0000916789-19-000003.txt : 20190109 0000916789-19-000003.hdr.sgml : 20190109 20190109124623 ACCESSION NUMBER: 0000916789-19-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20181130 FILED AS OF DATE: 20190109 DATE AS OF CHANGE: 20190109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELEN OF TROY LTD CENTRAL INDEX KEY: 0000916789 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 742692550 STATE OF INCORPORATION: D0 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14669 FILM NUMBER: 19517785 BUSINESS ADDRESS: STREET 1: CLARENDON HOUSE STREET 2: 2 CHURCH STREET CITY: HAMILTON STATE: D0 ZIP: HM 11 BUSINESS PHONE: 915-225-8000 MAIL ADDRESS: STREET 1: ONE HELEN OF TROY PLAZA CITY: EL PASO STATE: TX ZIP: 79912 10-Q 1 fy19_q3xhelenoftroy10-q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2018
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
helenoftroylogo.jpg
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 x      No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).      Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ¨ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at January 4, 2019
 
Common Shares, $0.10 par value, per share
 
25,594,840 shares



HELEN OF TROY LIMITED AND SUBSIDIARIES
FORM 10‐Q
TABLE OF CONTENTS
 
 
PAGE 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS
 
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except shares and par value)
November 30, 2018
 
February 28, 2018
Assets
 
 
 
Assets, current:
 
 
 
Cash and cash equivalents
$
19,136

 
$
20,738

Receivables - principally trade, less allowances of $1,788 and $2,912
339,124

 
275,565

Inventory
300,648

 
251,511

Prepaid expenses and other current assets
14,437

 
9,545

Income taxes receivable

 
349

Total assets, current
673,345


557,708

 
 
 
 
Property and equipment, net of accumulated depreciation of $122,602 and $115,202
130,940

 
123,503

Goodwill
602,320

 
602,320

Other intangible assets, net of accumulated amortization of $178,087 and $167,354
294,565

 
302,915

Deferred tax assets, net
9,942

 
16,654

Other assets, net of accumulated amortization of $2,092 and $2,022
14,257

 
20,617

Total assets
$
1,725,369


$
1,623,717

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Liabilities, current:
 

 
 

Accounts payable, principally trade
$
146,035

 
$
129,341

Accrued expenses and other current liabilities
184,237

 
168,261

Income taxes payable
3,181

 

Long-term debt, current maturities
1,884

 
1,884

Total liabilities, current
335,337


299,486

 
 
 
 
Long-term debt, excluding current maturities
337,846

 
287,985

Deferred tax liabilities, net
5,155

 
7,096

Other liabilities, noncurrent
13,773

 
14,691

Total liabilities
692,111


609,258

 
 
 
 
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; 25,593,327 and 26,575,634 shares issued and outstanding
2,534

 
2,658

Additional paid in capital
244,888

 
230,676

Accumulated other comprehensive income
5,207

 
631

Retained earnings
780,629

 
780,494

Total stockholders' equity
1,033,258


1,014,459

Total liabilities and stockholders' equity
$
1,725,369


$
1,623,717

 
See accompanying notes to condensed consolidated financial statements.

2


HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited) 
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Sales revenue, net
$
431,081

 
$
420,841

 
$
1,179,308

 
$
1,091,281

Cost of goods sold
249,236

 
242,703

 
695,732

 
638,096

Gross profit
181,845


178,138

 
483,576

 
453,185

 
 
 
 
 
 
 
 
Selling, general and administrative expense ("SG&A")
120,524

 
109,633

 
325,684

 
310,390

Asset impairment charges

 

 

 
4,000

Restructuring charges
25

 
1,165

 
2,609

 
1,165

Operating income
61,296


67,340

 
155,283

 
137,630

 
 
 
 
 
 
 
 
Nonoperating income, net
15

 
34

 
175

 
281

Interest expense
(2,971
)
 
(3,505
)
 
(8,413
)
 
(10,984
)
Income before income tax
58,340


63,869

 
147,045

 
126,927

 
 
 
 
 
 
 
 
Income tax expense
4,020

 
5,245

 
10,535

 
6,423

Income from continuing operations
54,320


58,624

 
136,510

 
120,504

 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
(4,850
)
 
(89,060
)
 
(5,231
)
 
(136,139
)
Net income (loss)
$
49,470


$
(30,436
)
 
$
131,279

 
$
(15,635
)
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic:
 

 
 

 
 
 
 
Continuing operations
$
2.08

 
$
2.16

 
$
5.19

 
$
4.44

Discontinued operations
(0.19
)
 
(3.28
)
 
(0.20
)
 
(5.02
)
Total earnings (loss) per share - basic
$
1.90

 
$
(1.12
)
 
$
4.99

 
$
(0.58
)
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted:
 

 
 

 
 
 
 
Continuing operations
$
2.06

 
$
2.15

 
$
5.15

 
$
4.41

Discontinued operations
(0.18
)
 
(3.27
)
 
(0.20
)
 
(4.99
)
Total earnings (loss) per share - diluted
$
1.88

 
$
(1.12
)
 
$
4.95

 
$
(0.57
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock used in computing earnings per share:
 
 
 

 
 
 
 
Basic
26,057

 
27,113

 
26,321

 
27,140

Diluted
26,366

 
27,267

 
26,520

 
27,304


See accompanying notes to condensed consolidated financial statements.

3


HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited) 
 
Three Months Ended November 30,
 
2018
 
2017
 
Before Tax
 
Tax (Expense) Benefit
 
Net of Tax
 
Before Tax
 
Tax (Expense) Benefit
 
Net of Tax
(in thousands)
 
 
 
 
 
Income from continuing operations
$
58,340

 
$
(4,020
)
 
$
54,320

 
$
63,869

 
$
(5,245
)
 
$
58,624

Loss from discontinued operations
(6,325
)
 
1,475

 
(4,850
)
 
(83,084
)
 
(5,976
)
 
(89,060
)
Net income (loss)
52,015


(2,545
)

49,470


(19,215
)

(11,221
)

(30,436
)
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Cash flow hedge activity - interest rate swap
 
 
 

 
 

 
 

 
 

 
 

Changes in fair market value
(4
)
 
50

 
46

 
753

 
(290
)
 
463

Adoption of ASU No. 2018-02

 

 

 

 

 

Subtotal
(4
)

50


46


753


(290
)

463

 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge activity - foreign currency contracts
 

 
 

 
 

 
 

 
 

 
 

Changes in fair market value
(563
)
 
96

 
(467
)
 
2,928

 
(725
)
 
2,203

Settlements reclassified to income
1,178

 
(197
)
 
981

 
(1,328
)
 
271

 
(1,057
)
Adoption of ASU No. 2018-02

 

 

 

 

 

Subtotal
615


(101
)

514


1,600


(454
)

1,146

Total other comprehensive income (loss)
611

 
(51
)
 
560

 
2,353

 
(744
)
 
1,609

Comprehensive income (loss)
$
52,626


$
(2,596
)

$
50,030


$
(16,862
)

$
(11,965
)

$
(28,827
)

 
Nine Months Ended November 30,
 
2018
 
2017
 
Before Tax
 
Tax (Expense) Benefit
 
Net of Tax
 
Before Tax
 
Tax (Expense) Benefit
 
Net of Tax
(in thousands)
 
 
 
 
 
Income from continuing operations
$
147,045

 
$
(10,535
)
 
$
136,510

 
$
126,927

 
$
(6,423
)
 
$
120,504

Loss from discontinued operations
(6,809
)
 
1,578

 
(5,231
)
 
(136,729
)
 
590

 
(136,139
)
Net income (loss)
140,236

 
(8,957
)
 
131,279

 
(9,802
)
 
(5,833
)
 
(15,635
)
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Cash flow hedge activity - interest rate swap
 
 
 

 
 

 
 

 
 

 
 

Changes in fair market value
72

 
29

 
101

 
753

 
(290
)
 
463

Adoption of ASU No. 2018-02

 
150

 
150

 

 

 

Subtotal
72

 
179

 
251

 
753

 
(290
)
 
463

 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge activity - foreign currency contracts
 

 
 

 
 

 
 

 
 

 
 

Changes in fair market value
3,962

 
(504
)
 
3,458

 
(1,275
)
 
75

 
(1,200
)
Settlements reclassified to income
1,101

 
(236
)
 
865

 
(2,208
)
 
434

 
(1,774
)
Adoption of ASU No. 2018-02

 
2

 
2

 

 

 

Subtotal
5,063

 
(738
)
 
4,325

 
(3,483
)
 
509

 
(2,974
)
Total other comprehensive income (loss)
5,135

 
(559
)
 
4,576

 
(2,730
)
 
219

 
(2,511
)
Comprehensive income (loss)
$
145,371

 
$
(9,516
)
 
$
135,855

 
$
(12,532
)
 
$
(5,614
)
 
$
(18,146
)

See accompanying notes to condensed consolidated financial statements.

4


HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended November 30,
(in thousands)
2018
 
2017
Cash provided by operating activities:
 

 
 

Net income (loss)
$
131,279

 
$
(15,635
)
Less: Loss from discontinued operations
(5,231
)
 
(136,139
)
Income from continuing operations
136,510


120,504

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 

 
 

Depreciation and amortization
22,490

 
25,139

Amortization of financing costs
761

 
632

Provision for doubtful receivables
725

 
2,045

Non-cash share-based compensation
17,029

 
10,619

Non-cash intangible asset impairment charges

 
4,000

Gain on the sale or disposal of property and equipment
(536
)
 
(10
)
Deferred income taxes and tax credits
4,060

 
(54,355
)
Changes in operating capital, net of effects of acquisition of businesses:
 

 
 

Receivables
(64,284
)
 
(77,017
)
Inventories
(49,137
)
 
2,795

Prepaid expenses and other current assets
(1,149
)
 
(3,356
)
Other assets and liabilities, net
5,554

 
(1,184
)
Accounts payable
16,694

 
(1,961
)
Accrued expenses and other current liabilities
17,809

 
21,425

Accrued income taxes
2,969

 
53,637

Net cash provided by operating activities - continuing operations
109,495


102,913

Net cash provided (used) by operating activities - discontinued operations
(5,231
)
 
4,716

Net cash provided by operating activities
104,264


107,629

 
 
 
 
Cash used by investing activities:
 

 
 

Capital and intangible asset expenditures
(22,166
)
 
(10,375
)
Proceeds from the sale of property and equipment
1,125

 
13

Net cash used by investing activities - continuing operations
(21,041
)

(10,362
)
Net cash used by investing activities - discontinued operations

 
(9,479
)
Net cash used by investing activities
(21,041
)

(19,841
)
 
 
 
 
Cash used by financing activities:
 

 
 

Proceeds from line of credit
462,350

 
389,500

Repayment of line of credit
(411,350
)
 
(444,200
)
Repayment of long-term debt
(1,900
)
 
(5,700
)
Proceeds from share issuances under share-based compensation plans
7,802

 
6,670

Payment of tax obligations resulting from cashless share award settlements
(4,660
)
 
(6,830
)
Payments for repurchases of common stock
(137,067
)
 
(29,158
)
Net cash used by financing activities - continuing operations
(84,825
)

(89,718
)
Net cash used by financing activities - discontinued operations

 

Net cash used by financing activities
(84,825
)

(89,718
)
 
 
 
 
 
 
 
 
Net decrease in cash and cash equivalents
(1,602
)
 
(1,930
)
Cash and cash equivalents, beginning balance
20,738

 
23,087

Cash and cash equivalents, ending balance
19,136


21,157

Less: Cash and cash equivalents of discontinued operations, ending balance

 
1,232

Cash and cash equivalents of continuing operations, ending balance
$
19,136


$
19,925

 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5


HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
November 30, 2018

Note 1 - Basis of Presentation and Related Information

The accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of November 30, 2018 and February 28, 2018, and the results of our consolidated operations for the interim periods presented.  We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 28, 2018, and our other reports on file with the Securities and Exchange Commission (“SEC”).

When used in these 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 our common shares, par value $0.10 per share, as “common stock.” References to the "FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to United States (“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 three segments: Housewares, Health & Home, and Beauty.  Our Housewares segment provides a broad range of innovative consumer products for the home.  Product offerings include food preparation tools and storage containers; cleaning, bath and garden tools and accessories; infant and toddler care products; and insulated beverage and food containers.  The Health & Home segment focuses on health care 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 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.

On December 20, 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC.  The results of the Nutritional Supplements operations have been reported as discontinued operations for all periods presented in the consolidated financial statements.  For more information, see Note 4 to these condensed consolidated financial statements.  All other notes present results from continuing operations.

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 condensed consolidated financial statements are prepared in U.S. Dollars.  All intercompany accounts and transactions are eliminated in consolidation.

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

6


We have reclassified, combined or separately disclosed certain amounts in the prior years’ condensed consolidated financial statements and accompanying footnotes to conform with the current period’s presentation, including discontinued operations (see Note 4) and the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)  (see Notes 2 and 3).

Note 2 – New Accounting Pronouncements
 
Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires the recognition of lease liabilities, representing future minimum lease payments, on a discounted basis, and corresponding right-of-use assets on a balance sheet for most leases, along with requirements for enhanced disclosures to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU 2018-10 and 2018-11 which permit application of the new guidance at the beginning of the year of adoption, recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. The ASU is effective for us on March 1, 2019. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

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

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU is effective for us on March 1, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures.  The ASU is effective for us on March 1, 2020, and interim periods within those fiscal years. Early adoption is permitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

Adopted

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income  (Topic 220).  The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.  Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements


7


In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting (Topic 718).  This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

In January 2017, the FASB, issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  This guidance provides for a single-step quantitative test to identify and measure impairment, requiring an entity to recognize an impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value.  Adoption of this guidance in the first quarter of fiscal 2018 did not have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra–Entity Asset Transfers of Assets Other Than Inventory (Topic 740).  ASU 2016-16 amends accounting guidance for intra-entity transfers of assets other than inventory to require the recognition of taxes when the transfer occurs.  The amendment was effective for us on March 1, 2018.  A modified retrospective approach is required for transition to the new guidance, with a cumulative-effect adjustment consisting of the net impact from (1) the write-off of any unamortized expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any valuation allowance.  The new guidance does not include any specific new disclosure requirements.  Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a framework for revenue recognition that replaces most existing GAAP revenue recognition guidance.  We adopted the guidance in the first quarter of fiscal 2019. See Note 3 for a further discussion regarding the impact of adoption of this guidance on our consolidated financial statements.

Note 3 – Revenue Recognition

We adopted the provisions of ASU 2014-9 in the first quarter of fiscal 2019, and we elected to adopt the standard using the retrospective method. 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. 

Our revenue is primarily generated from the sale of non-customized consumer products to customers. Revenue is recognized when control of, and title to, the product sold transfers to the customer. Therefore, the timing and amount of revenue recognized was not materially impacted by the new guidance. We have thus concluded that the adoption of the guidance did not have a material impact on our consolidated financial statements. The provisions of the new guidance did however impact the classification of certain consideration paid to our customers. We therefore, have reclassified an immaterial amount of such payments from SG&A to a reduction of net sales revenue for all periods presented. Also, in accordance with the guidance, we reclassified an immaterial amount of estimated sales returns from a reduction of receivables to accrued expenses and other current liabilities for all periods presented.  We elected to adopt the guidance using the full retrospective method. 

We measure revenue as the amount of consideration for which we expect to be entitled, in exchange for transferring goods.  Certain customers may receive cash incentives such as customer discounts (including volume or trade discounts), advertising discounts and other customer-related programs which are accounted for as variable consideration.  In some cases, we apply judgment, such as contractual

8


rates and historical payment trends, when estimating variable consideration.  In accordance with the guidance, most variable consideration is classified as a reduction to net sales.

Sales taxes and other similar taxes are excluded from revenue.  We elected to account for shipping and handling activities as a fulfillment cost as permitted by the guidance.  We do not have unsatisfied performance obligations since our performance obligations are satisfied at a single point in time.

The effect of the adoption of ASU 2014-9 on the condensed consolidated financial statements from continuing operations is as follows:

(in thousands)
Before Reclassification
 
 
 
After Reclassification
Balance Sheet 
February 28, 2018
 
Reclassification
 
February 28, 2018
Receivables  
$
273,168

 
$
2,397

 
$
275,565

Accrued expenses and other current liabilities 
$
165,864

 
$
2,397

 
$
168,261

(in thousands)
Before Reclassification
 
 
 
After Reclassification
Statement of Income 
Three Months Ended November 30, 2017
 
Reclassification
 
Three Months Ended November 30, 2017
Sales revenue, net
$
423,709

 
$
(2,868
)
 
$
420,841

SG&A 
$
112,501

 
$
(2,868
)
 
$
109,633

(in thousands)
Before Reclassification
 
 
 
After Reclassification
Statement of Income 
Nine Months Ended November 30, 2017
 
Reclassification
 
Nine Months Ended November 30, 2017
Sales revenue, net 
$
1,098,900

 
$
(7,619
)
 
$
1,091,281

SG&A 
$
318,009

 
$
(7,619
)
 
$
310,390


Note 4 – Discontinued Operations

In December 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries ("Healthy Directions") to Direct Digital, LLC. The purchase price from the sale was comprised of $46.0 million in cash, which was paid at closing, and a supplemental payment with a target value of $25.0 million, payable on or before August 1, 2019.  The final amount of the supplemental payment has been adjusted based on a settlement with respect to the calculation of the performance of Healthy Directions through February 28, 2018.  During the third quarter of fiscal 2019, we reduced the estimated value of the supplemental payment to $10.8 million and recorded a corresponding pre-tax charge of $5.8 million ($4.4 million after tax) to discontinued operations. Also, during the third quarter of fiscal 2019, we recorded an additional charge of $0.5 million (before and after tax) to discontinued operations, resulting from the resolution of certain contingencies. In conjunction with the sale of the business, we have agreed to provide certain transition services for up to an eighteen-month period following the closing of the transaction.

There were no balance sheet amounts related to discontinued operations for either period presented. The results of operations associated with discontinued operations are presented in the following table:

9


 
Three Months Ended November 30,
 
Nine Months Ended November 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Sales revenue, net
$

 
$
29,337

 
$

 
$
92,213

Cost of goods sold

 
8,568

 

 
26,860

Gross profit


20,769

 

 
65,353

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

 
21,394

 

 
69,324

Asset impairment charges (1)

 
82,227

 

 
132,297

Restructuring charges

 
118

 

 
118

Operating loss


(82,970
)
 

 
(136,386
)
 
 
 
 
 
 
 
 
Gain (loss) on sale before income tax (2)
(6,325
)
 

 
(6,809
)
 

Interest expense

 
(114
)
 

 
(343
)
Loss before income tax
(6,325
)
 
(83,084
)
 
(6,809
)
 
(136,729
)
 
 
 
 
 
 
 
 
Income tax benefit (expense)
1,475

 
(5,976
)
 
1,578

 
590

Loss from discontinued operations
$
(4,850
)

$
(89,060
)
 
$
(5,231
)
 
$
(136,139
)
 
 
 
 
 
 
 
 

(1)
Included pre-tax non-cash asset impairment charges consisting of $70.6 million to goodwill and $11.6 million to indefinite-lived brand assets for the three months ended November 30, 2017. Included pre-tax non-cash asset impairment charges consisting of $96.6 million to goodwill and $35.7 million to indefinite-lived brand assets for the nine months ended November 30, 2017.

(2)
Includes adjustments recorded during fiscal 2019 to the initial estimated gain on sale before income tax recorded in the fourth quarter of fiscal 2018.
               
Note 5 – Supplemental Balance Sheet Information

PROPERTY AND EQUIPMENT
(in thousands)
Estimated
Useful Lives
(Years)
 
November 30, 2018
 
February 28, 2018
Land
 
-
 
 
$
12,644

 
$
12,800

Building and improvements
3
-
40
 
104,227

 
106,870

Computer, software, furniture and other equipment
3
-
15
 
81,038

 
79,657

Tools, molds and other production equipment
1
-
10
 
36,471

 
33,466

Construction in progress
 
-
 
 
19,162

 
5,912

Property and equipment, gross
 
 
 
 
253,542


238,705

Less accumulated depreciation
 
 
 
 
(122,602
)
 
(115,202
)
Property and equipment, net
 
 
 
 
$
130,940


$
123,503

 
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 
(in thousands)
November 30, 2018
 
February 28, 2018
Accrued compensation, benefits and payroll taxes
$
32,196

 
$
37,666

Accrued sales discounts and allowances
34,134

 
28,311

Accrued sales returns
27,391

 
24,842

Accrued advertising
31,449

 
25,324

Accrued legal fees and settlements
2,162

 
17,243

Other
56,905

 
34,875

Total accrued expenses and other current liabilities
$
184,237

 
$
168,261

  
Note 6 – Goodwill and Intangible Assets

We perform annual impairment tests each fiscal year during the fourth quarter and interim impairment tests, if and when necessary.


10


During the first quarter of fiscal 2018, we performed interim impairment testing for a certain brand in our Beauty segment due to a revised financial projection. As a result of our testing, we recorded a pre-tax non-cash asset impairment charge of $4.0 million ($3.6 million after tax). The following table summarizes the carrying amounts and accumulated amortization for all intangible assets by segment as of the end of the periods presented:
 
November 30, 2018
 
February 28, 2018
(in thousands)
Gross
Carrying
Amount
 
Cumulative
Goodwill
Impairments
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Cumulative
Goodwill
Impairments
 
Accumulated
Amortization
 
Net Book
Value
Housewares:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Goodwill
$
282,056

 
$

 
$

 
$
282,056

 
$
282,056

 
$

 
$

 
$
282,056

Trademarks - indefinite
134,200

 

 

 
134,200

 
134,200

 

 

 
134,200

Other intangibles - finite
41,284

 

 
(18,915
)
 
22,369

 
40,828

 

 
(17,530
)
 
23,298

Subtotal
457,540




(18,915
)

438,625


457,084




(17,530
)

439,554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Health & Home:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Goodwill
284,913

 

 

 
284,913

 
284,913

 

 

 
284,913

Trademarks - indefinite
54,000

 

 

 
54,000

 
54,000

 

 

 
54,000

Licenses - finite
17,050

 

 
(15,315
)
 
1,735

 
15,300

 

 
(15,300
)
 

Licenses - indefinite
7,400

 

 

 
7,400

 
7,400

 

 

 
7,400

Other intangibles - finite
117,763

 

 
(85,243
)
 
32,520

 
117,586

 

 
(77,128
)
 
40,458

Subtotal
481,126




(100,558
)

380,568


479,199




(92,428
)

386,771

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beauty:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Goodwill
81,841

 
(46,490
)
 

 
35,351

 
81,841

 
(46,490
)
 

 
35,351

Trademarks - indefinite
30,407

 

 

 
30,407

 
30,407

 

 

 
30,407

Trademarks - finite
150

 

 
(101
)
 
49

 
150

 

 
(97
)
 
53

Licenses - indefinite
10,300

 

 

 
10,300

 
10,300

 

 

 
10,300

Licenses - finite
13,696

 

 
(12,403
)
 
1,293

 
13,696

 

 
(12,166
)
 
1,530

Other intangibles - finite
46,402

 

 
(46,110
)
 
292

 
46,402

 

 
(45,133
)
 
1,269

Subtotal
182,796


(46,490
)

(58,614
)

77,692


182,796


(46,490
)

(57,396
)

78,910

Total
$
1,121,462


$
(46,490
)

$
(178,087
)

$
896,885


$
1,119,079


$
(46,490
)

$
(167,354
)

$
905,235

 
The following table summarizes the amortization expense attributable to intangible assets recorded in SG&A in the condensed consolidated statements of income for the periods shown below, as well as our estimated amortization expense for fiscal 2019 through 2024:
Aggregate Amortization Expense 
 
For the three months ended (in thousands)
November 30, 2018
$
3,300

November 30, 2017
4,660


Aggregate Amortization Expense 
 
For the nine months ended (in thousands)
November 30, 2018
$
10,822

November 30, 2017
14,198


Estimated Amortization Expense (in thousands)
 
Fiscal 2019
$
14,110

Fiscal 2020
13,127

Fiscal 2021
10,459

Fiscal 2022
4,047

Fiscal 2023
3,975

Fiscal 2024
3,664



11



Note 7 – Share-Based Compensation Plans

We have equity awards outstanding under several share-based compensation plans. During the three- and nine-months ended November 30, 2018, we had the following share-based compensation activity:

We issued 1,160 and 3,897 shares to non-employee Board members with a total grant date fair value of $0.1 and $0.3 million, respectively, and share prices of $120.70 and $100.08, respectively.

We granted time-vested restricted stock units ("RSUs") that may be settled for 77,834 and 149,632 shares of common stock, respectively. The RSU grants have a weighted average grant price of $125.44 and $106.67 per share, respectively, for a total award fair value at date of grant of $9.8 million and $16.0 million, respectively.

There were no performance-based restricted stock units ("PSUs") granted during the three months ended November 30, 2018. For the nine-months ended November 30, 2018, we granted PSUs that may be settled for 76,064 shares of common stock with a weighted average grant price of $86.24 per share and a total award fair value at date of grant of $6.6 million.

RSUs for 875 and 37,942 shares vested and settled, respectively, with a total fair value at settlement of $0.1 and $3.4 million and a weighted average grant price of $126.99 and $89.55 per share, respectively.  

PSUs for 2,213 and 102,617 shares vested and settled, respectively, with a total grant date fair value of $0.3 and $9.4 million, and a weighted average grant price of $126.94 and $91.88 per share, respectively.

Employees exercised stock options to purchase 9,584 and 120,768 shares of common stock, respectively.

The Helen of Troy Limited 2008 Employee Stock Purchase Plan (“2008 ESPP”) became effective on September 1, 2008, and expired by its terms on September 1, 2018. On August 22, 2018, our shareholders approved the 2018 Employee Stock Purchase Plan (the "2018 ESPP"). The aggregate number of shares of common stock that may be purchased under the 2018 ESPP will not exceed 750,000 shares. Under the terms of the plan, employees may authorize the withholding of up to 15% of their wages or salaries to purchase our shares of common stock, not to exceed $25,000 of the fair market value of such shares for any calendar year. The purchase price for shares acquired under the 2018 ESPP is equal to the lower of 85% of the share's fair market value on either the first day of each option period or the last day of each period. The plan will expire by its terms on September 1, 2028. Shares of common stock purchased under the 2018 ESPP vest immediately at the time of purchase. Accordingly, the fair value award associated with their discounted purchase price is expensed at the time of purchase. For the three months ended November 30, 2018, employees purchased 14,222 shares under the 2018 ESPP.

The Helen of Troy Limited 2008 Stock Incentive Plan (“2008 Stock Incentive Plan”) and the 2008 Non-Employee Directors Stock Incentive Plan ("2008 Directors' Plan") became effective on August 19, 2008, and expired by their terms on August 19, 2018. On August 22, 2018, our shareholders approved the 2018 Stock Incentive Plan (the “2018 Plan”). The 2018 Plan permits the granting of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The aggregate number of shares for issuance under the 2018 Plan will not exceed 2,000,000 shares. As of November 30, 2018, there were 1,922,806 shares remaining for issuance under the 2018 Plan.

12



We recorded the following share-based compensation expense in SG&A for the periods shown below: 
 
Three Months Ended November 30,
(in thousands, except per share data)
2018
 
2017
Stock options
$
128

 
$
327

Directors stock compensation
200

 
175

Performance based and other stock awards
5,419

 
3,939

Employee stock purchase plan
329

 

Share-based compensation expense
6,076


4,441

Less income tax benefits
(398
)
 
(781
)
Share-based compensation expense, net of income tax benefits
$
5,678


$
3,660

 
 
 
 
Impact of share-based compensation on earnings per share from continuing operations:
 
 
 
Basic
$
0.22

 
$
0.13

Diluted
$
0.22

 
$
0.13


 
Nine Months Ended November 30,
(in thousands, except per share data)
2018
 
2017
Stock options
$
655

 
$
1,289

Directors stock compensation
550

 
575

Performance based and other stock awards
15,337

 
8,664

Employee stock purchase plan
651

 
263

Share-based compensation expense
17,193

 
10,791

Less income tax benefits
(1,009
)
 
(1,862
)
Share-based compensation expense, net of income tax benefits
$
16,184

 
$
8,929

 
 
 
 
Impact of share-based compensation on earnings per share from continuing operations:
 
 
 
Basic
$
0.61

 
$
0.33

Diluted
$
0.61

 
$
0.33


Note 8 – Repurchase of Helen of Troy Common Stock

On May 10, 2017, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock.  The authorization is effective for a period of three years and replaced our existing repurchase authorization, of which approximately $82 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities.  As of November 30, 2018, our repurchase authorization allowed for the purchase of $185.6 million of common stock. 

Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants.  In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the equity holder can be paid for by having the equity holder tender back to the Company a number of shares at fair value equal to the amounts due.  Net exercises are treated as purchases and retirements of shares.


13


The following table summarizes our share repurchase activity for the periods shown:
 
Three Months Ended November 30,
 
Nine Months Ended November 30,
(in thousands, except share and per share data)
2018
2017
 
2018
2017
Common stock repurchased on the open market:
 
 
 
 
 
Number of shares
813,696

311,100

 
1,220,721

311,100

Aggregate value of shares
$
100,000

$
29,158

 
$
137,067

$
29,158

Average price per share
$
122.90

$
93.72

 
$
112.28

$
93.72

 
 
 
 
 
 
Common stock received in connection with share-based compensation:
 

 
 
 
Number of shares
1,398

299

 
58,470

72,864

Aggregate value of shares
$
175

$
27

 
$
5,348

$
7,000

Average price per share
$
125.03

$
91.94

 
$
91.47

$
96.07


Note 9 – Restructuring Plan

In October 2017, we announced that we had approved a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance of primarily the Beauty and former Nutritional Supplements segments. Project Refuel includes a reduction-in-force and the elimination of certain contracts and operating expenses.  During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure.  We are targeting total annualized profit improvements of approximately $8.0 to $10.0 million over the duration of the plan.  We estimate the plan will be completed by the first quarter of fiscal 2020, and expect to incur total restructuring charges in the range of approximately $5.0 to $5.5 million during the period of the plan. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically.

Restructuring charges for the three months ended November 30, 2018 were not meaningful. We incurred $2.6 million of pre-tax restructuring charges during the nine months ended November 30, 2018, related primarily to employee severance and termination benefits. These charges were primarily related to our Beauty segment and shared service supply chain initiatives.  Our program to date has incurred $4.5 million of pre-tax restructuring costs related to employee severance and termination benefits and contract termination costs. 

During the three and nine months ended November 30, 2018, we made cash restructuring payments of $0.9 and $2.5 million, respectively. We had a remaining liability of $0.8 million as of November 30, 2018.

During the three and nine months ended November 30, 2017, we incurred $1.2 million of pre-tax restructuring costs related to employee severance and termination benefits for our Beauty segment.

Note 10 – Commitments and Contingencies

Thermometer Patent Litigation –  In January 2016, a jury ruled against us in a case that involved claims by Exergen Corporation.  The case involved the alleged patent infringement related to two forehead thermometer models sold by our subsidiary, Kaz USA, Inc., in the United States.  As a result of the jury verdict, we recorded a charge in fiscal 2016 including legal fees and other related expenses, of $17.8 million (before and after tax).  In June 2016, certain post-trial motions were concluded with Exergen Corporation being awarded an additional $1.5 million of pre-judgment compensation. We accrued this additional amount in May 2016.  In July 2016, we appealed the judgment to the United States Court of Appeals for the Federal Circuit.  In March 2018, the Federal Circuit issued a decision, which reversed the district court’s verdict of infringement of one of the two patents at issue and remanded the damage award for a determination by the district court of the impact the reversal of infringement has on the damage award.  Following the remand, we entered into a settlement agreement, filed a Stipulation of Dismissal with Prejudice and made a settlement payment of $15.0 million on May 31, 2018. 

14


Other Matters – 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. Notes 5, 11, 12 and 13 to these condensed consolidated financial statements provide additional information regarding certain of our significant commitments and contingencies.

Note 11 – Long-Term Debt

We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provided for an unsecured total revolving commitment of $1.0 billion as of November 30, 2018. The commitment under the Credit Agreement terminates on December 7, 2021. Borrowings accrue interest under one of two alternative methods as described in the Credit Agreement. With each borrowing against our credit line, we can elect the interest rate method based on our funding needs at the time.  We also incur loan commitment fees and letter of credit fees under the Credit Agreement.  Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis.  As of November 30, 2018, the outstanding revolving loan principal balance was $320.4 million (excluding prepaid financing fees) and the face amount of outstanding letters of credit was $9.0 million. For the three and nine months ended November 30, 2018, borrowings under the Credit Agreement incurred interest charges at rates ranging from 3.1% to 5.3% and 2.8% to 5.3%, respectively. For the three and nine months ended November 30, 2017, borrowings under the Credit Agreement incurred interest charges at rates ranging from 2.5% to 4.5% and 2.3% to 4.8%, respectively. As of November 30, 2018, the amount available for borrowings under the Credit Agreement was $670.6 million. Covenants in our debt agreements limit the amount of total indebtedness we can incur.  As of November 30, 2018, these covenants effectively limited our ability to incur more than $526.5 million of additional debt from all sources, including our Credit Agreement, or $670.6 million in the event a qualified acquisition is consummated.  The following table summarizes our long-term debt as of the end of the periods shown:
 
LONG-TERM DEBT
(in thousands)
Original
Date
Borrowed
 
Interest
Rates
 
Matures
 
November 30, 2018
 
February 28, 2018
Mississippi Business Finance Corporation Loan (the "MBFC Loan") (1)
03/13
 
Floating
 
03/23
 
$
22,331

 
$
24,219

Credit Agreement (2)
01/15
 
Floating
 
12/21
 
317,399

 
265,650

Total long-term debt
 
 
 
 
 
 
339,730

 
289,869

Less current maturities of long-term debt
 
 
 
 
 
 
(1,884
)
 
(1,884
)
Long-term debt, excluding current maturities
 
 
 
 
 
 
$
337,846

 
$
287,985


 
(1)
The MBFC Loan is unsecured with an original balance of $37.6 million and incurs floating interest based on applicable LIBOR plus a margin of up to 2.0%, or a Base Rate plus a margin of up to 1.0%, as determined by the interest rate elected and the Leverage Ratio. The loan is subject to holder’s call on or after March 1, 2018.  The loan can be prepaid without penalty.  The remaining principal balance is payable as follows: $1.9 million annually on March 1, 2019 through 2022; and $14.8 million on March 1, 2023.  Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.

(2)
Floating interest rates are hedged with an interest rate swap to effectively fix interest rates on $100 million of the outstanding principal balance under the Credit Agreement.  Notes 12 and 13 to these condensed consolidated financial statements provide additional information regarding the interest rate swap.

At November 30, 2018 and February 28, 2018, our long-term debt has floating interest rates, and its book value approximates its fair value. 

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

15


maximum leverage ratios, minimum interest coverage ratios and minimum consolidated net worth levels (as each of these terms is defined in the various agreements).  Our debt agreements also contain other customary covenants.  We were in compliance with the terms of these agreements as of November 30, 2018.
 
Note 12 – Fair Value 

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

Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2:
Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3:
Unobservable inputs that reflect the reporting entity’s own assumptions.

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

The following tables present the fair value of our financial assets and liabilities measured on a recurring basis as of the end of the periods shown:
 
Fair Values at
 
November 30, 2018
(in thousands)
(Level 2) (1)
Assets:
 

Money market accounts
$
646

Interest rate swap
2,553

Foreign currency contracts
4,057

Total assets
$
7,256

 
 

Liabilities:
 

Floating rate debt
$
339,730

Foreign currency contracts
64

Total liabilities
$
339,794

 
Fair Values at
 
February 28, 2018
(in thousands)
(Level 2) (1)
Assets:
 

Money market accounts
$
1,107

Interest rate swap
2,481

Foreign currency contracts
642

Total assets
$
4,230

 
 

Liabilities:
 

Floating rate debt
$
289,869

Foreign currency contracts
2,606

Total liabilities
$
292,475



16


(1)
Our financial assets and liabilities are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable.

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturity of these items.

We use derivatives for hedging purposes and our derivatives are primarily interest rate swaps, foreign currency contracts and cross-currency debt swaps.  See Notes 11 and 13 to these condensed consolidated financial statements for more information on our hedging activities.

We classify our floating rate debt as a Level 2 item because the estimation of the fair market value requires the use of a discount rate based upon current market rates of interest for obligations with comparable remaining terms.  Such comparable rates are considered significant other observable market inputs.  The book value of the floating rate debt approximates its fair value as of the reporting date.

Our other non-financial assets include goodwill and other intangible assets, which we classify as Level 3 items.  These assets are measured at fair value on a non-recurring basis as part of our impairment testing.  Note 6 to these condensed consolidated financial statements contains additional information related to intangible asset impairments.

Note 13 – Financial Instruments and Risk Management

Foreign Currency Risk - Our functional currency is the U.S. Dollar.  By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”).  Such transactions include sales, certain inventory purchases and operating expenses.  As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies.  During the three and nine months ended November 30, 2018 and 2017, approximately 13% of our net sales revenue was in foreign currencies, respectively. These sales were primarily denominated in Euros, Canadian Dollars, British Pounds, and Mexican Pesos.

In our condensed consolidated 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 are recognized in SG&A.  During the three and nine months ended November 30, 2018, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps of $0.3 million and $(0.8) million, respectively, in SG&A, and $0.0 million and $0.5 million, respectively, in income tax expense. For the three and nine months ended November 30, 2017, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $(2.2) million and $(1.5) million, respectively, in SG&A and $(0.1) million and $(0.7) million, respectively, in income tax expense.

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

Interest Rate Risk - Interest on our outstanding debt as of November 30, 2018 is based on floating interest rates.  If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. Floating interest rates are hedged with an interest rate swap

17


to effectively fix interest rates on $100.0 million of the outstanding principal balance under the Credit Agreement, which totaled $320.4 million (excluding prepaid finance fees) as of November 30, 2018.

The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:
(in thousands)
November 30, 2018

Derivatives designated as hedging instruments
Hedge Type
 
Final
Settlement Date
 
Notional Amount
 
Prepaid
Expenses
and Other
Current Assets
 
Other Assets
 
Accrued
Expenses
and Other
Current Liabilities
 
Other
Liabilities, Non-current
Foreign currency contracts - sell Euro
Cash flow
 
11/2019
 
20,500

 
$
1,759

 
$

 
$

 
$

Foreign currency contracts - sell Canadian Dollars
Cash flow
 
01/2020
 
$
16,000

 
477

 
26

 

 

Foreign currency contracts - sell Pounds
Cash flow
 
02/2020
 
£
18,500

 
1,490

 
81

 

 

Foreign currency contracts - sell Mexican Pesos
Cash flow
 
09/2019
 
$
40,000

 
39

 

 

 

Interest rate swap
Cash flow
 
12/2021
 
$
100,000

 
901

 
1,652

 

 

Subtotal
 
 
 
 
 
 
4,666

 
1,759

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated under hedge accounting
 
 
 
 
 

 
 

 
 

 
 

 
 

Foreign currency contracts - cross-currency debt swap - Euro
(1)
 
04/2020
 
$
5,280

 

 
185

 

 

Foreign currency contracts - cross-currency debt swaps - Pound
(1)
 
04/2020
 
$
6,395

 

 

 

 
64

Subtotal
 
 
 
 
 
 

 
185

 

 
64

Total fair value
 
 
 
 
 
 
$
4,666


$
1,944


$


$
64

(in thousands)
February 28, 2018

Derivatives designated as hedging instruments
Hedge Type
 
Final
Settlement Date
 
Notional Amount
 
Prepaid
Expenses
and Other
Current Assets
 
Other Assets
 
Accrued
Expenses
and Other
Current Liabilities
 
Other
Liabilities, Non-current
Foreign currency contracts - sell Euro
Cash flow
 
07/2019
 
38,000

 
$

 
$
102

 
$
1,320

 
$

Foreign currency contracts - sell Canadian Dollars
Cash flow
 
06/2019
 
$
27,750

 
378

 
101

 

 

Foreign currency contracts - sell Pounds
Cash flow
 
04/2019
 
£
19,500

 

 
56

 
513

 

Foreign currency contracts - sell Mexican Pesos
Cash flow
 
05/2018
 
$
20,000

 
5

 

 

 

Interest rate swap
Cash flow
 
12/2021
 
$
100,000

 
539

 
1,942

 

 

Subtotal
 
 
 
 
 
 
922

 
2,201

 
1,833

 

Derivatives not designated under hedge accounting
 
 
 
 
 

 
 

 
 

 
 

 
 

Foreign currency contracts - cross-currency debt swap - Euro
(1)
 
04/2020
 
$
5,280

 

 

 

 
208

Foreign currency contracts - cross-currency debt swaps - Pound
(1)
 
04/2020
 
$
6,395

 

 

 

 
565

Subtotal
 
 
 
 
 
 






773

Total fair value
 
 
 
 
 
 
$
922


$
2,201


$
1,833


$
773


(1)
These are foreign currency contracts for which we have not elected hedge accounting.  We refer to them as “cross-currency debt swaps”. They, in effect, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements. 

The following table summarizes the pre-tax effect of derivative instruments for the periods shown:
 
Three Months Ended November 30,
 
Gain (Loss)
Recognized in OCI
(effective portion)
 
Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income (Loss) into Income
 
Gain (Loss) Recognized
As Income
(in thousands)
2018
 
2017
 
Location
 
2018
 
2017
 
Location
 
2018
 
2017
Currency contracts - cash flow hedges
$
(563
)
 
$
2,928

 
SG&A
 
$
(1,178
)
 
$
1,328

 
 
 
$

 
$

Interest rate swaps - cash flow hedges
(4
)
 
753

 
Interest expense
 

 

 
Interest expense
 
136

 
(48
)
Cross-currency debt swaps - principal

 

 
 
 

 

 
SG&A
 
228

 
(419
)
Cross-currency debt swaps - interest

 

 
 
 

 

 
Interest Expense
 
73

 
74

Total
$
(567
)
 
$
3,681

 
 
 
$
(1,178
)
 
$
1,328

 
 
 
$
437

 
$
(393
)


18


 
Nine Months Ended November 30,
 
Gain (Loss)
Recognized in OCI
(effective portion)
 
Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Income (Loss) into Income
 
Gain (Loss) Recognized
As Income
(in thousands)
2018
 
2017
 
Location
 
2018
 
2017
 
Location
 
2018