Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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
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
HELEN OF TROY LIMITED AND SUBSIDIARIES
FORM 10‐Q
TABLE OF CONTENTS
PAGE
PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Note 1 - Basis of Presentation and Related Information
Note 2 - New Accounting Pronouncements
Note 3 - Supplemental Balance Sheet Information
Note 4 - Acquisitions
Note 5 - Goodwill and Intangible Assets
Note 6 - Share-Based Compensation Plans
Note 7 - Repurchase of Helen of Troy Common Stock
Note 8 - Restructuring Plan
Note 9 - Commitments and Contingencies
Note 10 - Long-Term Debt
Note 11 - Fair Value
Note 12 - Financial Instruments and Risk Management
Note 13 - Comprehensive Income (Loss)
Note 14 - Segment Information
Note 15 - Income Taxes
Note 16 - Earnings Per Share
Note 17 - Subsequent Events
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART 2.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
SIGNATURES
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets (Unaudited)
November 30,
February 28,
(in thousands, except shares and par value)
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
Inventory
285,594
Prepaid expenses and other current assets
13,505
Income taxes receivable
-
2,242
Total assets, current
622,646
Property and equipment, net of accumulated depreciation of $118,485 and $106,561
132,989
Goodwill
602,320
Other intangible assets, net of accumulated amortization of $184,937 and $165,388
369,201
Deferred tax assets, net
44,590
Other assets, net of accumulated amortization of $1,999 and $1,930
3,149
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
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
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
Total liabilities and stockholders' equity
See accompanying notes to consolidated condensed financial statements.
2
Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended November 30,
Nine Months Ended November 30,
(in thousands, except per share data)
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
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
2.07
3.74
Weighted average shares of common stock used in
computing net earnings per share:
27,113
27,484
27,140
27,700
27,802
28,058
3
Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited)
Before
Tax (Expense)
Net of
(in thousands)
Tax
Benefit
Income (loss)
(11,221)
(2,188)
Cash flow hedge activity - interest rate swaps
Changes in fair market value
753
(290)
463
Subtotal
Cash flow hedge activity - foreign currency contracts
2,928
(725)
2,203
2,049
(370)
1,679
Settlements reclassified to income
(1,328)
271
(1,057)
(522)
73
(449)
1,600
(454)
1,146
1,527
(297)
1,230
Total other comprehensive income
2,353
(744)
1,609
Comprehensive income (loss)
(16,862)
(11,965)
(28,827)
61,327
(2,485)
58,842
(5,833)
(7,912)
(1,275)
75
(1,200)
2,319
(412)
1,907
(2,208)
434
(1,774)
(505)
20
(485)
(3,483)
509
(2,974)
1,814
(392)
1,422
Total other comprehensive income (loss)
(2,730)
219
(2,511)
(12,532)
(5,614)
(18,146)
114,719
(8,304)
106,415
4
Consolidated Condensed Statements of Cash Flows (Unaudited)
Cash provided by operating activities:
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
Gain (loss) on the sale or disposal of property and equipment
(10)
167
Deferred income taxes and tax credits
(8,769)
Changes in operating capital, net of effects of acquisition of businesses:
Receivables
(74,538)
(66,005)
Inventories
3,528
7,001
(2,850)
(2,134)
Other assets and liabilities, net
(1,532)
(3,772)
Accounts payable
(2,532)
29,004
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
225,800
Cash and cash equivalents, ending balance
16,780
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOVEMBER 30, 2017
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
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
7
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
(Years)
Land
12,800
Building and improvements
40
109,108
109,026
Computer, furniture and other equipment
15
89,838
81,122
Tools, molds and other production equipment
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
134,935
8
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
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
OTHER LIABILITIES, NONCURRENT
Deferred compensation liability
5,988
6,560
3,467
6,611
Other liabilities
8,420
8,490
Total other liabilities, noncurrent
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.
9
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
Assets:
7,955
6,243
336
Property and equipment
1,108
116,053
Trade names - indefinite
59,000
Technology assets - definite
10,300
Customer relationships - definite
14,200
Subtotal - assets
215,195
Liabilities:
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
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.
11
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
Carrying
Accumulated
Net Book
Amount
Impairments
Amortization
Value
Housewares:
282,056
Trademarks - indefinite
134,200
Other intangibles - finite
40,751
(17,074)
23,677
40,393
(15,476)
24,917
Total Housewares
457,007
439,933
456,649
441,173
Health & Home:
284,913
54,000
Licenses - finite
15,300
(15,300)
Licenses - indefinite
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:
96,609
(96,609)
Brand assets - indefinite
20,432
56,020
52,180
(22,095)
30,085
44,180
(16,715)
27,465
Total Nutritional Supplements
169,221
50,517
196,809
180,094
Beauty:
81,841
(46,490)
35,351
41,854
45,854
Trademarks - finite
150
(96)
54
(92)
58
13,696
(12,087)
(11,849)
1,847
46,402
(43,885)
2,517
(39,929)
6,473
Total Beauty
194,243
(56,068)
91,685
198,243
(51,870)
99,883
Total goodwill and intangible assets
1,299,557
(143,099)
(184,937)
971,521
1,330,296
(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
6,430
November 30, 2016
7,199
For the nine months ended
19,578
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
12
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
Stock options
327
629
1,289
2,036
Directors stock compensation
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:
0.14
0.08
0.35
0.32
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:
Common stock repurchased on the open market or through tender offer:
Number of shares
311,100
922,731
Aggregate value of shares
29,158
75,000
Average price per share
93.72
81.28
Common stock received in connection with share-based compensation:
299
961
72,864
6,235
27
83
7,000
590
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
Beginning balance
22,094
19,459
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
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
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
(dollars in thousands)
Borrowed
Rates
Matures
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
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)
_____________________
(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
(Level 2)(1)
Money market accounts
496
Interest rate swap and foreign currency contracts
1,023
1,519
Fixed rate debt(2)
20,035
Floating rate debt
406,215
Foreign currency contracts
2,815
429,065
2,711
2,167
4,878
20,105
465,852
486,004
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.
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
Prepaid
Accrued
Expenses
Final
and Other
Settlement
Notional
Liabilities,
Derivatives designated as hedging instruments
Hedge Type
Liabilities
Non-current
Foreign currency contracts - sell Euro
Cash flow
12/2018
€
32,250
1,381
Foreign currency contracts - sell Canadian Dollars
27,750
252
Foreign currency contracts - sell Pounds
01/2019
£
20,400
765
Foreign currency contracts - sell Mexican Pesos
05/2018
45,000
159
Interest rate swap
12/2021
100,000
134
619
386
637
Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro
4/2020
5,280
65
Foreign currency contracts - cross-currency debt swaps - Pound
6,395
413
478
Total fair value
510
2/2018
27,500
727
6/2018
26,000
155
13,500
548
59,600
1,430
Foreign currency contracts - cross-currency debt swap - Euro
1/2018
10,000
705
2,135
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
Gain (Loss)
Gain (Loss) Reclassified from
Recognized in OCI
Accumulated Other Comprehensive
Gain (Loss) Recognized
(effective portion)
Income (Loss) into Income
As Income
Location
Currency contracts - cash flow hedges
SG&A
1,328
522
Interest rate swaps - cash flow hedges
(48)
Cross-currency debt swaps - principal
(419)
493
Cross-currency debt swaps - interest
Interest Expense
74
Total
3,681
(393)
2,208
505
(1,183)
528
35
(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
Interest Rate Swaps(1)
Foreign Currency Contracts(2)
Balance at February 28, 2017
Other comprehensive income (loss) before reclassification
Amounts reclassified out of accumulated other comprehensive income (loss)
Tax effects
Other comprehensive income (loss)
Balance at November 30, 2017
(1,801)
Includes net deferred tax benefits of $0.3 million at November 30, 2017.
Balances at November 30, 2017 and February 28, 2017 include net deferred tax benefit (expense) of $0.3 and $(0.2) million, respectively.
Note 14 – Segment Information
The following tables present segment information for the periods shown:
THREE MONTHS ENDED
Nutritional
Housewares
Health & Home
Supplements
128,017
190,975
29,336
104,717
118
1,165
29,982
27,897
(83,521)
10,012
565
171
1,802
502
3,040
1,444
4,232
2,374
2,710
10,760
124,723
179,842
32,163
107,686
29,223
20,155
(80)
14,021
1,100
1,492
1,558
624
4,774
1,429
5,221
2,108
2,467
11,225
NINE MONTHS ENDED
Housewares(1)
341,165
489,102
92,212
268,633
132,297
4,000
71,601
50,187
(138,413)
17,869
1,166
14,561
2,746
19,854
4,290
12,553
7,223
8,296
315,302
470,650
101,215
273,355
5,000
2,400
68,956
39,156
(6,581)
22,173
3,938
3,526
3,665
3,860
14,989
4,200
15,738
6,242
7,143
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
Weighted average shares outstanding, basic
Incremental shares from share-based compensation arrangements
318
358
Weighted average shares outstanding, diluted
Dilutive securities, stock options
222
325
236
401
Dilutive securities, unvested or unsettled stock awards
82
163
100
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.
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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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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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 non‐GAAP financial measures and are discussed further, and reconciled to their applicable GAAP‐based 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”.
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:
% of Sales Revenue, net
(In thousands)
$ Change
% Change
Sales revenue by segment, net
3,294
2.6
11,133
6.2
(2,827)
(8.8)
(2,969)
(2.8)
Total sales revenue, net
8,631
1.9
1,072
0.4
55.5
56.3
7,559
Selling, general and administrative expense
2,998
2.3
*
18.1
0.3
(78,949)
(124.7)
(72)
(67.9)
(0.2)
Total other expense
(3,585)
(3,519)
(66)
(0.8)
(79,015)
(132.1)
Income tax expense
11,221
2,188
9,033
(88,048)
(152.8)
(6.7)
13.0
25,863
8.2
28.6
27.2
18,452
41.1
40.6
(9,003)
(8.9)
7.7
8.7
(4,722)
(1.7)
22.6
23.6
30,590
100.0
14,044
2.2
55.8
56.1
16,546
3.2
44.2
43.9
8,826
32.5
32.6
128,897
11.4
0.6
0.1
Operating income
(122,460)
(99.0)
10.7
(62)
(18.1)
(185)
1.7
(1.0)
(11,046)
(10,799)
(247)
(0.9)
(122,707)
(108.7)
9.7
5,833
7,912
(2,079)
(26.3)
0.5
0.7
(120,628)
(114.9)
(1.3)
9.0
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:
Fiscal 2017 sales revenue, net
Core business
3,074
9,323
(3,731)
5,839
Impact of foreign currency
220
1,810
762
2,792
Change in sales revenue, net
Fiscal 2018 sales revenue, net
Total net sales revenue growth
(3.5)
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
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.
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
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.
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.
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
30
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 non‐cash asset impairment charges, restructuring charges, amortization of intangible assets, and non‐cash share‐based 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
NutritionalSupplements
Operating income (loss), as reported (GAAP)
23.4
14.6
(284.7)
9.6
(3.4)
280.3
Restructuring charges(1)
1.1
(1,176)
(4.0)
11,177
67,880
15.0
Amortization of intangible assets
489
2,797
1.5
1,770
6.0
1,374
1.3
1.4
1.2
1,632
0.9
467
1.6
1,025
1.0
4,651
Adjusted operating income (non-GAAP)
31,998
25.0
32,326
16.9
1,061
3.6
13,576
78,961
17.4
Three Months Ended November 30, 2016
11.2
14.2
658
3,546
2.0
1,571
4.9
1,424
671
872
369
991
2,903
30,552
24.5
24,573
13.7
1,860
5.8
16,436
15.3
73,421
16.5
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;
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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.
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.
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:
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.
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.
Segment adjusted operating income was $1.1 million compared to $1.9 million in the same period last year.
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 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 non‐cash asset impairment charges, restructuring charges, amortization of intangible assets, and non‐cash share‐based compensation, as applicable.
33
Income (Loss)
Diluted Earnings (Loss) Per Share
Before tax
Net of Tax
As reported (GAAP)
(0.71)
0.41
(6,380)
88,607
3.02
(0.23)
3.25
69
1,214
0.05
0.04
64,295
4,910
59,385
2.36
0.18
2.18
853
5,577
0.24
0.03
0.20
781
3,870
0.17
Adjusted (non-GAAP)
75,376
6,544
68,832
2.76
2.52
Weighted average shares of common stock used in computing:
Diluted earnings (loss) per share, as reported
Adjusted diluted earnings per share (non-GAAP)
27,267
Income
Diluted Earnings Per Share
2.15
1,009
6,190
0.26
0.22
706
2,197
0.10
0.02
69,902
3,903
65,999
2.51
2.37
Diluted earnings per share, as reported
_________________
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.
Comparison of First Nine Months of Fiscal 2018 to First Nine Months of Fiscal 2017
20,043
17,364
(5,025)
23,379
(328)
1,088
303
1,063
Acquisitions(1)
6,148
(1.8)
(0.1)
0.2
Acquisitions
Includes approximately one-half month of incremental operating results from Hydro Flask, which was acquired on March 18, 2016.
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%.
a decline in the Nutritional Supplements segment of $9.0 million;
a decline in the personal care category within Beauty; and
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.
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%.
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.
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.
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.
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
36
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.
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.
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 non‐cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non‐cash share‐based compensation, as applicable, on operating income (loss) and operating margin for each segment and in total for the periods covered below.
37
Nine Months Ended November 30, 2017
Housewares(2)
21.0
10.3
(150.1)
6.7
143.5
TRU bankruptcy charge
956
2,640
3,596
72,557
21.3
52,827
10.8
(5,998)
(6.5)
23,034
8.6
142,420
12.0
1,618
8,373
5,380
4,207
3,579
3,792
0.8
980
2,779
77,754
22.8
64,992
13.3
362
30,020
173,128
14.5
Nine Months Ended November 30, 2016
21.9
8.3
8.1
Patent litigation charge
1,468
40,624
(1,581)
(1.6)
132,572
1,986
10,626
4,713
4.7
4,300
2,404
3,787
1,734
3,736
73,346
23.3
55,037
11.7
4,866
4.8
32,609
11.9
165,858
14.3
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.
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:
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.
38
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.
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 amortization expense;
the comparative impact of a $1.5 million patent litigation charge in the same period last year;
lower royalty expense; and
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.
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;
39
higher promotion, advertising and customer acquisition costs; and
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.
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 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.
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:
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.
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 non‐cash asset impairment charges, restructuring charges, the TRU bankruptcy charge, patent litigation charges, amortization of intangible assets, and non‐cash share‐based compensation, as applicable.
(0.36)
0.21
136,294
4.99
204
3,392
0.13
0.01
0.12
131,374
6,109
125,265
4.81
4.59
2,625
16,953
0.72
0.62
1,862
9,268
0.07
0.34
162,082
10,596
151,486
5.94
0.39
5.55
27,304
0.28
2,303
5,097
1,464
121,773
10,219
111,554
4.34
0.36
3.98
3,005
18,620
0.77
0.11
0.66
2,920
8,741
0.42
0.31
155,059
16,144
138,915
5.53
0.58
4.95
__________________
(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.
41
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.
42
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
Accounts Receivable Turnover (Days)(1)
59.1
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
Return on Average Equity(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;
43
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:
44
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)
÷
Interest Coverage Ratio
Interest Expense (2)
Minimum Required: 3.00 to 1.00
Minimum Required: 2.50 to 1.00
Total Current and Long Term Debt (3)
Maximum Leverage Ratio
[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.
45
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
1 year
2 years
3 years
4 years
5 years
Fixed rate debt
20,000
410,307
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
Interest on floating rate debt(1)
43,591
10,800
10,750
10,701
10,651
593
96
Open purchase orders
205,399
Long-term purchase commitments
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
Total contractual obligations(2)
831,578
281,554
42,235
38,963
33,152
408,193
27,481
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.
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.
46
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;
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.
48
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.
49
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.
50
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.
ISSUER PURCHASES OF EQUITY SECURITIES FOR THE THREE MONTHS ENDED NOVEMBER 30, 2017
Total Number ofShares Purchased
Average PricePaid per Share
Total Number ofShares Purchasedas Part of Publicly Announced Plansor Programs
Dollar Value ofShares that MayYet be PurchasedUnder the Plansor Programs(in thousands)
September 1 through September 30, 2017
259
90.93
394,090
October 1 through October 31, 2017
311,140
364,928
November 1 through November 30, 2017
311,399
51
n
ITEM 6.
EXHIBITS
(a)
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.
52
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.
(Registrant)
Date: January 9, 2018
/s/ Julien R. Mininberg
Julien R. Mininberg
Chief Executive Officer,
Director and Principal Executive Officer
/s/ Brian L. Grass
Brian L. Grass
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
53