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

 

FORM 10-Q

 

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

 

For the quarterly period ended May 31, 2016

 

or

 

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

 

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

 

Commission file number: 001-14669

 

Picture 1

HELEN OF TROY LIMITED

 

(Exact name of registrant as specified in its charter)

 

 

 

 

Bermuda

 

74-2692550

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Clarendon House

2 Church Street

Hamilton, Bermuda

 

 

(Address of principal executive offices)

 

 

 

 

 

1 Helen of Troy Plaza

 

 

El Paso, Texas

 

79912

(Registrant’s United States Mailing Address)

 

(Zip Code)

 

(915) 225-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes       No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer

 

Accelerated filer    

 

 

 

Non-accelerated filer    

 

Smaller Reporting Company      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No

 

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

 

 

 

 

Class

 

Outstanding at July 6, 2016

Common Shares, $0.10 par value, per share

 

27,836,021 shares

 

 

 

 

 

 

 


 

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

FORM 10Q

TABLE OF CONTENTS

PAGE

 

 

 

 

 

 

 

 

 

PART 1. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Item 2. 

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

24 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

42 

 

 

 

Item 4. 

Controls and Procedures

47 

 

 

 

PART 2. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

48 

 

 

 

Item 1A. 

Risk Factors

48 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

49 

 

 

 

Item 6. 

Exhibits

50 

 

 

 

SIGNATURES 

51 

 

 

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Table of Contents

PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited)

(in thousands, except shares and par value)

 

 

 

 

 

 

 

 

 

May 31, 

 

February 29,

 

    

2016

    

2016

Assets

 

 

 

 

 

 

Assets, current:

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,115

 

$

225,800

Receivables - principally trade, less allowances of $4,462 and $5,898

 

 

204,544

 

 

217,543

Inventory

 

 

319,249

 

 

301,609

Prepaid expenses and other current assets

 

 

13,501

 

 

9,780

Income taxes receivable

 

 

 -

 

 

356

Total assets, current

 

 

560,409

 

 

755,088

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $97,130 and $93,926

 

 

132,708

 

 

130,465

Goodwill

 

 

698,494

 

 

583,005

Other intangible assets, net of accumulated amortization of $144,356 and $137,174

 

 

444,893

 

 

375,751

Deferred tax assets, net

 

 

2,686

 

 

2,484

Other assets, net of accumulated amortization of $1,861 and $1,828

 

 

2,326

 

 

2,101

Total assets

 

$

1,841,516

 

$

1,848,894

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

 

Accounts payable, principally trade

 

$

110,795

 

$

103,713

Accrued expenses and other current liabilities

 

 

138,351

 

 

141,245

Income taxes payable

 

 

3,700

 

 

 -

Long-term debt, current maturities

 

 

24,540

 

 

22,644

Total liabilities, current

 

 

277,386

 

 

267,602

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

 

562,951

 

 

597,270

Deferred tax liabilities, net

 

 

24,163

 

 

27,364

Other liabilities, noncurrent

 

 

20,545

 

 

26,615

Total liabilities

 

 

885,045

 

 

918,851

 

 

 

 

 

 

 

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; 27,818,575 and 28,488,411 shares

 

 

 

 

 

 

issued and outstanding

 

 

2,782

 

 

2,774

Additional paid in capital

 

 

206,989

 

 

198,077

Accumulated other comprehensive income (loss)

 

 

(19)

 

 

665

Retained earnings

 

 

746,719

 

 

728,527

Total stockholders' equity

 

 

956,471

 

 

930,043

Total liabilities and stockholders' equity

 

$

1,841,516

 

$

1,848,894

 

See accompanying notes to consolidated condensed financial statements.

 

 

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Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

    

2016

    

2015

Sales revenue, net

 

$

347,938

 

$

345,345

Cost of goods sold

 

 

195,511

 

 

202,026

Gross profit

 

 

152,427

 

 

143,319

 

 

 

 

 

 

 

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

 

 

122,129

 

 

113,776

Asset impairment charges

 

 

7,400

 

 

3,000

Operating income

 

 

22,898

 

 

26,543

 

 

 

 

 

 

 

Nonoperating income, net

 

 

149

 

 

138

Interest expense

 

 

(3,651)

 

 

(2,892)

Income before income taxes

 

 

19,396

 

 

23,789

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

Current

 

 

3,772

 

 

4,014

Deferred

 

 

(3,402)

 

 

(635)

Net income

 

$

19,026

 

$

20,410

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.69

 

$

0.72

Diluted

 

$

0.68

 

$

0.70

 

 

 

 

 

 

 

Weighted average shares of common stock used in

 

 

 

 

 

 

computing net earnings per share:

 

 

 

 

 

 

Basic

 

 

27,773

 

 

28,520

Diluted

 

 

28,147

 

 

29,088

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

 

2016

 

2015

 

 

Before

 

 

 

 

Net of

 

Before

 

 

 

 

Net of

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

Income

 

$

19,396

 

$

(370)

 

$

19,026

 

$

23,789

 

$

(3,379)

 

$

20,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

 

(1,019)

 

 

233

 

 

(786)

 

 

267

 

 

(68)

 

 

199

Settlements reclassified to income

 

 

158

 

 

(56)

 

 

102

 

 

(119)

 

 

13

 

 

(106)

Total other comprehensive income

 

 

(861)

 

 

177

 

 

(684)

 

 

148

 

 

(55)

 

 

93

Comprehensive income

 

$

18,535

 

$

(193)

 

$

18,342

 

$

23,937

 

$

(3,434)

 

$

20,503

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

  

2016

  

2015

Cash provided (used) by operating activities:

 

 

 

 

 

 

Net income

  

$

19,026

  

$

20,410

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

  

 

 

  

 

 

Depreciation and amortization

  

 

10,956

  

 

10,354

Amortization of financing costs

  

 

290

  

 

291

Provision for doubtful receivables

  

 

347

  

 

(46)

Non-cash share-based compensation

  

 

5,614

  

 

2,061

Non-cash intangible asset impairment charges

  

 

7,400

  

 

3,000

Loss on the sale of property and equipment

  

 

20

  

 

 -

Deferred income taxes and tax credits

  

 

(3,458)

  

 

(954)

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

  

 

 

  

 

 

Receivables

  

 

20,524

  

 

12,544

Inventories

  

 

(11,160)

  

 

(6,219)

Prepaid expenses and other current assets

  

 

(3,393)

  

 

(1,367)

Other assets and liabilities, net

  

 

(4,934)

  

 

(2,942)

Accounts payable

  

 

4,819

  

 

14,820

Accrued expenses and other current liabilities

  

 

(7,021)

  

 

(10,013)

Accrued income taxes

  

 

2,706

  

 

(4,121)

Net cash provided by operating activities

  

 

41,736

  

 

37,818

 

  

 

 

  

 

 

Cash provided (used) by investing activities:

  

 

 

  

 

 

Capital and intangible asset expenditures

  

 

(5,154)

  

 

(2,717)

Proceeds from the sale of property and equipment

  

 

2

 

 

7

Payments to acquire businesses

  

 

(209,258)

  

 

(42,750)

Net cash used by investing activities

  

 

(214,410)

  

 

(45,460)

 

  

 

 

  

 

 

Cash provided (used) by financing activities:

  

 

 

  

 

 

Proceeds from line of credit

  

 

100,200

  

 

121,500

Repayment of line of credit

  

 

(129,100)

  

 

(114,000)

Repayment of long-term debt

  

 

(3,800)

  

 

(1,900)

Payment of financing costs

  

 

(14)

  

 

 -

Proceeds from share issuances under share-based compensation plans

  

 

3,127

  

 

5,009

Payment of tax obligations resulting from cashless share award settlements

  

 

(424)

  

 

 -

Net cash provided (used) by financing activities

  

 

(30,011)

  

 

10,609

 

  

 

 

  

 

 

Net increase (decrease) in cash and cash equivalents

  

 

(202,685)

  

 

2,967

Cash and cash equivalents, beginning balance

  

 

225,800

  

 

12,295

Cash and cash equivalents, ending balance

  

$

23,115

  

$

15,262

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

 

 

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

May 31, 2016

 

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

 

The accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of May 31, 2016 and February 29, 2016, 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 29, 2016, and our other reports on file with the Securities and Exchange Commission (the “SEC”).

 

In this report and the accompanying consolidated condensed financial statements and notes, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries. We refer to the Company's common shares, par value $0.10 per share, as “common stock.” References to “OXO” and “Hydro Flask” refer to businesses that operate together under the Housewares segment. The OXO business includes the operations of OXO International and certain of its subsidiaries. The Hydro Flask business refers to the operations of Steel Technology, LLC, acquired on March 18, 2016. References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries that comprise our Health & Home segment. References to “Healthy Directions” refer to the operations of Healthy Directions, LLC and its subsidiaries that comprise our Nutritional Supplements segment. Our Beauty segment was formerly referred to as “Personal Care.” References to “EMEA” refer to the combined geographic markets of Europe, the Middle East and Africa. We use product and service names in this report for identification purposes only and they may be protected in the United States and other jurisdictions by trademarks, trade names, service marks, and other intellectual property rights of the Company and other parties. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks, and logos referenced herein belong to their respective owners. References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.

 

We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products. We have four segments: Housewares, Health & Home, 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 appliances, insulated stainless steel food and beverage containers, gadgets and storage containers, cleaning, organization, and baby and toddler care products. The Health & Home segment focuses on healthcare devices such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems; and small home appliances such as portable heaters, fans, air purifiers, and insect control devices. Our Nutritional Supplements segment is a leading provider of premium branded vitamins, minerals and supplements, as well as other health products sold directly to consumers. Our Beauty segment products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid-, solid- and powder-based personal care and grooming products.

 

Our business is seasonal due to different calendar events, holidays and seasonal weather patterns. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

 

Our consolidated condensed financial statements are prepared in U.S. Dollars and in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those

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

 

Note 2 – New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt according to the various timetables the FASB specifies. Unless otherwise discussed below, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position, results of operations and cash flows upon adoption.

 

Not yet adopted:

 

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 fiscal years beginning after December 15, 2019. The new standard must be adopted using a modified retrospective transition that provides for certain practical expedients 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 customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB affirmed its proposal to defer the effective date of the standard to annual reporting periods beginning after December 15, 2017 (and interim reporting periods within those years). Accordingly, we will be required to adopt the new standard in our fiscal year 2019 and can adopt either retrospectively or as a cumulative effect adjustment as of the date of adoption. We are currently evaluating the effect this new accounting guidance may have on our consolidated financial position, results of operations and cash flows.

 

New pronouncements adopted:

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which changes the accounting for certain aspects of share-based payments to employees. The provisions of the new guidance affecting the Company require excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled; remove the requirement to include hypothetical excess tax benefits in the application of the treasury stock method when computing earnings per share; and provided for a new policy election to either (1) continue applying forfeiture rate estimates in the determination of compensation cost, or (2) account for forfeitures as a reduction of share-based compensation cost as they occur. The new guidance also requires cash flows related to excess tax benefits to be classified as an operating activity in the cash flow statement and now requires shares withheld for tax withholding purposes to be classified as a financing activity.

 

We elected to early adopt the new guidance in the first quarter of fiscal year 2017. This required us to reflect any adjustments as of March 1, 2016. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than additional paid-in capital for all periods after fiscal year 2016. We elected to change our accounting policy regarding forfeitures. Previously, we estimated forfeitures expected to occur in the determination of compensation costs. Going forward we will now recognize forfeitures in the period

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they occur. The cumulative effect adjustments made upon adoption were not material. For the fiscal quarter ended May 31, 2016, we recognized additional share-based compensation expense of $0.23 million from the change in accounting for forfeitures of share-based awards, and we recognized $1.11 million of excess tax benefits in income tax expense rather than additional paid-in capital. The excess tax benefits were also reported as an increase to cash provided by operations and a reduction to cash provided (used) by financing activities.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which eliminates the requirement for companies to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, upon adoption, companies are required to classify all deferred tax assets and liabilities as non-current. We elected to early adopt the new guidance in the first quarter of fiscal year 2017 and have made the necessary conforming reclassifications to the accompanying February 29, 2016 consolidated condensed balance sheet. The application of the provisions of ASU 2015-17 did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. We adopted the new guidance in the first quarter of fiscal year 2017 and have made the necessary conforming reclassifications to the accompanying February 29, 2016 consolidated condensed balance sheet and related footnote disclosures. The application of the provisions of ASU 2015-03 did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

We have provided the table below, which summarizes the impact of each of the adopted accounting changes to the accompanying consolidated condensed financial statements.

 

IMPACT OF RECENT ACCOUNTING CHANGES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

 

Standard

 

Transition Method

 

May 31, 2016

 

February 29, 2016

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

Current deferred tax assets, net

 

ASU 2015-17

 

Retrospective

 

$

(18,921)

 

$

(17,636)

Long-term deferred tax assets, net

 

ASU 2015-17

 

Retrospective

 

$

1,127

 

$

879

Long-term deferred tax assets, net

 

ASU-2016-09

 

Modified retrospective

 

$

(232)

 

$

 -

Other assets - debt issuance costs

 

ASU 2015-03

 

Retrospective

 

$

(12,630)

 

$

(12,618)

Other assets - accumulated amortization

 

ASU 2015-03

 

Retrospective

 

$

(8,914)

 

$

(8,625)

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, current maturities

 

ASU 2015-03

 

Retrospective

 

$

(1,160)

 

$

(1,156)

Long-term deferred tax liabilities, net

 

ASU 2015-17

 

Retrospective

 

$

(17,795)

 

$

(16,757)

Long-term debt, excluding current maturities

 

ASU 2015-03

 

Retrospective

 

$

(2,556)

 

$

(2,837)

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

ASU-2016-09

 

Modified retrospective

 

$

588

 

$

 -

Retained earnings

 

ASU-2016-09

 

Modified retrospective

 

$

(820)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

 

Standard

 

Transition Method

 

 

2016

 

 

2015

Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

ASU-2016-09

 

Modified retrospective

 

$

229

 

$

 -

Current income tax expense

 

ASU-2016-09

 

Modified retrospective

 

$

(1,110)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

Consolidated  Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Accrued income taxes

 

ASU-2016-09

 

Retrospective

 

$

1,110

 

$

319

 

 

 

 

 

 

 

 

 

 

 

Cash provided by financing activities:

 

 

 

 

 

 

 

 

 

 

Share-based compensation tax benefit

 

ASU-2016-09

 

Retrospective

 

$

(1,110)

 

$

(319)

 

 

 

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Note 3 – Commitments and Contingencies

 

On January 22, 2016, a jury ruled against the Company in a case that involved claims by Exergen Corporation. The case dealt with 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, the Company recorded a charge in the fiscal quarter ended February 29, 2016, including legal fees and other related expenses of $17.83 million ($17.79 million, after tax). On June 8, 2016, certain post-trial motions were concluded with Exergen Corporation being awarded an additional $1.47 million of pre-judgment compensation. We accrued this additional amount in the fiscal quarter ended May 31, 2016. On July 6, 2016, the Company appealed the judgment to the United States Court of Appeals for the Federal Circuit. The Company intends to vigorously pursue its appellate rights and defend against the underlying judgment.

 

We are involved in various other 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.

 

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

 

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

 

2016

 

2015

Beginning balance

 

$

20,622

 

$

23,553

Additions to the accrual

 

 

14,523

 

 

13,514

Reductions of the accrual - payments and credits issued

 

 

(16,164)

 

 

(16,173)

Ending balance

 

$

18,981

 

$

20,894

 

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

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Note 4 – Earnings per Share

 

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities. Dilutive securities at any given point in time may consist of outstanding stock options, issued and contingently issuable unvested restricted share units (“RSUs”), and performance-based restricted share units (“PSUs”). Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive. See Note 15 to these consolidated condensed financial statements for more information regarding share-based payment awards.

 

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

 

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

    

2016

    

2015

Weighted average shares outstanding, basic

 

27,773

 

28,520

Incremental shares from share-based payment arrangements

 

374

 

568

Weighted average shares outstanding, diluted

 

28,147

 

29,088

 

 

 

 

 

Dilutive securities, stock options

 

425

 

798

Dilutive securities, unvested or unsettled stock awards

 

333

 

294

Antidilutive securities, stock options

 

143

 

197

 

 

 

 

 

 

 

 

Note 5 – Segment Information

 

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

 

THREE MONTHS ENDED

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

May 31, 2016

    

Housewares (1)

    

Health & Home

    

Supplements

    

Beauty

    

Total

Sales revenue, net

 

$

84,603

 

$

146,355

 

$

35,940

 

$

81,040

 

$

347,938

Asset impairment charges

 

 

 -

 

 

 -

 

 

5,000

 

 

2,400

 

 

7,400

Operating income

 

 

15,500

 

 

9,604

 

 

(5,272)

 

 

3,066

 

 

22,898

Capital and intangible asset expenditures

 

 

589

 

 

1,189

 

 

1,562

 

 

1,814

 

 

5,154

Depreciation and amortization

 

 

1,329

 

 

5,233

 

 

1,960

 

 

2,434

 

 

10,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional

 

 

 

 

 

May 31, 2015

    

Housewares

    

Health & Home

    

Supplements

    

Beauty

    

Total

Sales revenue, net

 

$

65,186

 

$

143,042

 

$

39,440

 

$

97,677

 

$

345,345

Asset impairment charges

 

 

 -

 

 

 -

 

 

 -

 

 

3,000

 

 

3,000

Operating income

 

 

11,183

 

 

8,418

 

 

2,620

 

 

4,322

 

 

26,543

Capital and intangible asset expenditures

 

 

325

 

 

300

 

 

1,131

 

 

961

 

 

2,717

Depreciation and amortization

 

 

1,008

 

 

5,063

 

 

1,968

 

 

2,315

 

 

10,354

(1)

Includes approximately two and a half months of operating results of Hydro Flask, acquired on March 18, 2016, with no comparable results in the same period last year. See Notes 8 and 9 to these consolidated condensed financial statements for further information regarding the acquisition.

 

We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment, plus shared service and corporate overhead expenses that are allocable to the segment. The two and a half months of operating results of Hydro Flask do not include any allocation of corporate or shared service costs. As the new acquisition is further integrated into our operating structure, we expect to make such allocations to its operations. When we decide such allocations are appropriate, there may be some

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reduction in the operating income of the Housewares segment offset by increases in operating income of our other segments. The extent of this operating income impact between the segments has not yet been determined. We do not allocate nonoperating income and expense, including interest or income taxes, to operating segments.

 

Note 6 – Comprehensive Income (Loss)

 

The table below presents the changes in accumulated other comprehensive income (loss) by component and the amounts reclassified out of accumulated other comprehensive income (loss) for the 2017 fiscal year-to-date:

 

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT

(in thousands)

 

 

 

 

 

Unrealized Holding Gains (Losses)
on Cash Flow Hedges (1)

Balance at February 29, 2016

$

665

Other comprehensive income before reclassification

 

(1,019)

Amounts reclassified out of accumulated other comprehensive income

 

158

Tax effects

 

177

Other comprehensive income (loss)

 

(684)

Balance at May 31, 2016

$

(19)

(1)

Represents activity associated with certain foreign currency contracts. Balances at May 31, 2016 and February 29, 2016 include net deferred tax (expense) benefits of $0.18 and $0.00 million, respectively.

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Note 7 – Supplemental Balance Sheet Information

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

Useful Lives

 

May 31, 

 

February 29, 

 

    

(Years)

    

2016

    

2016

Land

 

 

-

 

 

$

12,800

 

$

12,800

Building and improvements

 

3

-

40

 

 

108,278

 

 

108,509

Computer, furniture and other equipment

 

3

-

15

 

 

71,407

 

 

70,778

Tools, molds and other production equipment

 

1

-

10

 

 

29,242

 

 

28,254

Construction in progress

 

 

-

 

 

 

8,111

 

 

4,050

Property and equipment, gross

 

 

 

 

 

 

229,838

 

 

224,391

Less accumulated depreciation

 

 

 

 

 

 

(97,130)

 

 

(93,926)

Property and equipment, net

 

 

 

 

 

$

132,708

 

$

130,465

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

May 31, 

 

February 29,

 

    

2016

    

2016

Accrued compensation, benefits and payroll taxes

 

$

18,836

 

$

28,912

Accrued sales returns, discounts and allowances

 

 

29,135

 

 

27,530

Accrued warranty returns

 

 

18,981

 

 

20,622

Accrued advertising

 

 

22,889

 

 

22,087

Accrued legal fees and settlements

 

 

17,634

 

 

16,699

Accrued royalties

 

 

8,187

 

 

7,961

Accrued property, sales and other taxes

 

 

8,447

 

 

6,938

Accrued product liability

 

 

1,824

 

 

2,098

Derivative liabilities, current

 

 

943

 

 

495

Liability for uncertain tax positions

 

 

 -

 

 

536

Other

 

 

11,475

 

 

7,367

Total accrued expenses and other current liabilities

 

$

138,351

 

$

141,245

 

OTHER LIABILITIES, NONCURRENT

(in thousands)

 

 

 

 

 

 

 

 

 

 

May 31, 

 

February 29,

 

    

2016

    

2016

Deferred compensation liability

 

$

4,398

 

$

8,298

Liability for uncertain tax positions

 

 

6,851

 

 

8,201

Other liabilities

 

 

9,296

 

 

10,116

Total other liabilities, noncurrent

 

$

20,545

 

$

26,615

 

 

 

 

 

 

Note 8 – Goodwill and Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2017 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2017. As a result of our testing of indefinite-lived trademarks, we recorded non-cash asset impairment charges of $7.40 million ($5.10 million after tax). The charges 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 future discounted cash flows using the relief from royalty valuation method.

 

Impairments in the Fourth Quarter of Fiscal Year 2016 – We performed certain interim impairment testing in the fourth quarter of fiscal year 2016 for certain of our brands as a result of revised growth outlooks. As a result of our testing, we recorded a non-cash impairment charge of $3.00 million ($2.66 million after tax). The charge was

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related to a trademark in our Beauty segment, which was written down to fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

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

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31, 2016

 

February 29, 2016

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

Amount

 

Impairments

 

Amortization

 

Value

Housewares:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Goodwill (1)

 

$

281,621

 

$

 -

 

$

 -

 

$

281,621

 

$

166,132

 

$

 -

 

$

 -

 

$

166,132

Trademarks - indefinite (1)

 

 

134,200

 

 

 -

 

 

 -

 

 

134,200

 

 

75,200

 

 

 -

 

 

 -

 

 

75,200

Other intangibles - finite (1)

 

 

40,078

 

 

 -

 

 

(13,553)

 

 

26,525

 

 

15,448

 

 

 -

 

 

(12,916)

 

 

2,532

Total Housewares

 

 

455,899

 

 

 -

 

 

(13,553)

 

 

442,346

 

 

256,780

 

 

 -

 

 

(12,916)

 

 

243,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health & Home:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

284,913

 

 

 -

 

 

 -

 

 

284,913

 

 

284,913

 

 

 -

 

 

 -

 

 

284,913

Trademarks - indefinite

 

 

54,000

 

 

 -

 

 

 -

 

 

54,000

 

 

54,000

 

 

 -

 

 

 -

 

 

54,000

Licenses - finite

 

 

15,300

 

 

 -

 

 

(13,515)

 

 

1,785

 

 

15,300

 

 

 -

 

 

(12,750)

 

 

2,550

Licenses - indefinite

 

 

7,400

 

 

 -

 

 

 -

 

 

7,400

 

 

7,400

 

 

 -

 

 

 -

 

 

7,400

Other intangibles - finite

 

 

116,669

 

 

 -

 

 

(57,687)

 

 

58,982

 

 

116,575

 

 

 -

 

 

(54,913)

 

 

61,662

Total Health & Home

 

 

478,282

 

 

 -

 

 

(71,202)

 

 

407,080

 

 

478,188

 

 

 -

 

 

(67,663)

 

 

410,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritional Supplements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

96,609

 

 

 -

 

 

 -

 

 

96,609

 

 

96,609

 

 

 -

 

 

 -

 

 

96,609

Brand assets - indefinite

 

 

60,520

 

 

 -

 

 

 -

 

 

60,520

 

 

65,520

 

 

 -

 

 

 -

 

 

65,520

Other intangibles - finite

 

 

44,180

 

 

 -

 

 

(12,002)

 

 

32,178

 

 

44,180

 

 

 -

 

 

(10,431)

 

 

33,749

Total Nutritional Supplements

 

 

201,309

 

 

 -

 

 

(12,002)

 

 

189,307

 

 

206,309

 

 

 -

 

 

(10,431)

 

 

195,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beauty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

 

 

81,841

 

 

(46,490)

 

 

 -

 

 

35,351

Trademarks - indefinite

 

 

46,354

 

 

 -

 

 

 -

 

 

46,354

 

 

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