by Segment” and “Net Income (Loss), Earnings (Loss) Per Share, Adjusted Income (non-GAAP), and Adjusted Diluted Earnings Per Share (non-GAAP),” we report operating income (loss), operating margin, net income (loss) and earnings (loss) per share without the impact of non-cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. 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 statements of operations. We believe that adjusted operating income, adjusted operating margin, adjusted income and adjusted diluted earnings per share provide useful information to management and investors regarding financial and business trends relating to our financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with our financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges on operating income (loss), operating margin, net income (loss) and earnings (loss) per share. We also believe that these non-GAAP measures facilitate a more direct comparison of our performance with our competitors. We further believe that including the excluded charges would not accurately reflect the underlying performance of our continuing operations for the period in which the charges are incurred, even though such charges may be incurred and reflected in our 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 our activities. Our adjusted operating income, adjusted operating margin, adjusted income and adjusted diluted earnings per share 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

Selected measures of our liquidity and capital resources are shown for the periods below:

SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL UTILIZATION

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 30, 

 

 

    

2017

    

2016

 

Accounts Receivable Turnover (Days)(1)

 

 

59.1

 

 

57.8

 

Inventory Turnover (Times)(1)

 

 

2.9

 

 

2.8

 

Working Capital (in thousands)

 

$

263,520

 

$

292,559

 

Current Ratio

 

 

1.7:1

 

 

1.9:1

 

Ending Debt to Ending Equity Ratio

 

 

43.3

%  

 

57.7

%  

Return on Average Equity(1)

 

 

2.0

%  

 

11.9

%  

_____________________

(1)

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

Operating Activities

Operating activities provided $107.6 million of cash during the nine months ended November 30, 2017 compared to $139.1 million of cash provided during the same period last year.

Accounts receivable increased $72.5 million, to $302.4 million as of November 30, 2017, compared to $229.9 million at the end of fiscal year 2017. Accounts receivable turnover was 59.1 days at November 30, 2017, compared to 57.8 days for the same period last year.

Inventory decreased $3.5 million, to $285.6 million as of November 30, 2017, compared to $289.1 million at the end of fiscal year 2017. Inventory turnover was 2.9 times at November 30, 2017 compared to 2.8 times at November 30, 2016.

Working capital was $263.5 million at November 30, 2017, compared to $292.6 million at November 30, 2016 and our current ratio was 1.7:1 at November 30, 2017, compared to 1.9:1 as of November 30, 2016.

Investing Activities

Investing activities used $19.8 million of cash during the nine months ended November 30, 2017. We spent $7.1 million on computers, furniture and other equipment, $3.7 million on tools, molds and other capital asset additions, and $9.0 million on patents and certain trademark related assets.

Financing Activities

Financing activities used $89.7 million of cash during the nine months ended November 30, 2017. Highlights of those activities follow:

·

we had draws of $389.5 million against our credit agreement;

·

we repaid $444.2 million drawn against our credit agreement;

·

we repaid $5.7 million of our long-term debt;

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·

employees exercised options to purchase 110,552 shares of common stock, providing $5.5 million of cash;

·

employees purchased 16,018 shares of common stock for $1.2 million through our employee stock purchase plan; and

·

we paid $6.8 million in tax obligations resulting from cashless share award settlements.

Credit and Other Debt Agreements

Credit Agreement

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 $1 billion as of November 30, 2017. The commitment under the Credit Agreement terminates on December 7, 2021. 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 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, 2017, the outstanding revolving loan principal balance was $386.0 million and the balance of outstanding letters of credit was $7.6 million. As of November 30, 2017, the amount available for borrowings under the Credit Agreement was $606.4 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur. As of November 30, 2017, these covenants effectively limited our ability to incur more than $348.2 million of additional debt from all sources, including our Credit Agreement. 

Other Debt Agreements

In addition to the Credit Agreement, at November 30, 2017, we had an aggregate principal balance of $20 million of 3.9% Senior Notes due January 2018 with one remaining installment due in January 2018.

We also have an aggregate principal balance of $24.3 million under a loan agreement with the Mississippi Business Finance Corporation (the “MBFC Loan”). The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. The remaining loan balance is payable as follows: $1.9 million annually on March 1, 2018 through 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

Our debt agreements require the maintenance of certain key financial covenants, defined in the table below. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, 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. The commitments of the lenders to make loans to us under the Credit Agreement 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.

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

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Applicable Financial Covenant

Credit Agreement and MBFC Loan

3.9% 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 Acquisitions]

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

 

 

 

 

 

 

 

Maximum Currently 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

Our contractual obligations and commercial commitments in effect as of November 30, 2017, were:

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2019

 

2020

 

2021

 

2022

 

After

(in thousands)

    

Total

    

1 year

    

2 years

    

3 years

    

4 years

    

5 years

    

5 years

Fixed rate debt

 

$

20,000

 

$

20,000

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Floating rate debt

 

 

410,307

 

 

1,900

 

 

1,900

 

 

1,900

 

 

1,900

 

 

387,900

 

 

14,807

Long-term incentive plan payouts

 

 

10,658

 

 

4,972

 

 

4,286

 

 

1,400

 

 

 -

 

 

 -

 

 

 -

Interest on fixed rate debt

 

 

91

 

 

91

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Interest on floating rate debt(1)

 

 

43,591

 

 

10,800

 

 

10,750

 

 

10,701

 

 

10,651

 

 

593

 

 

96

Open purchase orders

 

 

205,399

 

 

205,399

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Long-term purchase commitments

 

 

1,180

 

 

1,180

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Minimum royalty payments

 

 

56,970

 

 

12,515

 

 

12,905

 

 

13,067

 

 

8,999

 

 

8,983

 

 

501

Advertising and promotional

 

 

48,396

 

 

17,586

 

 

7,315

 

 

7,371

 

 

7,450

 

 

7,174

 

 

1,500

Operating leases

 

 

34,343

 

 

6,468

 

 

5,079

 

 

4,524

 

 

4,152

 

 

3,543

 

 

10,577

Capital spending commitments

 

 

643

 

 

643

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total contractual obligations(2)

 

$

831,578

 

$

281,554

 

$

42,235

 

$

38,963

 

$

33,152

 

$

408,193

 

$

27,481

_____________________

(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, 2017 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, 2017 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, 2017, we have recorded total provisions for our uncertain tax positions totaling $4.5 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. We may also elect to repurchase additional shares of common stock up to the balance of our current authorization over the next three fiscal years, subject to limitations contained in our debt agreements and based upon our 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.  Additional information regarding risk management activities can be found in Note 12 to the accompanying consolidated condensed financial statements.

Information Regarding Forward-Looking Statements

Certain written and oral statements in this Form 10-Q 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 may occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report under Item 1A., “Risk Factors” and that are otherwise described from time to time in our SEC reports as filed. As described later in this report, such risks, uncertainties and other important factors include, among others:

·

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

·

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

·

our relationship with key customers and licensors;

·

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

·

our dependence on sales to several large customers and the risk associated with any loss or substantial decline in sales to top customers;

·

expectations regarding any proposed restructurings, our recent and future acquisitions or divestitures, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses or separate divested businesses;

·

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

·

the retention and recruitment of key personnel; 

·

foreign currency exchange rate fluctuations;

·

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

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·

risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors;

·

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

·

the impact of changing costs of raw materials, 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;

·

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;

·

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;

·

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

·

the risks to our liquidity as a result of changes to capital market conditions and other constraints or events that impose constraints 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 risks associated with product recalls, product liability, other claims, and related litigation against us;

·

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

·

the risk of potential changes in laws in the U.S. or abroad, including tax laws, regulations or treaties, employment and health insurance laws and regulations, and laws relating to environmental policy, financial regulation, transportation policy and infrastructure policy 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.

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.

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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, 2017. 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, 2017, 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, 2017, 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 Form 10-K for the fiscal year ended February 28, 2017. Since the filing of our 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

On May 10, 2017, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The new authorization is effective for a period of three years and replaced our existing repurchase authorization of which approximately $82 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of November 30, 2017, our repurchase authorization allowed for the purchase of $364.9 million of common stock.

Our current equity-based compensation plans include provisions that allow for the “net exercise” of share settled awards 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. Net exercises are treated as purchases and retirements of shares.

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

ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED NOVEMBER 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

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, 2017

    

 

259

    

$

90.93

    

 

259

    

$

394,090

October 1 through October 31, 2017

 

 

311,140

 

 

93.72

 

 

311,140

 

 

364,928

November 1 through November 30, 2017

 

 

 -

 

 

 -

 

 

 -

 

 

364,928

Total

 

 

311,399

 

$

93.72

 

 

311,399

 

 

 

 

 

 

 

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n

 

 

 

 

 

ITEM 6.

EXHIBITS

 

 

 

(a)

Exhibits

 

 

 

 

 

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

 

 

 

 

 

 

*     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 9, 2018

   /s/ Julien R. Mininberg

 

  Julien R. Mininberg

 

  Chief Executive Officer,

  Director and Principal Executive Officer

 

 

 

 

Date:    January 9, 2018

  /s/ Brian L. Grass

 

  Brian L. Grass

 

  Chief Financial Officer, Principal Financial

 

  Officer and Principal Accounting Officer

 

 

 

 

 

  

 

 

 

 

 

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