10-Q 1 a13-19224_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

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

 

FORM 10-Q

 

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

 

For the quarterly period ended August 31, 2013

 

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.)

 

 

 

Clarenden House

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 T      No £

 

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

 

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

 

Large accelerated filer T

 

Accelerated filer £

 

 

 

Non-accelerated filer   £ (Do not check if a smaller reporting company)

 

Smaller reporting company  £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £      No T

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

 

Class

 

Outstanding at October 7, 2013

Common Shares, $0.10 par value, per share

 

32,045,496 shares

 

 



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

INDEX – FORM 10-Q

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets (unaudited)

 

 

 

as of August 31, 2013 and February 28, 2013

3

 

 

 

 

 

 

Consolidated Condensed Statements of Income (unaudited)

 

 

 

for the Three- and Six-Months Ended

 

 

 

August 31, 2013 and August 31, 2012

4

 

 

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income (unaudited)

 

 

 

for the Three- and Six-Months Ended

 

 

 

August 31, 2013 and August 31, 2012

5

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows (unaudited)

 

 

 

for the Six Months Ended

 

 

 

August 31, 2013 and August 31, 2012

6

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements (unaudited)

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

 

 

 

and Results of Operations

20

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

 

 

Item 1A.

Risk Factors

40

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

 

Item 6.

Exhibits

41

 

 

 

 

 

Signatures

 

42

 

- 2 -



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)

 

 

August 31,

 

 

February 28,

 

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Assets, current:

 

 

 

 

 

Cash and cash equivalents

 

$

10,097

 

$

12,842

 

Receivables - principally trade, less allowances of $3,610 and $5,031

 

231,309

 

219,719

 

Inventory, net

 

306,854

 

280,872

 

Prepaid expenses and other current assets

 

13,715

 

8,442

 

Income taxes receivable

 

1,919

 

1,800

 

Deferred tax assets, net

 

24,009

 

21,530

 

Total assets, current

 

587,903

 

545,205

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $75,860 and $74,775

 

130,450

 

101,716

 

Goodwill

 

453,241

 

453,241

 

Other intangible assets, net of accumulated amortization of $84,097 and $73,344

 

332,918

 

355,628

 

Deferred tax assets, net

 

2,726

 

2,401

 

Other assets, net of accumulated amortization of $5,948 and $5,403

 

10,933

 

15,813

 

Total assets

 

$

1,518,171

 

$

1,474,004

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities, current:

 

 

 

 

 

Revolving line of credit

 

$

23,500

 

$

82,000

 

Accounts payable, principally trade

 

109,067

 

72,263

 

Accrued expenses and other current liabilities

 

130,982

 

134,063

 

Deferred tax liabilities, net

 

224

 

339

 

Long-term debt, current maturities

 

96,900

 

20,000

 

Total liabilities, current

 

360,673

 

308,665

 

 

 

 

 

 

 

Long-term debt, excluding current maturities

 

107,247

 

155,000

 

Deferred tax liabilities, net

 

55,889

 

57,991

 

Other liabilities, non-current

 

23,639

 

25,742

 

Total liabilities

 

547,448

 

547,398

 

 

 

 

 

 

 

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; 32,033,505 and 31,868,416 shares issued and outstanding

 

3,203

 

3,187

 

Additional paid in capital

 

171,264

 

164,471

 

Accumulated other comprehensive loss

 

(1,843

)

(2,729

)

Retained earnings

 

798,099

 

761,677

 

Total stockholders’ equity

 

970,723

 

926,606

 

Total liabilities and stockholders’ equity

 

$

1,518,171

 

$

1,474,004

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 3 -



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended August 31,

 

 

Six Months Ended August 31,

 

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

319,387

 

$

287,411

 

$

623,903

 

$

587,622

 

Cost of goods sold

 

196,132

 

170,381

 

380,484

 

349,444

 

Gross profit

 

123,255

 

117,030

 

243,419

 

238,178

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

92,899

 

86,189

 

180,389

 

176,189

 

Asset impairment charges

 

-

 

-

 

12,049

 

-

 

Operating income

 

30,356

 

30,841

 

50,981

 

61,989

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense), net

 

56

 

31

 

140

 

54

 

Interest expense

 

(2,192

)

(3,130)

 

(5,134

)

(6,442

)

Income before income taxes

 

28,220

 

27,742

 

45,987

 

55,601

 

 

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

 

 

Current

 

9,973

 

8,487

 

13,869

 

14,388

 

Deferred

 

(5,071

)

(3,713)

 

(5,591

)

(5,227

)

Net income

 

$

23,318

 

$

22,968

 

$

37,709

 

$

46,440

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.73

 

$

0.72

 

$

1.18

 

$

1.46

 

Diluted

 

$

0.72

 

$

0.72

 

$

1.17

 

$

1.46

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used in computing net earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

31,993

 

31,743

 

31,951

 

31,721

 

Diluted

 

32,272

 

31,846

 

32,226

 

31,843

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 4 -



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)

 

 

Three Months Ended August 31,

 

 

 

2013

 

2012

 

 

 

Before

 

 

 

Net of

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

$  28,220

 

$  (4,902

)

$  23,318

 

$  27,742

 

$  (4,774

)

$  22,968

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(24

)

9

 

(15

)

(457

)

160

 

(297

)

Interest rate settlements reclassified to income

 

925

 

(325

)

600

 

980

 

(343

)

637

 

Subtotal

 

901

 

(316

)

585

 

523

 

(183

)

340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(68

)

18

 

(50

)

(933

)

327

 

(606

)

Ineffectiveness recorded in income

 

-

 

-

 

-

 

(14

)

5

 

(9

)

Settlements reclassified to income

 

(108

)

13

 

(95

)

(11

)

3

 

(8

)

Subtotal

 

(176

)

31

 

(145

)

(958

)

335

 

(623

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

725

 

(285

)

440

 

(435

)

152

 

(283

)

Comprehensive income

 

$  28,945

 

$  (5,187

)

$  23,758

 

$  27,307

 

$  (4,622

)

$  22,685

 

 

 

 

 

Six Months Ended August 31,

 

 

 

2013

 

2012

 

 

 

Before

 

 

 

Net of

 

Before

 

 

 

Net of

 

 

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

$  45,987

 

$  (8,278

)

$  37,709

 

$  55,601

 

$  (9,161

)

$  46,440

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(27

)

10

 

(17

)

(501

)

175

 

(326

)

Interest rate settlements reclassified to income

 

1,839

 

(645

)

1,194

 

1,906

 

(667

)

1,239

 

Subtotal

 

1,812

 

(635

)

1,177

 

1,405

 

(492

)

913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge activity - foreign currency contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value

 

(32

)

11

 

(21

)

(23

)

9

 

(14

)

Ineffectiveness recorded in income

 

-

 

-

 

-

 

(49

)

17

 

(32

)

Settlements reclassified to income

 

(324

)

54

 

(270

)

(37

)

12

 

(25

)

Subtotal

 

(356

)

65

 

(291

)

(109

)

38

 

(71

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

1,456

 

(570

)

886

 

1,296

 

(454

)

842

 

Comprehensive income

 

$  47,443

 

$  (8,848

)

$  38,595

 

$  56,897

 

$  (9,615

)

$  47,282

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 5 -



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

 

 

Six Months Ended August 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash provided (used) by operating activities:

 

 

 

 

 

Net income

 

$

37,709

 

$

46,440

 

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

 

 

 

 

 

Depreciation and amortization

 

16,889

 

17,795

 

Provision for doubtful receivables

 

316

 

(54

)

Non-cash share-based compensation

 

6,797

 

3,057

 

Intangible asset impairment charges

 

12,049

 

-

 

(Gain) loss on the sale of property and equipment

 

63

 

(15

)

Deferred income taxes and tax credits

 

(5,592

)

(5,231

)

Changes in operating capital:

 

 

 

 

 

Receivables

 

(11,906

)

(12,947

)

Inventories

 

(25,982

)

(72,450

)

Prepaid expenses and other current assets

 

(1,991

)

(674

)

Other assets and liabilities, net

 

(3,232

)

(390

)

Accounts payable

 

36,807

 

36,611

 

Accrued expenses and other current liabilities

 

(3,401

)

(8,472

)

Accrued income taxes

 

(1,386

)

7,083

 

Net cash provided by operating activities

 

57,140

 

10,753

 

 

 

 

 

 

 

Cash provided (used) by investing activities:

 

 

 

 

 

Capital and intangible asset expenditures

 

(34,578

)

(5,760

)

Proceeds from the sale or disposal of property and equipment

 

-

 

20

 

Note receivable from land sale

 

-

 

737

 

Net cash used by investing activities

 

(34,578

)

(5,003

)

 

 

 

 

 

 

Cash provided (used) by financing activities:

 

 

 

 

 

Proceeds from line of credit

 

76,800

 

114,950

 

Repayment of line of credit

 

(135,300

)

(125,050

)

Proceeds (repayments) of long-term debt

 

29,147

 

(3,000

)

Payments of financing costs

 

(127

)

(28

)

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

 

4,511

 

6,913

 

Payment of tax obligations resulting from issuance of restricted shares

 

(438

)

(72

)

Payments for repurchases of common stock

 

(1,311

)

-

 

Share-based compensation tax benefit

 

1,411

 

458

 

Net cash used by financing activities

 

(25,307

)

(5,829

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,745

)

(79

)

Cash and cash equivalents, beginning balance

 

12,842

 

21,846

 

Cash and cash equivalents, ending balance

 

$

10,097

 

$

21,767

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

- 6 -



Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

August 31, 2013

 

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

 

The accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of August 31, 2013 and February 28, 2013, and the results of our consolidated operations for the three- and six-month periods ended August 31, 2013 and 2012. 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, 2013, and our other reports on file with the Securities and Exchange Commission (“SEC”).

 

In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company”, “our Company”, “Helen of Troy”,  “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.” References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries.  References to “PUR” refer to the PUR brand of water filtration products that we acquired, along with certain other assets and liabilities, from The Procter & Gamble Company and certain of its affiliates. Kaz and PUR comprise a segment within the Company referred to as the Healthcare / Home Environment segment.  References to “OXO” refer to the operations of OXO International and certain of its affiliated subsidiaries that comprise our Housewares segment.  Product and service names mentioned in this report are used for identification purposes only and may be protected by trademarks, trade names, services marks, and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks, and logos referenced herein belong to their owners.  References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.

 

We are a global designer, developer, importer, marketer and distributor of an expanding portfolio of brand-name consumer products.  We have three segments: Housewares, Healthcare / Home Environment and Personal Care.  Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation and storage, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on health care devices such as thermometers, blood pressure monitors, humidifiers, and heating pads; water filtration systems; and small home appliances such as air purifiers, portable heaters, fans, and insect control devices (bug zappers).  Our Personal Care segment’s products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid, solid- and powder-based personal care and grooming products. All three segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores.  In addition, the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores, and the Personal Care segment sells extensively through beauty supply retailers and wholesalers. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

 

Our consolidated condensed financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.  We have reclassified, combined or separately disclosed certain amounts in the prior period’s consolidated condensed financial statements and accompanying footnotes to conform to the current period’s presentation.

 

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Table of Contents

 

Note 2 – New Accounting Pronouncements

 

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

 

Note 3 – Commitments and Contingencies

 

We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

Notes 7, 9, 11, 12, and 14 provide additional information regarding certain of our significant commitments and certain significant contingencies we have provided for in the accompanying consolidated condensed financial statements.

 

Our products are under warranty against defects in material and workmanship for periods ranging from two to five years. We estimate our warranty accrual using historical trends and believe that these trends are the most reliable method by which we can estimate our warranty liability.  The following table summarizes the activity in our warranty accrual for the periods covered in the accompanying consolidated condensed statements of income:

 

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

 

 

Three Months Ended August 31,

 

 

Six Months Ended August 31,

 

 

 

 

2013

 

 

2012

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

   $

20,782

 

 

$

23,313

 

   $

23,150

 

 

$

26,665

 

Additions to the accrual

 

9,578

 

 

7,899

 

18,776

 

 

14,773

 

Reductions of the accrual - payments and credits issued

 

(9,003

)

 

(9,352

)

(20,569

)

 

(19,578

)

Ending balance

 

   $

21,357

 

 

$

21,860

 

   $

21,357

 

 

$

21,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 4 – Earnings per Share

 

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period and diluted earnings per share using basic earnings per share plus the effect of dilutive securities.   Our securities that can have dilutive effects consist of outstanding options to purchase common stock and issued and contingently issuable unvested restricted share units and awards.  See Note 14 to these consolidated condensed financial statements for more information regarding these restricted share units and awards.  Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive.

 

For the periods covered in the accompanying consolidated condensed statements of income, the basic and diluted shares are as follows:

 

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2013

 

 

2012

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

31,993

 

 

31,743

 

31,951

 

 

31,721

 

Incremental shares from share-based payment arrangements

 

279

 

 

103

 

275

 

 

122

 

Weighted average shares outstanding, diluted

 

32,272

 

 

31,846

 

32,226

 

 

31,843

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities, as a result of in-the-money options

 

347

 

 

380

 

273

 

 

376

 

Dilutive securities, as a result of unvested restricted shares

 

251

 

 

-     

 

242

 

 

-     

 

Antidilutive securities, as a result of out-of-the-money options

 

603

 

 

617

 

700

 

 

621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

Note 5 – Segment Information

 

The following tables contain segment information for the periods covered in the accompanying consolidated condensed statements of income:

 

THREE MONTHS ENDED AUGUST 31, 2013 AND 2012

(in thousands)

 

 

 

 

Healthcare /

 

 

Personal

 

 

 

 

August 31, 2013

 

 

Housewares

 

 

Home Environment

 

 

Care

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

70,165

 

$

133,044

 

$

116,178

 

$

319,387

 

Asset impairment charges

 

-    

 

-    

 

-    

 

-    

 

Operating income

 

13,772

 

4,974

 

11,610

 

30,356

 

Capital and intangible asset expenditures

 

167

 

17,009

 

402

 

17,578

 

Depreciation and amortization

 

1,030

 

4,767

 

2,645

 

8,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare /

 

 

Personal

 

 

 

 

August 31, 2012

 

 

Housewares

 

 

Home Environment

 

 

Care

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

64,570

 

$

110,477

 

$

112,364

 

$

287,411

 

Operating income

 

12,078

 

6,883

 

11,880

 

30,841

 

Capital and intangible asset expenditures

 

326

 

1,202

 

864

 

2,392

 

Depreciation and amortization

 

1,278

 

4,175

 

3,242

 

8,695

 

 

SIX MONTHS ENDED AUGUST 31, 2013 AND 2012

(in thousands)

 

 

 

 

Healthcare /

 

 

Personal

 

 

 

 

August 31, 2013

 

 

Housewares

 

 

Home Environment

 

 

Care

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

133,695

 

$

258,646

 

$

231,562

 

$

623,903

 

Asset impairment charges

 

-    

 

-    

 

12,049

 

12,049

 

Operating income

 

26,228

 

11,510

 

13,243

 

50,981

 

Capital and intangible asset expenditures

 

381

 

33,114

 

1,083

 

34,578

 

Depreciation and amortization

 

2,049

 

9,548

 

5,292

 

16,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare /

 

 

Personal

 

 

 

 

August 31, 2012

 

 

Housewares

 

 

Home Environment

 

 

Care

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue, net

 

$

124,819

 

$

232,887

 

$

229,916

 

$

587,622

 

Operating income

 

23,355

 

14,874

 

23,760

 

61,989

 

Capital and intangible asset expenditures

 

517

 

2,124

 

3,119

 

5,760

 

Depreciation and amortization

 

2,576

 

8,710

 

6,509

 

17,795

 

 

We compute operating income for each segment based on net sales revenue, less cost of goods sold, selling, general and administrative expense (“SG&A”), and any 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 overhead expenses that are allocable to the segment. We make allocations of overhead between operating segments using a number of relevant allocation criteria, depending on the nature of the expense, the most significant of which are relative revenues, estimates of relative labor expenditures, headcount, and facility square footage.  We do not allocate nonoperating income and expense, including interest or income taxes to operating segments.

 

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Table of Contents

 

Note 6 – Comprehensive Income (Loss)

 

The components of accumulated other comprehensive loss, net of tax, are as follows:

 

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

(in thousands)

 

 

 

August 31,

 

 

 

February 28,

 

 

 

2013

 

 

2013

 

 

 

 

 

 

 

 

Unrealized holding losses on cash flow hedges - interest rate swap, net of tax (1)

 

   $

(1,958

)

 

$

(3,135

)

Unrealized holding gains on cash flow hedges - foreign currency contracts, net of tax (2)

 

115

 

 

406

 

Total accumulated other comprehensive loss

 

   $

(1,843

)

 

$

(2,729

)

 

 

 

 

 

 

 

 

 

 

(1) Includes net deferred tax benefits of $1.05 and $1.69 million at August 31, 2013 and February 28, 2013, respectively.

 

(2) Includes net deferred tax expense of $0.03 and $0.09 million at August 31, 2013 and February 28, 2013, respectively.

 

Note 7 – Supplemental Balance Sheet Information

 

PROPERTY AND EQUIPMENT

(in thousands)

 

 

Estimated

 

 

 

 

 

 

 

 

Useful Lives

 

August 31,

 

 

February 28,

 

 

 

(Years)

 

2013

 

 

2013

 

 

 

 

 

 

 

 

 

 

Land

 

-     

 

   $

12,800

 

 

$

12,800

 

Building and improvements

 

3 - 40

 

67,494

 

 

66,994

 

Computer, furniture and other equipment

 

3 - 15

 

55,670

 

 

58,284

 

Tools, molds and other production equipment

 

1 - 10

 

29,311

 

 

29,264

 

Construction in progress

 

-     

 

41,035

 

 

9,149

 

Property and equipment, gross

 

 

 

206,310

 

 

176,491

 

Less accumulated depreciation

 

 

 

(75,860

)

 

(74,775

)

Property and equipment, net

 

 

 

   $

130,450

 

 

$

101,716

 

 

 

 

 

 

 

 

 

 

 

Construction in progress includes expenditures of $30.94  million at August 31, 2013 for construction costs incurred in connection with our new 1.3 million square foot distribution facility on approximately 84 acres of land in Olive Branch, Mississippi.  The new facility will consolidate the operations of our U.S. based Personal Care and Healthcare / Home Environment appliance businesses.  The new facility became operational for the Healthcare / Home Environment segment during the first week of September 2013.  See Note 9 to these consolidated condensed financial statements for related information regarding the debt incurred to fund the construction of the new distribution facility.

 

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Table of Contents

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

(in thousands)

 

 

 

August 31,

 

 

February 28,

 

 

 

 

2013

 

 

2013

 

 

 

 

 

 

 

 

 

Accrued compensation, benefits and payroll taxes

 

 

$

32,790

 

 

$

34,265

 

Accrued sales returns, discounts and allowances

 

 

27,829

 

 

22,561

 

Accrued warranty returns

 

 

21,357

 

 

23,150

 

Accrued advertising

 

 

18,111

 

 

14,554

 

Accrued product liability, legal and professional fees

 

 

7,057

 

 

9,061

 

Accrued royalties

 

 

5,993

 

 

7,731

 

Accrued property, sales and other taxes

 

 

6,934

 

 

5,729

 

Derivative liabilities, current

 

 

3,012

 

 

3,044

 

Other

 

 

7,899

 

 

13,968

 

Total accrued expenses and other current liabilities

 

 

$

130,982

 

 

$

134,063

 

 

OTHER LIABILITIES, NON-CURRENT

 

(in thousands)

 

 

 

August 31,

 

 

February 28,

 

 

 

 

2013

 

 

2013

 

 

 

 

 

 

 

 

 

Deferred compensation liability

 

 

$

6,431

 

 

$

6,443

 

Liability for uncertain tax positions

 

 

15,903

 

 

15,759

 

Derivative liabilities

 

 

-    

 

 

1,780

 

Other liabilites

 

 

1,305

 

 

1,760

 

Total other liabilities, non-current

 

 

$

23,639

 

 

$

25,742

 

 

Note 8 – Goodwill and Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2014 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2014. As a result of our testing of indefinite-lived trademarks and licenses, we recorded a non-cash asset impairment charge of $12.05 million ($12.03 million after tax). The charge was related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

Annual Impairment Testing in the First Quarter of Fiscal Year 2013 - We performed our annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal year 2013.  As a result, we concluded no asset impairment charges were required. For fiscal year 2013, the estimated fair value of the indefinite-lived trademarks and licenses, reporting unit net assets, and the Company’s estimated enterprise value exceeded their respective carrying values as of the date of the evaluation.

 

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

 

GOODWILL AND INTANGIBLE ASSETS

 

(in thousands)

 

 

 

August 31, 2013

 

 

February 28, 2013

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

Gross

 

Cumulative

 

 

 

 

 

 

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

 

Carrying

 

Goodwill

 

Accumulated

 

Net Book

 

Description

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

Amount

 

Impairments

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housewares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

$

166,132

 

$

-    

 

$

-    

 

$

166,132

 

 

$

166,132

 

$

-    

 

$

-    

 

$

166,132

 

Trademarks - indefinite

 

 

75,200

 

-    

 

-    

 

75,200

 

 

75,200

 

-    

 

-    

 

75,200

 

Other intangibles - finite

 

 

15,701

 

-    

 

(10,637

)

5,064

 

 

15,609

 

-    

 

(10,070

)

5,539

 

Total Housewares

 

 

257,033

 

-    

 

(10,637

)

246,396

 

 

256,941

 

-    

 

(10,070

)

246,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare / Home Environment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

251,758

 

-    

 

-    

 

251,758

 

 

251,758

 

-    

 

-    

 

251,758

 

Trademarks - indefinite

 

 

54,000

 

-    

 

-    

 

54,000

 

 

54,000

 

-    

 

-    

 

54,000

 

Licenses - finite

 

 

15,300

 

-    

 

(4,935

)

10,365

 

 

15,300

 

-    

 

(3,455

)

11,845

 

Other Intangibles - finite

 

 

114,490

 

-    

 

(28,962

)

85,528

 

 

114,490

 

-    

 

(23,220

)

91,270

 

Total Healthcare / Home Environment

 

 

435,548

 

-    

 

(33,897

)

401,651

 

 

435,548

 

-    

 

(26,675

)

408,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

81,841

 

 

(46,490

)

 

 -    

 

 

 35,351

 

 

 

 81,841

 

 

(46,490

)

 

-    

 

 

35,351

 

Trademarks - indefinite

 

 

63,754

 

-    

 

-    

 

63,754

 

 

75,803

 

-    

 

-    

 

75,803

 

Trademarks - finite

 

 

150

 

-    

 

(75

)

75

 

 

150

 

-    

 

(72

)

78

 

Licenses - indefinite

 

 

10,300

 

-    

 

-    

 

10,300

 

 

10,300

 

-    

 

-    

 

10,300

 

Licenses - finite

 

 

18,683

 

-    

 

(15,729

)

2,954

 

 

18,683

 

-    

 

(15,570

)

3,113

 

Other intangibles - finite

 

 

49,437

 

-    

 

(23,759

)

25,678

 

 

49,437

 

-    

 

(20,957

)

28,480

 

Total Personal Care

 

 

224,165

 

(46,490

)

(39,563

)

138,112

 

 

236,214

 

(46,490

)

(36,599

)

153,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

916,746

 

$

(46,490

)

$

(84,097

)

$

786,159

 

 

$

928,703

 

$

(46,490

)

$

(73,344

)

$

808,869

 

 

The following table summarizes the amortization expense attributable to intangible assets for the periods covered in the accompanying consolidated condensed statements of income, as well as our estimated amortization expense for the fiscal years 2014 through 2019.

 

AMORTIZATION OF INTANGIBLE ASSETS

 

(in thousands)

 Aggregate Amortization Expense

 

 

 

 For the three months ended

 

 

 

 

 

 

 

August 31, 2013

 

$

5,408

 

 

 

 

 

August 31, 2012

 

$

5,626

 

 

 

 

 

 

 Aggregate Amortization Expense

 

 

 

 For the six months ended

 

 

 

 

 

 

 

August 31, 2013

 

$

10,839

 

 

 

 

 

August 31, 2012

 

$

11,262

 

 

 

 

 

 

 Estimated Amortization Expense

 

 

 

 For the fiscal years ended

 

 

 

 

 

 

 

February 2014

 

$

21,557

 

February 2015

 

$

21,018

 

February 2016

 

$

20,838

 

February 2017

 

$

20,515

 

February 2018

 

$

16,697

 

February 2019

 

$

11,917

 

 

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Table of Contents

 

Note 9 – Debt

 

Revolving Line of Credit - We have a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. that provides for an unsecured total revolving commitment of up to $250.00 million. The commitment under the Credit Agreement terminates on December 30, 2015. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time. We also incur loan commitment fees and letter of credit fees under the Credit Agreement. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. As of August 31, 2013, the outstanding revolving loan principal balance was $23.50 million and there were $0.31 million of open letters of credit outstanding against the Credit Agreement. For both the three- and six-months ended August 31, 2013, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.18 to 3.63 percent. For the three- and six-months ended August 31, 2012, borrowings under the Credit Agreement incurred interest charges at rates ranging from 1.61 to 3.63 percent and 1.61 to 4.00 percent, respectively. As of August 31, 2013, the amount available for borrowings under the Credit Agreement was $226.19 million.

 

Long-Term Debt – A summary of our long-term debt is as follows:

 

LONG-TERM DEBT

 

 

(dollars in thousands)

 

 

Original

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

Interest

 

 

 

 

August 31,

 

 

February 28,

 

 

 

Borrowed

 

Rates

 

Matures

 

 

2013

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$38 million unsecured loan with a state industrial development corporation, interim draws, interest is set and payable quarterly at the Base Rate, as defined below, plus a margin of up to 1.125%, or applicable LIBOR plus a margin of up to 2.125%, as determined by the interest rate elected. Loan subject to holder’s call on or after March 1, 2018. Loan can be prepaid without penalty any time after March 20, 2014.

 

03/13

 

1.18% to 1.57%

 

03/23

 

 

$

29,147

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million unsecured floating interest rate 10 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 90 basis points. Principal is due in June 2014. Notes can be prepaid without penalty. (1)

 

06/04

 

6.01%

 

06/14

 

 

75,000

 

 

75,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

01/11

 

3.90%

 

01/18

 

 

100,000

 

 

100,000

 

Total long-term debt

 

 

 

 

 

 

 

 

204,147

 

 

175,000

 

Less current maturities of long-term debt

 

 

 

 

 

 

 

 

(96,900

)

 

(20,000

)

Long-term debt, excluding current maturities

 

 

 

 

 

 

 

 

$

107,247

 

 

$

155,000

 

 

(1)      Floating interest rates have been hedged with an interest rate swap to effectively fix interest rates. Additional information regarding the swap is provided in Note 12 to these consolidated condensed financial statements.

 

In March 2013, Kaz USA, Inc. (“Kaz USA”), a wholly owned subsidiary of the Company, entered into a Loan Agreement, dated as of March 1, 2013, with the Mississippi Business Finance Corporation (the “MBFC”) in connection with the issuance by MBFC of up to $38.00 million of taxable industrial development revenue bonds (the “Bonds”). The Bonds are issued under a Trust Indenture (the “IRB Indenture”), between MBFC and Deutsche Bank National Trust Company, as trustee. Interim draws, accumulating up to a $38.00 million aggregate maximum, may be made through March 20, 2014. The Bonds and the related loan to Kaz USA (the “MBFC Loan”) will bear interest at a variable rate as elected by Kaz USA equal to either (a) a “Base Rate” plus a margin of 0.00 to 1.125 percent, depending upon the leverage ratio at the time of the borrowing or (b) the respective one-, two-, three-, or six-month LIBOR rate plus 1.00 to 2.125 percent, depending upon the leverage ratio at the time of the borrowing. The Base Rate is equal to the highest of (i) the federal funds rate for the day,

 

- 13 -



Table of Contents

 

plus 0.50 percent, (ii) the prime rate of Bank of America, N.A., or (iii) the respective one-, two-, three-, or six-month LIBOR rate plus 1.00 percent. The proceeds of the MBFC Loan are being used by Kaz USA to finance the purchase of land, construction of a distribution facility and the acquisition and installation of equipment, machinery and related assets located in Olive Branch, Mississippi.

 

Assuming the $38.00 million aggregate maximum is borrowed, outstanding principal of the MBFC Loan will be payable as follows: $1.90 million on March 1 in each of 2014, 2015, 2018, 2019, 2020, 2021 and 2022; $3.80 million on March 1, 2016; $5.70 million on March 1, 2017; and $15.20 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023. The MBFC Loan may be prepaid in whole or part without penalty any time after March 20, 2014. Additionally, Bank of America, N.A., the purchaser of the Bonds, may elect for the MBFC Loan to be prepaid in full on March 1, 2018. Following March 1, 2018, Bank of America, N.A. may elect for the MBFC Loan to be prepaid on March 1 of each subsequent year prior to maturity upon at least 90 days notice. In lieu of any prepayment, the Bonds may be purchased by a transferee, as permitted under the IRB Indenture.

 

The fair market value of the fixed rate debt at August 31, 2013, computed using a discounted cash flow analysis, was $103.96 million compared to the $100.00 million book value and represents a Level 2 liability. All other long-term debt has floating interest rates, and its book value approximates its fair value at August 31, 2013.

 

All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain financial covenants, including maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms is defined in the various agreements). Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting the Company, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on its properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends.

 

As of August 31, 2013, our debt agreements effectively limited our ability to incur more than $354.23 million of additional debt from all sources, including draws on the Credit Agreement. As of August 31, 2013, we were in compliance with the terms of all of our debt agreements.

 

Note 10 – Income Taxes

 

Income tax expense for the three- and six-month periods ended August 31, 2013 was 17.4 and 18.0 percent of income before income taxes, respectively, compared to 17.2 and 16.5 percent, respectively, for the same periods last year. Our effective tax rate for the six months ended August 31, 2013 was also impacted by asset impairment charges of $12.05 million, for which the related tax benefit was only $0.02 million.

 

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Table of Contents

 

Note 11 – Fair Value

 

The fair value hierarchy of our financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:

 

FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

(in thousands)

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

Active Markets

 

Observable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

August 31, 2013

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Money market accounts

 

$

913

 

$

913

 

$

-

 

Foreign currency contracts

 

140

 

-

 

140

 

Total assets

 

$

1,053

 

$

913

 

$

140

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

103,960

 

$

-

 

$

103,960

 

Long-term debt - floating rate

 

104,147

 

-

 

104,147

 

Interest rate swaps

 

3,012

 

-

 

3,012

 

Total liabilities

 

$

211,119

 

$

-

 

$

211,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

 

 

 

 

Active Markets

 

Observable

 

 

 

Fair Values at

 

for Identical Assets

 

Market Inputs

 

Description

 

February 28, 2013

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Money market accounts

 

$

1,091

 

$

1,091

 

$

-

 

Foreign currency contracts

 

496

 

-

 

496

 

Total assets

 

$

1,587

 

$

1,091

 

$

496

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Long-term debt - fixed rate (1)

 

$

105,725

 

$

-

 

$

105,725

 

Long-term debt - floating rate

 

75,000

 

-

 

75,000

 

Interest rate swaps

 

4,824

 

-

 

4,824

 

Total liabilities

 

$

185,549

 

$

-

 

$

185,549

 

 

(1)  Debt values are reported at estimated fair value in these tables, but are recorded in the accompanying consolidated condensed balance sheets at the undiscounted value of remaining principal payments due.

 

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturity of these items.  Money market accounts are included in cash and cash equivalents in the accompanying consolidated condensed balance sheets and are classified as Level 1 assets.

 

We classify our fixed and floating rate debt as Level 2 liabilities because the estimation of the fair market value of these financial liabilities requires the use of discount rates based upon current market rates of interest for debt with comparable remaining terms. Such comparable rates are significant other observable market inputs. The fair market value of the fixed rate debt was computed using a discounted cash flow analysis and discount rates of 2.16 and 1.83 percent at August 31, 2013 and February 28, 2013, respectively. All other long-term debt has floating interest rates, and its book value approximates its fair value as of the reporting date.

 

We use derivatives for hedging purposes and our derivatives are primarily foreign currency contracts and an interest rate swap. We determine the fair value of our derivative instruments based on Level 2 inputs in the fair

 

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value hierarchy. See Note 12 to these consolidated condensed financial statements for more information on our hedging activities.

 

The Company’s other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 assets. These assets are measured at fair value on a non-recurring basis as part of the Company’s impairment assessments and as circumstances require. As discussed in Note 8, in connection with our annual impairment testing during the fiscal quarter ended May 31, 2013, we recorded a non-cash asset impairment charge of $12.05 million ($12.03 million after tax).  The charge related to certain trademarks in our Personal Care segment, which were written down to their estimated fair value, determined on the basis of future discounted cash flows using the relief from royalty valuation method.

 

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 each of the three- and six-month periods ended August 31, 2013, approximately 14 percent of our net sales revenue was in foreign currencies.  During each of the three- and six-month periods ended August 31, 2012, approximately 16 percent of our net sales revenue was in foreign currencies.  These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases.  In our consolidated condensed statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses from remeasurement are recognized in SG&A.  For the three- and six-month periods ended August 31, 2013, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.38) and ($0.50) million, respectively, in SG&A and ($0.02) and $0.03 million, respectively, in income tax expense.  For the three- and six-month periods ended August 31, 2012, we recorded net foreign exchange gains (losses), including the impact of currency hedges and currency swaps, of $0.77 and ($0.17) million, respectively, in SG&A and ($0.03) and $0.16 million, respectively, in income tax expense.

 

We have historically hedged against certain foreign currency exchange rate risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar.  We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

 

Interest Rate Risk – Interest on our outstanding debt as of August 31, 2013 is both floating and fixed.  Fixed rates are in place on $100.00 million of Senior Notes at 3.90 percent, while floating rates are in place on $23.50 million of borrowings under our Credit Agreement, $29.15 million of interim draws under our MBFC Loan and $75.00 million of Senior Notes due June 2014.  If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under the Credit Agreement and MBFC Loan. The floating rate Senior Notes due June 2014 reset as described in Note 9, and have been effectively converted to fixed rate debt using an interest rate swap (the “swap”), as described below.

 

We manage our floating rate $75.00 million of Senior Notes due June 2014 using an interest rate swap.  As of August 31, 2013, the swap converted an aggregate notional principal amount of $75.00 million from floating interest rate payments under our Senior Notes due June 2014 to fixed interest rate payments at 6.01 percent.  In the swap transaction, we maintain contracts to pay fixed rates of interest on an aggregate notional principal amount of $75.00 million at a rate of 5.11 percent on our Senior Notes due June 2014, while simultaneously receiving floating rate interest payments set at 0.28 percent as of August 31, 2013 on the same notional amounts.  The fixed rate side of the swap will not change over its life.  The floating rate payments are reset quarterly based on three-month LIBOR.  The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments.  The swap is

 

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used to reduce our risk of increased interest costs; however, when interest rates drop significantly below the swap rate, we lose the benefit that our floating rate debt would provide, if not managed with a swap. The swap is considered 100 percent effective.

 

The fair values of our various derivative instruments are as follows:

 

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

August 31, 2013

 

 

 

 

 

 

 

 

Prepaid

 

Accrued