UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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T |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended August 31, 2012 | |
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or | |
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£ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ..... to ..... | |
Commission file number: 001-14669
HELEN OF TROY LIMITED
(Exact name of registrant as specified in its charter)
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Bermuda |
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74-2692550 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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Clarenden House Church Street Hamilton, Bermuda |
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(Address of principal executive offices) |
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1 Helen of Troy Plaza |
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El Paso, Texas |
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79912 |
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(Registrant’s United States Mailing Address) |
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(Zip Code) |
(915) 225-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer T |
Accelerated filer £ |
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Non-accelerated filer £ (Do not check if a smaller reporting company) |
Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No T
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at October 3, 2012 |
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Common Shares, $0.10 par value, per share |
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31,806,775 shares |
HELEN OF TROY LIMITED AND SUBSIDIARIES
INDEX – FORM 10-Q
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Balance Sheets (unaudited)
(in thousands, except shares and par value)
|
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August 31, |
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February 29, |
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||
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2012 |
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2012 |
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||
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Assets |
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Assets, current: |
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Cash and cash equivalents |
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$ |
21,767 |
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$ |
21,846 |
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Receivables - principally trade, less allowances of $5,487 and $5,541 |
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208,284 |
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195,283 |
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||
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Inventory, net |
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318,697 |
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246,142 |
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Prepaid expenses and other current assets |
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7,939 |
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7,645 |
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Deferred tax assets, net |
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17,462 |
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17,620 |
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Total assets, current |
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574,149 |
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488,536 |
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Property and equipment, net of accumulated depreciation of $70,545 and $62,550 |
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99,615 |
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100,690 |
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||
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Goodwill |
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452,253 |
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452,350 |
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Other intangible assets, net of accumulated amortization of $62,436 and $52,268 |
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366,651 |
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377,150 |
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||
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Deferred tax assets, net |
|
734 |
|
976 |
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||
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Other assets, net of accumulated amortization of $4,824 and $3,938 |
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15,660 |
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16,021 |
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Total assets |
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$ |
1,509,062 |
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$ |
1,435,723 |
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Liabilities and Stockholders’ Equity |
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Liabilities, current: |
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Revolving line of credit |
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$ |
161,000 |
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$ |
171,100 |
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Accounts payable, principally trade |
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106,475 |
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69,845 |
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||
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Accrued expenses and other current liabilities |
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124,753 |
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131,632 |
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||
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Income taxes payable |
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7,692 |
|
352 |
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||
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Deferred tax liabilities, net |
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1,168 |
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2,960 |
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Long-term debt, current maturities |
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- |
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3,000 |
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Total liabilities, current |
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401,088 |
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378,889 |
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Long-term debt, excluding current maturities |
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175,000 |
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175,000 |
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Deferred tax liabilities, net |
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57,265 |
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60,576 |
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Other liabilities, noncurrent |
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23,349 |
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24,529 |
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Total liabilities |
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656,702 |
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638,994 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued |
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- |
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- |
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||
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Common stock, $0.10 par. Authorized 50,000,000 shares; 31,789,225 and 31,681,067 shares issued and outstanding |
|
3,179 |
|
3,168 |
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||
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Additional paid in capital |
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159,879 |
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151,006 |
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||
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Accumulated other comprehensive loss |
|
(4,747 |
) |
(5,589 |
) |
||
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Retained earnings |
|
694,049 |
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648,144 |
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||
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Total stockholders’ equity |
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852,360 |
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796,729 |
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Total liabilities and stockholders’ equity |
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$ |
1,509,062 |
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$ |
1,435,723 |
|
See accompanying notes to consolidated condensed financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Statements of Income (unaudited)
(in thousands, except per share data)
|
|
|
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Three Months Ended August 31, |
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Six Months Ended August 31, |
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||||||||
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2012 |
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2011 |
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2012 |
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2011 |
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|||||
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Sales revenue, net |
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$ |
287,411 |
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$ |
277,420 |
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$ |
587,622 |
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$ |
548,887 |
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Cost of goods sold |
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170,381 |
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165,138 |
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349,444 |
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326,692 |
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|||||
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Gross profit |
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117,030 |
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112,282 |
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238,178 |
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222,195 |
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|||||
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|||||
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Selling, general and administrative expense |
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86,189 |
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81,933 |
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176,189 |
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161,192 |
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|||||
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Operating income |
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30,841 |
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30,349 |
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61,989 |
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61,003 |
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|||||
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Nonoperating income (expense), net |
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31 |
|
(658 |
) |
54 |
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(515 |
) |
|||||
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Interest expense |
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(3,130 |
) |
(3,265 |
) |
(6,442 |
) |
(6,694 |
) |
|||||
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Income before income taxes |
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27,742 |
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26,426 |
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55,601 |
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53,794 |
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|||||
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Income tax expense: |
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|
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|
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|
|
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|||||
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Current |
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8,487 |
|
1,044 |
|
14,388 |
|
2,434 |
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|||||
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Deferred |
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(3,713 |
) |
1,789 |
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(5,227 |
) |
3,162 |
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|||||
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Net income |
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$ |
22,968 |
|
$ |
23,593 |
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$ |
46,440 |
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$ |
48,198 |
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Earnings per share: |
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Basic |
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$ |
0.72 |
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$ |
0.75 |
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$ |
1.46 |
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$ |
1.55 |
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Diluted |
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$ |
0.72 |
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$ |
0.74 |
|
$ |
1.46 |
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$ |
1.52 |
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|||||
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Weighted
average shares of common stock used in |
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|
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|||||
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Basic |
|
31,743 |
|
31,292 |
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31,721 |
|
31,074 |
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|||||
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Diluted |
|
31,846 |
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31,731 |
|
31,843 |
|
31,696 |
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|||||
See accompanying notes to consolidated condensed financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income (unaudited)
(in thousands)
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Three Months Ended August 31, |
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|||||||||||||||||
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2012 |
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2011 |
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||||||||||||||
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|
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Before |
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|
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Net of |
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Before |
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|
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Net of |
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|||||||
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|
|
Tax |
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Tax |
|
Tax |
|
|
Tax |
|
Tax |
|
Tax |
|
|||||||
|
Net income |
|
$ |
27,742 |
|
$ |
(4,774 |
) |
$ |
22,968 |
|
$ |
26,426 |
|
$ |
(2,833 |
) |
$ |
23,593 |
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||
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|
|
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|
|
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|
|
|
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|
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|
||||||||
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Other comprehensive income |
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|
|
|
|
|
|
|
|
|
|
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||||||||
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Cash flow hedge activity - interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
(457 |
) |
160 |
|
(297 |
) |
(846 |
) |
296 |
|
(550 |
) |
||||||||
|
Interest rate settlements reclassified to income |
|
980 |
|
(343 |
) |
637 |
|
1,103 |
|
(386 |
) |
717 |
|
||||||||
|
Subtotal |
|
523 |
|
(183 |
) |
340 |
|
257 |
|
(90 |
) |
167 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cash flow hedge activity - foreign currency swaps and contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
(933 |
) |
327 |
|
(606 |
) |
499 |
|
(159 |
) |
340 |
|
||||||||
|
Ineffectiveness recorded in income |
|
(14 |
) |
5 |
|
(9 |
) |
115 |
|
(36 |
) |
79 |
|
||||||||
|
Settlements reclassified to income |
|
(11 |
) |
3 |
|
(8 |
) |
125 |
|
(40 |
) |
85 |
|
||||||||
|
Subtotal |
|
(958 |
) |
335 |
|
(623 |
) |
739 |
|
(235 |
) |
504 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Auction rate security activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
- |
|
- |
|
- |
|
1,423 |
|
(498 |
) |
925 |
|
||||||||
|
Settlements reclassified to income |
|
- |
|
- |
|
- |
|
(6 |
) |
2 |
|
(4 |
) |
||||||||
|
Subtotal |
|
- |
|
- |
|
- |
|
1,417 |
|
(496 |
) |
921 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Total other comprehensive income |
|
(435 |
) |
152 |
|
(283 |
) |
2,413 |
|
(821 |
) |
1,592 |
|
||||||||
|
Comprehensive income |
|
$ |
27,307 |
|
$ |
(4,622 |
) |
$ |
22,685 |
|
$ |
28,839 |
|
$ |
(3,654 |
) |
$ |
25,185 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
Six Months Ended August 31, |
|
|||||||||||||||||
|
|
|
|
2012 |
|
|
2011 |
|
||||||||||||||
|
|
|
Before |
|
|
|
Net of |
|
|
Before |
|
|
|
Net of |
|
|||||||
|
|
|
Tax |
|
Tax |
|
Tax |
|
Tax |
|
Tax |
|
Tax |
|
||||||||
|
Net income |
|
$ |
55,601 |
|
$ |
(9,161 |
) |
$ |
46,440 |
|
$ |
53,794 |
|
$ |
(5,596 |
) |
$ |
48,198 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cash flow hedge activity - interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
(501 |
) |
175 |
|
(326 |
) |
(3,288 |
) |
1,407 |
|
(1,881 |
) |
||||||||
|
Interest rate settlements reclassified to income |
|
1,906 |
|
(667 |
) |
1,239 |
|
2,629 |
|
(1,081 |
) |
1,548 |
|
||||||||
|
Subtotal |
|
1,405 |
|
(492 |
) |
913 |
|
(659 |
) |
326 |
|
(333 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cash flow hedge activity - foreign currency swaps and contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
(23 |
) |
9 |
|
(14 |
) |
12 |
|
(3 |
) |
9 |
|
||||||||
|
Ineffectiveness recorded in income |
|
(49 |
) |
17 |
|
(32 |
) |
178 |
|
(56 |
) |
122 |
|
||||||||
|
Settlements reclassified to income |
|
(37 |
) |
12 |
|
(25 |
) |
269 |
|
(86 |
) |
183 |
|
||||||||
|
Subtotal |
|
(109 |
) |
38 |
|
(71 |
) |
459 |
|
(145 |
) |
314 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Auction rate security activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in fair market value |
|
- |
|
- |
|
- |
|
1,465 |
|
(520 |
) |
945 |
|
||||||||
|
Settlements reclassified to income |
|
- |
|
- |
|
- |
|
(126 |
) |
65 |
|
(61 |
) |
||||||||
|
Subtotal |
|
- |
|
- |
|
- |
|
1,339 |
|
(455 |
) |
884 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Total other comprehensive income |
|
1,296 |
|
(454 |
) |
842 |
|
1,139 |
|
(274 |
) |
865 |
|
||||||||
|
Comprehensive income |
|
$ |
56,897 |
|
$ |
(9,615 |
) |
$ |
47,282 |
|
$ |
54,933 |
|
$ |
(5,870 |
) |
$ |
49,063 |
|
||
See accompanying notes to consolidated condensed financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (unaudited)
(in thousands)
|
|
|
Six Months Ended August 31, |
|
||||
|
|
|
2012 |
|
2011 |
|
||
|
Cash provided (used) by operating activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
46,440 |
|
$ |
48,198 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
||
|
Depreciation and amortization |
|
17,795 |
|
13,691 |
|
||
|
Provision for doubtful receivables |
|
(54 |
) |
225 |
|
||
|
Share-based compensation |
|
3,129 |
|
1,163 |
|
||
|
Gain on the sale of property and equipment |
|
(15 |
) |
(84 |
) |
||
|
Unrealized loss on investments |
|
- |
|
756 |
|
||
|
Deferred income taxes and tax credits |
|
(5,231 |
) |
3,114 |
|
||
|
Changes in operating capital: |
|
|
|
|
|
||
|
Receivables |
|
(12,947 |
) |
(12,411 |
) |
||
|
Inventories |
|
(72,450 |
) |
(40,380 |
) |
||
|
Prepaid expenses and other current assets |
|
(674 |
) |
(3,382 |
) |
||
|
Other assets and liabilities, net |
|
(390 |
) |
(796 |
) |
||
|
Accounts payable |
|
36,611 |
|
31,394 |
|
||
|
Accrued expenses and other current liabilities |
|
(8,544 |
) |
(13,994 |
) |
||
|
Accrued income taxes |
|
7,083 |
|
1,792 |
|
||
|
Net cash provided by operating activities |
|
10,753 |
|
29,286 |
|
||
|
|
|
|
|
|
|
||
|
Cash provided (used) by investing activities: |
|
|
|
|
|
||
|
Capital and intangible asset expenditures |
|
(5,760 |
) |
(6,979 |
) |
||
|
Proceeds from the sale of property and equipment |
|
20 |
|
1,438 |
|
||
|
Proceeds from note receivable related to land sale |
|
737 |
|
- |
|
||
|
Proceeds from sale of investments |
|
- |
|
3,100 |
|
||
|
Net cash used by investing activities |
|
(5,003 |
) |
(2,441 |
) |
||
|
|
|
|
|
|
|
||
|
Cash provided (used) by financing activities: |
|
|
|
|
|
||
|
Proceeds from line of credit |
|
114,950 |
|
485,500 |
|
||
|
Repayment of line of credit |
|
(125,050 |
) |
(451,500 |
) |
||
|
Repayments of long-term debt |
|
(3,000 |
) |
(53,000 |
) |
||
|
Payments of financing costs |
|
(28 |
) |
(25 |
) |
||
|
Proceeds from exercise of stock options and employee stock purchases, including tax benefits |
|
6,913 |
|
2,619 |
|
||
|
Directors’ stock repurchased |
|
(72 |
) |
- |
|
||
|
Payment of tax obligations resulting from cashless option exercise |
|
- |
|
(12,546 |
) |
||
|
Share-based compensation tax benefit |
|
458 |
|
52 |
|
||
|
Net cash used by financing activities |
|
(5,829 |
) |
(28,900 |
) |
||
|
|
|
|
|
|
|
||
|
Net decrease in cash and cash equivalents |
|
(79 |
) |
(2,055 |
) |
||
|
Cash and cash equivalents, beginning balance |
|
21,846 |
|
27,193 |
|
||
|
Cash and cash equivalents, ending balance |
|
$ |
21,767 |
|
$ |
25,138 |
|
See accompanying notes to consolidated condensed financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2012
Note 1 - Basis of Presentation and Conventions Used in this Report
The accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of August 31, 2012 and February 29, 2012, and the results of our consolidated operations for the three- and six-month periods ended August 31, 2012 and 2011. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 29, 2012, and our other reports on file with the Securities and Exchange Commission (“SEC”).
In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us,” or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars. We refer to the Company’s common shares, par value $0.10 per share, as “common stock.” References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries. References to “PUR” refer to the PUR brand of water filtration products that we acquired, along with certain other assets and liabilities, from The Procter & Gamble Company and certain of its affiliates on December 30, 2011. Kaz and PUR comprise a segment within the Company referred to as the Healthcare / Home Environment segment. Product and service names mentioned in this report are used for identification purposes only and may be protected by trademarks, trade names, services marks, and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks, and logos referenced herein belong to their owners. References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASC” refer to the codification of U.S. GAAP in the Accounting Standards Codification issued by the FASB.
We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have three segments: Personal Care, Housewares and Healthcare / Home Environment. Our Personal Care segment’s products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid, solid- and powder-based personal care and grooming products. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation and storage, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on health care devices such as thermometers, blood pressure monitors, humidifiers, and heating pads; water filtration systems; and small home appliances such as air purifiers, portable heaters, fans, and bug zappers. All three segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores. In addition, the Personal Care segment sells extensively through beauty supply retailers and wholesalers, and the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.
Our consolidated condensed financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We have reclassified, combined or separately disclosed certain amounts in the prior period’s consolidated condensed financial statements and accompanying footnotes to conform to the current period’s presentation.
Note 2 – New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt according to the various timetables the FASB specifies. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position, results of operations and cash flows upon adoption.
Note 3 – Commitments and Contingencies
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
Notes (7), (9), (10), (11), and (14) provide additional information regarding certain of our significant long-term commitments and certain significant contingencies we have provided for in the accompanying consolidated condensed financial statements.
Our products are under warranty against defects in material and workmanship for periods ranging from two to five years. We estimate our warranty accrual using historical trends and believe that these trends are the most reliable method by which we can estimate our warranty liability. The following table summarizes the activity in our warranty accrual for the periods covered in the accompanying consolidated condensed statements of income:
ACCRUAL FOR WARRANTY RETURNS
(in thousands)
|
|
|
Three Months Ended August 31, |
|
Six Months Ended August 31, |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Beginning balance |
|
$ |
23,313 |
|
$ |
24,369 |
|
$ |
26,665 |
|
$ |
24,021 |
|
|
Additions to the accrual |
|
7,899 |
|
9,386 |
|
14,773 |
|
16,496 |
| ||||
|
Reductions of the accrual - payments and credits issued |
|
(9,352 |
) |
(9,303 |
) |
(19,578 |
) |
(16,065 |
) | ||||
|
Ending balance |
|
$ |
21,860 |
|
$ |
24,452 |
|
$ |
21,860 |
|
$ |
24,452 |
|
Note 4 – Earnings per Share
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period and diluted earnings per share using basic earnings per share plus the effect of dilutive securities. Our securities that can have dilutive effects consist of outstanding options to purchase common stock. “In-the-money” options to purchase common stock are dilutive because they have exercise prices that are less than the average market price of our common stock during the period reported. “Out-of-the-money” options to purchase common stock are antidilutive and are excluded from the computation of earnings per share because the exercise price of the options was greater than the average market price of our common stock during the period reported. For the periods covered in the accompanying consolidated condensed statements of income, the basic and diluted shares are as follows:
WEIGHTED AVERAGE DILUTED SECURITIES
(in thousands)
|
|
|
Three Months Ended August 31, |
|
Six Months Ended August 31, |
| ||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
31,743 |
|
31,292 |
|
31,721 |
|
31,074 |
|
|
Incremental shares from share-based payment arrangements |
|
103 |
|
439 |
|
122 |
|
622 |
|
|
Weighted average shares outstanding, diluted |
|
31,846 |
|
31,731 |
|
31,843 |
|
31,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities, as a result of in-the-money options |
|
380 |
|
665 |
|
376 |
|
644 |
|
|
Antidilutive securities, as a result of out-of-the-money options |
|
617 |
|
365 |
|
621 |
|
386 |
|
Note 5 – Segment Information
The following tables contain segment information for the periods covered in the accompanying consolidated condensed statements of income:
THREE MONTHS ENDED AUGUST 31, 2012 AND 2011
(in thousands)
|
|
|
Personal |
|
|
|
Healthcare / Home |
|
|
| ||||
|
August 31, 2012 |
|
Care |
|
Housewares |
|
Environment |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Sales revenue, net |
|
$ |
112,364 |
|
$ |
64,570 |
|
$ |
110,477 |
|
$ |
287,411 |
|
|
Operating income |
|
11,880 |
|
12,078 |
|
6,883 |
|
30,841 |
| ||||
|
Capital and intangible asset expenditures |
|
864 |
|
326 |
|
1,202 |
|
2,392 |
| ||||
|
Depreciation and amortization |
|
3,242 |
|
1,278 |
|
4,175 |
|
8,695 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
Personal |
|
|
|
Healthcare / Home |
|
|
| ||||
|
August 31, 2011 |
|
Care |
|
Housewares |
|
Environment |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Sales revenue, net |
|
$ |
115,296 |
|
$ |
63,848 |
|
$ |
98,276 |
|
$ |
277,420 |
|
|
Operating income |
|
11,155 |
|
11,973 |
|
7,221 |
|
30,349 |
| ||||
|
Capital and intangible asset expenditures |
|
3,736 |
|
385 |
|
822 |
|
4,943 |
| ||||
|
Depreciation and amortization |
|
2,582 |
|
1,398 |
|
2,617 |
|
6,597 |
| ||||
SIX MONTHS ENDED AUGUST 31, 2012 AND 2011
(in thousands)
|
|
|
Personal |
|
|
|
Healthcare / Home |
|
|
| ||||
|
August 31, 2012 |
|
Care |
|
Housewares |
|
Environment |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Sales revenue, net |
|
$ |
229,916 |
|
$ |
124,819 |
|
$ |
232,887 |
|
$ |
587,622 |
|
|
Operating income |
|
23,760 |
|
23,355 |
|
14,874 |
|
61,989 |
| ||||
|
Capital and intangible asset expenditures |
|
3,119 |
|
517 |
|
2,124 |
|
5,760 |
| ||||
|
Depreciation and amortization |
|
6,509 |
|
2,576 |
|
8,710 |
|
17,795 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
Personal |
|
|
|
Healthcare / Home |
|
|
| ||||
|
August 31, 2011 |
|
Care |
|
Housewares |
|
Environment |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Sales revenue, net |
|
$ |
238,014 |
|
$ |
116,794 |
|
$ |
194,079 |
|
$ |
548,887 |
|
|
Operating income |
|
31,007 |
|
22,838 |
|
7,158 |
|
61,003 |
| ||||
|
Capital and intangible asset expenditures |
|
4,633 |
|
965 |
|
1,381 |
|
6,979 |
| ||||
|
Depreciation and amortization |
|
5,243 |
|
2,839 |
|
5,609 |
|
13,691 |
| ||||
We compute operating income for each segment based on net sales revenue, less cost of goods sold, selling, general and administrative expense (“SG&A”), and any impairment charges associated with the segment. SG&A used to compute each segment’s operating income is directly associated with the segment, plus overhead expenses allocable to the segment. We make allocations of overhead between operating segments using a number of relevant allocation criteria, depending on the nature of the expense, the most significant of which are relative revenues, estimates of relative labor expenditures, headcount, and facilities square footage. In fiscal 2013, we began making certain additional cost allocations to the Healthcare / Home Environment segment that were not made in fiscal 2012. These allocations are costs of corporate and operating functions that are shared by our segments. We made this change because we now have a complete fiscal year’s operating experience with the Healthcare / Home Environment segment. In the past year, we have integrated certain of the segment’s corporate and operating functions into consolidated corporate and shared operating functions. For the three- and six-month periods ended August 31, 2012, the allocation totaled $4.10 and $8.22 million, respectively, compared to $1.51 and $3.01 million, respectively, for the same periods last year. We do not allocate nonoperating income and expense, interest or income taxes to operating segments.
Note 6 – Comprehensive Income (Loss)
The components of accumulated other comprehensive loss, net of tax, are as follows:
COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(in thousands)
|
|
|
August 31, |
|
February 29, |
| ||
|
|
|
2012 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Unrealized holding losses on cash flow hedges - interest rate swap, net of tax (1) |
|
$ |
(4,647 |
) |
$ |
(5,559 |
) |
|
Unrealized holding losses on cash flow hedges - foreign currency swaps and contracts, net of tax (2) |
|
(100 |
) |
(30 |
) | ||
|
Total accumulated other comprehensive loss |
|
$ |
(4,747 |
) |
$ |
(5,589 |
) |
(1) Includes net deferred tax benefits of $2.50 and $2.99 million at August 31, 2012 and February 29, 2012, respectively.
(2) Includes net deferred tax benefits of $0.05 and $0.02 million at August 31, 2012 and February 29, 2012, respectively.
Note 7 – Supplemental Balance Sheet Information
PROPERTY AND EQUIPMENT
(in thousands)
|
|
|
Estimated |
|
|
|
|
| ||
|
|
|
Useful Lives |
|
August 31, |
|
February 29, |
| ||
|
|
|
(Years) |
|
2012 |
|
2012 |
| ||
|
|
|
|
|
|
|
|
| ||
|
Land |
|
- |
|
$ |
8,767 |
|
$ |
8,767 |
|
|
Building and improvements |
|
3 - 40 |
|
66,953 |
|
66,580 |
| ||
|
Computer, furniture and other equipment |
|
3 - 15 |
|
57,711 |
|
56,162 |
| ||
|
Tools, molds and other production equipment |
|
1 - 10 |
|
30,818 |
|
25,617 |
| ||
|
Construction in progress |
|
- |
|
5,911 |
|
6,114 |
| ||
|
Property and equipment, gross |
|
|
|
170,160 |
|
163,240 |
| ||
|
Less accumulated depreciation |
|
|
|
(70,545 |
) |
(62,550 |
) | ||
|
Property and equipment, net |
|
|
|
$ |
99,615 |
|
$ |
100,690 |
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(in thousands)
|
|
|
August 31, |
|
February 29, |
| ||
|
|
|
2012 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Accrued sales returns, discounts and allowances |
|
$ |
33,860 |
|
$ |
29,481 |
|
|
Accrued warranty returns |
|
21,860 |
|
26,665 |
| ||
|
Accrued compensation, benefits and payroll taxes |
|
22,331 |
|
31,754 |
| ||
|
Accrued advertising |
|
9,514 |
|
7,849 |
| ||
|
Accrued royalties |
|
7,782 |
|
6,990 |
| ||
|
Accrued property, sales and other taxes |
|
5,781 |
|
5,745 |
| ||
|
Accrued legal expenses and professional fees |
|
5,316 |
|
5,364 |
| ||
|
Derivative liabilities |
|
3,896 |
|
3,694 |
| ||
|
Other |
|
14,413 |
|
14,090 |
| ||
|
Total accrued expenses and other current liabilities |
|
$ |
124,753 |
|
$ |
131,632 |
|
OTHER LIABILITIES, NONCURRENT
(in thousands)
|
|
|
August 31, |
|
February 29, |
| ||
|
|
|
2012 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Deferred compensation liability |
|
$ |
4,727 |
|
$ |
4,478 |
|
|
Liability for uncertain tax positions |
|
13,375 |
|
13,213 |
| ||
|
Derivative liabilities |
|
3,574 |
|
5,022 |
| ||
|
Other liabilites |
|
1,673 |
|
1,816 |
| ||
|
Total other liabilities, noncurrent |
|
$ |
23,349 |
|
$ |
24,529 |
|
Note 8 – Goodwill and Intangible Assets
Annual Impairment Testing in the First Quarter of Fiscal 2013 and 2012 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarters of fiscal 2013 and 2012. As a result, we concluded no impairment charges were required during either period. For both periods, the estimated fair value of the indefinite-lived trademarks and licenses, reporting unit net assets, and the Company’s estimated enterprise value exceeded their respective carrying values as of the date of the evaluation.
A summary of the carrying amounts and associated accumulated amortization for all intangible assets by operating segment follows:
GOODWILL AND INTANGIBLE ASSETS
(in thousands)
|
|
|
|
|
|
| |||||||||||||||||||||||
|
|
|
|
August 31, 2012 |
|
February 29, 2012 | |||||||||||||||||||||||
|
|
|
Gross |
|
Cumulative |
|
|
|
|
|
|
|
Gross |
|
Cumulative |
|
|
|
|
| |||||||||
|
|
|
Carrying |
|
Goodwill |
|
Accumulated |
|
Net Book |
|
|
|
Carrying |
|
Goodwill |
|
Accumulated |
|
Net Book |
| |||||||||
|
Description |
|
Amount |
|
Impairments |
|
Amortization |
|
Value |
|
|
|
Amount |
|
Impairments |
|
Amortization |
|
Value |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Personal Care: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Goodwill |
|
$ |
81,842 |
|
$ |
(46,490 |
) |
$ |
- |
|
$ |
35,352 |
|
|
|
$ |
81,842 |
|
$ |
(46,490 |
) |
$ |
- |
|
$ |
35,352 |
| |
|
Trademarks - indefinite |
|
75,803 |
|
- |
|
- |
|
75,803 |
|
|
|
75,303 |
|
- |
|
- |
|
75,303 |
| |||||||||
|
Trademarks - finite |
|
150 |
|
- |
|
(70 |
) |
80 |
|
|
|
150 |
|
- |
|
(67 |
) |
83 |
| |||||||||
|
Licenses - indefinite |
|
10,300 |
|
- |
|
- |
|
10,300 |
|
|
|
10,300 |
|
- |
|
- |
|
10,300 |
| |||||||||
|
Licenses - finite |
|
18,683 |
|
- |
|
(15,344 |
) |
3,339 |
|
|
|
19,564 |
|
- |
|
(15,967 |
) |
3,597 |
| |||||||||
|
Other intangibles - finite |
|
49,437 |
|
- |
|
(17,998 |
) |
31,439 |
|
|
|
49,437 |
|
- |
|
(15,012 |
) |
34,425 |
| |||||||||
|
Total Personal Care |
|
236,215 |
|
(46,490 |
) |
(33,412 |
) |
156,313 |
|
|
|
236,596 |
|
(46,490 |
) |
(31,046 |
) |
159,060 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Housewares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Goodwill |
|
166,131 |
|
- |
|
- |
|
166,131 |
|
|
|
166,131 |
|
- |
|
- |
|
166,131 |
| |||||||||
|
Trademarks - indefinite |
|
75,200 |
|
- |
|
- |
|
75,200 |
|
|
|
75,200 |
|
- |
|
- |
|
75,200 |
| |||||||||
|
Other intangibles - finite |
|
15,724 |
|
- |
|
(9,572 |
) |
6,152 |
|
|
|
15,774 |
|
- |
|
(9,000 |
) |
6,774 |
| |||||||||
|
Total Housewares |
|
257,055 |
|
- |
|
(9,572 |
) |
247,483 |
|
|
|
257,105 |
|
- |
|
(9,000 |
) |
248,105 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Healthcare / Home Environment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Goodwill |
|
250,770 |
|
- |
|
- |
|
250,770 |
|
|
|
250,867 |
|
- |
|
- |
|
250,867 |
| |||||||||
|
Trademarks - indefinite |
|
54,000 |
|
- |
|
- |
|
54,000 |
|
|
|
54,000 |
|
- |
|
- |
|
54,000 |
| |||||||||
|
Licenses - finite |
|
15,300 |
|
- |
|
(1,974 |
) |
13,326 |
|
|
|
14,900 |
|
- |
|
(481 |
) |
14,419 |
| |||||||||
|
Other Intangibles - finite |
|
114,490 |
|
- |
|
(17,478 |
) |
97,012 |
|
|
|
114,790 |
|
- |
|
(11,741 |
) |
103,049 |
| |||||||||
|
Total Healthcare / Home Environment |
|
434,560 |
|
- |
|
(19,452 |
) |
415,108 |
|
|
|
434,557 |
|
- |
|
(12,222 |
) |
422,335 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Total |
|
$ |
927,830 |
|
$ |
(46,490 |
) |
$ |
(62,436 |
) |
$ |
818,904 |
|
|
|
$ |
928,258 |
|
$ |
(46,490 |
) |
$ |
(52,268 |
) |
$ |
829,500 |
| |
The following table summarizes the amortization expense attributable to intangible assets for the periods covered in the accompanying consolidated condensed statements of income, as well as our estimated amortization expense for the fiscal years 2013 through 2018.
|
AMORTIZATION OF INTANGIBLE ASSETS |
|
|
| |
|
(in thousands) |
|
|
| |
|
Aggregate Amortization Expense |
|
|
| |
|
For the three months ended |
|
|
| |
|
|
|
|
| |
|
August 31, 2012 |
|
$ |
5,626 |
|
|
August 31, 2011 |
|
$ |
4,492 |
|
|
|
|
|
| |
|
Aggregate Amortization Expense |
|
|
| |
|
For the six months ended |
|
|
| |
|
|
|
|
| |
|
August 31, 2012 |
|
$ |
11,262 |
|
|
August 31, 2011 |
|
$ |
9,049 |
|
|
|
|
|
| |
|
Estimated Amortization Expense |
|
|
| |
|
For the fiscal years ended |
|
|
| |
|
|
|
|
| |
|
February 2013 |
|
$ |
22,326 |
|
|
February 2014 |
|
$ |
21,583 |
|
|
February 2015 |
|
$ |
21,019 |
|
|
February 2016 |
|
$ |
20,835 |
|
|
February 2017 |
|
$ |
20,500 |
|
|
February 2018 |
|
$ |
16,677 |
|
NOTE 9 - Acquisitions
PUR Acquisition - On December 30, 2011, we completed an asset and stock purchase transaction in which we acquired 100 percent of the stock of PUR Water Purification Products, Inc., and certain other assets and liabilities from The Procter & Gamble Company and certain of its affiliates (“P&G”) for a net cash purchase price of $160 million, subject to future adjustments. The acquisition was funded entirely with short-term debt. Significant assets acquired include manufacturing equipment, trademarks, customer lists, distribution rights, patents, and the goodwill of the PUR water filtration business. PUR’s product line includes faucet mount water filtration systems and filters, pitcher systems and filters, and refrigerator filters. We are operating the PUR business in our Healthcare / Home Environment segment and market its products primarily into retail trade channels in the U.S. Goodwill arising from the acquisition consists largely of the distribution network, marketing synergies and economies of scale that are anticipated from the addition of the new product line.
In connection with this acquisition, we entered into transitional services and supply agreements whereby P&G or one or more of its affiliates will provide certain short-term services for, and supply certain products to the Company in exchange for specified fees. We finished using certain of these services in the second quarter of fiscal 2013 and acquired the remaining PUR inventory on-hand from P&G.
We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. None of the goodwill recognized is expected to be deductible for income tax purposes. We completed our preliminary estimate of the economic lives of all the assets acquired and a preliminary allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and are amortizing the customer list, patents, trademarks and technology license agreements, and covenant not to compete over expected weighted average lives of approximately 15.0, 12.4, 5.2, and 2.0 years, respectively. For the customer list, we used historical attrition rates to assign an expected life. For patent rights, we used the underlying non-renewable term of a royalty-free license we acquired for the use of patented designs in certain PUR products.
The following schedule presents the acquisition date fair value of the net assets of PUR:
PUR - NET ASSETS ACQUIRED ON DECEMBER 30, 2011
|
(in thousands) |
|
|
| |
|
|
|
|
| |
|
Supplier tooling advances |
|
$ |
1,432 |
|
|
Tools, dies, molds and other production equipment |
|
12,495 |
| |
|
Goodwill |
|
86,162 |
| |
|
Trademarks |
|
54,000 |
| |
|
Trademark and technology licensing agreements |
|
14,900 |
| |
|
Patents |
|
4,140 |
| |
|
Customer relationships |
|
18,600 |
| |
|
Covenant not to compete |
|
200 |
| |
|
Total assets acquired |
|
191,929 |
| |
|
Less: Deferred tax liabilities recorded at acquisition |
|
(31,929 |
) | |
|
Net assets acquired |
|
$ |
160,000 |
|
We estimated the fair values of the PUR assets acquired by applying income and market approaches. The fair value measurement of the intangible assets is based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. Key assumptions included various discount rates based upon a 15.20 percent weighted average cost of capital, a royalty rate of 7.0 percent used to determine the trademark fair value, royalty rates of 0.50 to 1.00 percent used to determine patent estate values, and customer attrition rates of 5.00 percent per year used to determine customer list value.
Note 10 – Debt
Revolving Line of Credit - We have a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. that provides for an unsecured total revolving commitment of up to $250.00 million. The commitment under the Credit Agreement terminates on December 30, 2015. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time. We also incur loan commitment fees and letter of credit fees under the Credit Agreement. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. As of August 31, 2012, the outstanding revolving loan principal balance was $161.00 million and there were $0.62 million of open letters of credit outstanding against the Credit Agreement. For the three- and six-month periods ended August 31, 2012, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.61 to 3.63 percent and 1.61 to 4.00 percent, respectively. As of August 31, 2012, the amount available for borrowings under the Credit Agreement was $88.38 million.
Long-Term Debt – A summary of our long-term debt is as follows:
LONG-TERM DEBT
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
Original |
|
|
|
|
|
|
|
|
| ||
|
|
|
Date |
|
Interest |
|
|
|
August 31, |
|
February 29, |
| ||
|
|
|
Borrowed |
|
Rates |
|
Matures |
|
2012 |
|
2012 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
$15 million unsecured Senior Note payable at a fixed interest rate of 7.24%. Interest payable quarterly. Annual principal payments of $3 million began in July 2008. Paid in July 2012. |
|
07/97 |
|
7.24% |
|
07/12 |
|
$ |
- |
|
$ |
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
$75 million unsecured floating interest rate 10 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 90 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1) |
|
06/04 |
|
6.01% |
|
06/14 |
|
75,000 |
|
75,000 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
$100 million unsecured Senior Notes payable at a fixed interest rate of 3.90%. Interest payable semi-annually. Annual principal payments of $20 million begin in January 2014. Prepayment of notes are subject to a “make whole” premium. |
|
01/11 |
|
3.90% |
|
01/18 |
|
100,000 |
|
100,000 |
| ||
|
Total long-term debt |
|
|
|
|
|
|
|
175,000 |
|
178,000 |
| ||
|
Less current maturities of long-term debt |
|
|
|
|
|
|
|
- |
|
(3,000 |
) | ||
|
Long-term debt, excluding current maturities |
|
|
|
|
|
|
|
$ |
175,000 |
|
$ |
175,000 |
|
(1) Floating interest rates have been hedged with an interest rate swap (the “Swap”) to effectively fix interest rates. Additional information regarding the swap is provided in Note 12 to these consolidated condensed financial statements.
The fair market value of the fixed rate debt at August 31, 2012 computed using a discounted cash flow analysis was $104.56 million compared to the $100.00 million book value and represents a Level 2 liability. All other long-term debt has floating interest rates, and its book value approximates its fair value at August 31, 2012.
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain financial covenants, including maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms is defined in the various agreements). Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting the Company, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends.
As of August 31, 2012, our debt agreements effectively limited our ability to incur more than $237.60 million of additional debt from all sources, including draws on the Credit Agreement. As of August 31, 2012, we were in compliance with the terms of all of our debt agreements.
Note 11 – Fair Value
The fair value hierarchy of our financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
|
(in thousands) |
|
|
|
|
|
|
| |||
|
|
|
|
|
Quoted Prices in |
|
Significant Other |
| |||
|
|
|
|
|
Active Markets |
|
Observable |
| |||
|
|
|
Fair Values at |
|
for Identical Assets |
|
Market Inputs |
| |||
|
Description |
|
August 31, 2012 |
|
(Level 1) |
|
(Level 2) |
| |||
|
|
|
|
|
|
|
|
| |||
|
Assets: |
|
|
|
|
|
|
| |||
|
Money market accounts |
|
$ |
1,119 |
|
$ |
1,119 |
|
$ |
- |
|
|
Foreign currency contracts and currency swaps |
|
36 |
|
- |
|
36 |
| |||
|
Total assets |
|
$ |
1,155 |
|
$ |
1,119 |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
| |||
|
Liabilities: |
|
|
|
|
|
|
| |||
|
Long-term debt - fixed rate (1) |
|
$ |
104,559 |
|
$ |
- |
|
$ |
104,559 |
|
|
Long-term debt - floating rate |
|
75,000 |
|
- |
|
75,000 |
| |||
|
Interest rate swap |
|
7,148 |
|
- |
|
7,148 |
| |||
|
Foreign currency contracts |
|
322 |
|
- |
|
322 |
| |||
|
Total liabilities |
|
$ |
187,029 |
|
$ |
- |
|
$ |
187,029 |
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
Quoted Prices in |
|
Significant Other |
| |||
|
|
|
|
|
Active Markets |
|
Observable |
| |||
|
|
|
Fair Values at |
|
for Identical Assets |
|
Market Inputs |
| |||
|
Description |
|
February 29, 2012 |
|
(Level 1) |
|
(Level 2) |
| |||
|
|
|
|
|
|
|
|
| |||
|
Assets: |
|
|
|
|
|
|
| |||
|
Money market accounts |
|
$ |
801 |
|
$ |
801 |
|
$ |
- |
|
|
Note receivable (1) |
|
737 |
|
- |
|
737 |
| |||
|
Total assets |
|
$ |
1,538 |
|
$ |
801 |
|
$ |
737 |
|
|
|
|
|
|
|
|
|
| |||
|
Liabilities: |
|
|
|
|
|
|
| |||
|
Long-term debt - fixed rate (1) |
|
$ |
104,450 |
|
$ |
- |
|
$ |
104,450 |
|
|
Long-term debt - floating rate |
|
75,000 |
|
- |
|
75,000 |
| |||
|
Interest rate swap |
|
8,553 |
|
- |
|
8,553 |
| |||
|
Foreign currency contracts |
|
163 |
|
- |
|
163 |
| |||
|
Total liabilities |
|
$ |
188,166 |
|
$ |
- |
|
$ |
188,166 |
|
(1) Note receivable and debt values are reported at estimated fair value in these tables, but are recorded in the accompanying consolidated condensed balance sheets at the undiscounted value of remaining principal payments due.
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturity of these items.
Money market accounts are included in cash and cash equivalents in the accompanying consolidated condensed balance sheets and are classified as Level 1 assets.
We classify our note receivable as a Level 2 asset and our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of these financial assets and liabilities requires the use of discount rates based upon current market rates of interest for obligations with comparable remaining terms. Such comparable rates are significant other observable market inputs. The fair market value of the note receivable was computed using a discounted cash flow analysis and a discount rate of 6.95 percent at February 29, 2012. The fair market value of the fixed rate debt was computed using a discounted cash flow analysis and discount rate of 2.48 percent at August 31, 2012 (one Senior Note) and rates ranging from 0.54 to 3.54 percent at February 29, 2012 (multiple Senior Notes), depending on the term of the loan. All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.
We use derivatives for hedging purposes and our derivatives are primarily foreign currency contracts, a foreign currency swap and an interest rate swap. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair value hierarchy.
The Company’s other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 assets. These assets are measured at fair value on a non-recurring basis as part of the Company’s impairment assessments and as circumstances require.
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 the three- and six-month periods ended August 31, 2012, approximately 16 percent of our net sales revenue was in foreign currencies. During the three- and six-month periods ended August 31, 2011, approximately 17 and 19 percent, respectively, of our net sales revenue was in foreign currencies. In each of the periods, sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Japanese Yen, Australian Dollars, Chilean Pesos, Peruvian Soles, and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines, and all other foreign exchange gains and losses from remeasurement are recognized in SG&A. For the three- and six-month periods ended August 31, 2012, we recorded net foreign exchange gains (losses), including the impact of currency hedges and currency swaps, of $0.77 and ($0.17) million, respectively, in SG&A and ($0.03) and $0.16 million, respectively, in income tax expense. For the three- and six-month periods ended August 31, 2011, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.05) and ($0.20) million, respectively, in SG&A and ($0.04) and ($0.08) million, respectively, in income tax expense.
We have historically hedged against certain foreign currency exchange rate risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.
Interest Rate Risk – Interest on our outstanding debt as of August 31, 2012 is both floating and fixed. Fixed rates are in place on $100.00 million of Senior Notes due January 2018 at 3.90 percent and floating rates are in place on $161.00 million in advances against our Credit Agreement and $75.00 million of Senior Notes due June 2014. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under the Credit Agreement. The floating rate Senior Notes due June 2014 reset as described in Note 10, and have been effectively converted to fixed rate debt using an interest rate swap, as described below.
We manage our floating rate debt using an interest rate swap. As of August, 31, 2012, the swap converted an aggregate notional principal amount of $75.00 million from floating interest rate payments under our Senior Notes due June 2014 to fixed interest rate payments at 6.01 percent. In the swap transaction, we maintain
contracts to pay fixed rates of interest on an aggregate notional principal amount of $75.00 million at a rate of 5.11 percent on our Senior Notes due June 2014, while simultaneously receiving floating rate interest payments set at 0.46 percent as of August 31, 2012 on the same notional amounts. The fixed rate side of the swap will not change over its life. The floating rate payments are reset quarterly based on three-month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. The swap is used to reduce our risk of increased interest costs; however, when interest rates drop significantly below the swap rate, we lose the benefit that our floating rate debt would provide if not managed with a swap. The swap is considered 100 percent effective.
In addition, during August 2012, we entered into two foreign currency swaps maturing October 2012, which we accounted for as cash flow hedges.
The fair values of our various derivative instruments are as follows:
FAIR VALUES OF DERIVATIVE INSTRUMENTS
|
(in thousands) | |||||||||||||||||
|
August 31, 2012 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
Prepaid |
|
Accrued |
|
|
| ||||
|
|
|
|
|
|
|
|
|
Expenses |
|
Expenses |
|
|
| ||||
|
|
|
|
|
Final |
|
|
|
and Other |
|
and Other |
|
Other |
| ||||
|
|
|
|
|
Settlement |
|
Notional |
|
Current |
|
Current |
|
Liabilities, |
| ||||
|
Designated as hedging instruments |
|
Hedge Type |
|
Date |
|
| |||||||||||