10-Q 1 form_10q_3qtrfy15.htm FORM 10-Q - 3QTRFY15 (MAR 31, 2015)

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

FORM 10-Q

(Mark One)

[x]

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

 

For the quarterly period ended March 31, 2015

 

[  ]

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 1-6370

ELIZABETH ARDEN, INC.

(Exact name of registrant as specified in its charter)

Florida

        

59-0914138

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
Identification No.)

2400 S.W. 145 Avenue, Miramar, Florida

 

33027

(Address of principal executive offices)

 

(Zip Code)

(954) 364-6900

(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 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 (ss.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  [X]      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

[X]

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  [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
May 4, 2015

Common Stock, $.01 par value per share

 

29,811,655


ELIZABETH ARDEN, INC.

INDEX TO FORM 10-Q

PART I

 

FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

 

Page No.

 

 

Unaudited Consolidated Balance Sheets -- March 31, 2015 and June 30, 2014

 

3

 

 

 

 

Unaudited Consolidated Statements of Operations -- Three and nine months ended March 31, 2015 and March 31, 2014

 

4

 

 

   

Unaudited Consolidated Statements of Comprehensive (Loss) Income -- Three and nine months ended March 31, 2015 and March 31, 2014

 

5

 

 

 

 

Unaudited Consolidated Statement of Shareholders' Equity -- Nine months ended
March 31, 2015

 

6

 

 

 

 

Unaudited Consolidated Statements of Cash Flow -- Nine months ended March 31, 2015 and March 31, 2014

 

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

Item 2.

 

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

 

26

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

Item 4.

 

Controls and Procedures

 

47

 

 

 

   

PART II

 

OTHER INFORMATION

   

 

 

Item 1A.

 

Risk Factors

 

48

 

 

Item 6.

 

Exhibits

 

48

 

 

Signatures

 

51

 

 

Exhibit Index

 

52

- 2 -


PART I      FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Amounts in thousands, except shares and par value)

   

As of

   

   

March 31,
2015

   

June 30,
2014

   

ASSETS

                 

Current Assets

                 
 

Cash and cash equivalents

 

$

91,817

   

$

56,308

   
 

Accounts receivable, net

   

131,436

     

160,806

   
 

Inventories

   

268,183

     

338,826

   
 

Deferred income taxes

   

2,049

     

3,742

   
 

Prepaid expenses and other assets

   

31,900

     

48,076

   

   

Total current assets

   

525,385

     

607,758

   

Property and equipment, net

   

107,249

     

116,806

   

Exclusive brand licenses, trademarks and intangibles, net

   

227,180

     

275,004

   

Goodwill

   

31,607

     

31,607

   

Debt financing costs, net

   

7,754

     

7,225

   

Deferred income taxes

   

5,772

     

5,213

   

Other

   

17,186

     

18,040

   

   

Total assets

 

$

922,133

   

$

1,061,653

   

LIABILITIES AND SHAREHOLDERS' EQUITY

                 

Current Liabilities

                 
 

Short-term debt

 

$

64,000

   

$

80,418

   
 

Accounts payable - trade

   

54,910

     

81,660

   
 

Other payables and accrued expenses

   

95,040

     

111,953

   

   

Total current liabilities

   

213,950

     

274,031

   

Long-term Liabilities

                 
 

Long-term debt

   

355,833

     

356,432

   
 

Deferred income taxes and other liabilities

   

57,615

     

54,648

   

   

Total long-term liabilities

   

413,448

     

411,080

   

   

Total liabilities

   

627,398

     

685,111

   

Redeemable noncontrolling interest (See Note 5)

   

4,139

     

5,553

   

Commitments and contingencies (See Note 11)

                 

Redeemable Series A Serial Preferred Stock, $0.01 par value

                 

50,000 shares authorized: 50,000 shares issued and outstanding

   

50,000

     

--

   

Shareholders' Equity

                 
 

Common stock, $.01 par value, 50,000,000 shares authorized; 34,652,963 and
   34,599,106 shares issued, respectively

   

347

     

346

   
 

Additional paid-in capital

   

374,201

     

356,260

   
 

(Accumulated deficit) retained earnings

   

(25,298

)

   

112,337

   
 

Treasury stock (4,841,308 shares at cost)

   

(93,169

)

   

(93,169

)

 
 

Accumulated other comprehensive loss

   

(15,557

)

   

(4,785

)

 

   

Total Elizabeth Arden shareholders' equity

   

240,524

     

370,989

   
   

Noncontrolling interest (See Note 5)

   

72

     

--

   

   

Total shareholders' equity

   

240,596

     

370,989

   

Total liabilities, redeemable noncontrolling interest, redeemable preferred stock
   and shareholders' equity

$

922,133

$

1,061,653

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 3 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

Three Months Ended

Nine Months Ended

March 31,
2015

March 31,
2014

March 31,
2015

March 31,
2014

Net sales

$

191,653

$

210,841

$

795,638

$

972,587

Cost of goods sold:

    Cost of sales

110,058

119,205

460,146

538,115

    Depreciation related to cost of goods sold

1,957

1,967

5,916

5,784

        Total cost of goods sold

112,015

121,172

466,062

543,899

Gross profit

79,638

89,669

329,576

428,688

Operating expenses:

    Selling, general and administrative

97,463

107,338

391,533

365,713

    Depreciation and amortization

9,547

11,286

31,055

33,122

        Total operating expenses

107,010

118,624

422,588

398,835

(Loss) income from operations

(27,372

)

(28,955

)

(93,012

)

29,853

Other expense

    Interest expense, net

7,055

6,605

22,523

18,371

    Debt extinguishment charges

--

--

239

--

        Other expense, net

7,055

6,605

22,762

18,371

(Loss) income before income taxes

(34,427

)

(35,560

)

(115,774

)

11,482

Provision for (benefit from) income taxes

500

(8,626

)

1,557

2,172

Net (loss) income

(34,927

)

(26,934

)

(117,331

)

9,310

Net loss attributable to noncontrolling interests
   (See Note 5)

(481

)

(491

)

(1,396

)

(897

)

Net (loss) income attributable to Elizabeth
   Arden shareholders

(34,446

)

(26,443

)

(115,935

)

10,207

Less: Accretion and dividends on preferred
   stock (See Note 12)

615

--

21,700

--

Net (loss) income attributable to Elizabeth
   Arden common shareholders

$

(35,061

)

$

(26,443

)

$

(137,635

)

$

10,207

Net (loss) income per common share
   attributable to Elizabeth Arden common
   shareholders:

    Basic

$

(1.18

)

$

(0.89

)

$

(4.62

)

$

0.34

    Diluted

$

(1.18

)

$

(0.89

)

$

(4.62

)

$

0.34

Weighted average number of common shares:

    Basic

29,812

29,697

29,801

29,664

    Diluted

29,812

29,697

29,801

30,173

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 4 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(Amounts in thousands)

Three Months Ended

Nine Months Ended

March 31,
2015

March 31,
2014

March 31,
2015

March 31,
2014

Net (loss) income

$

(34,927

)

$

(26,934

)

$

(117,331

)

$

9,310

Other comprehensive (loss) income, net of tax:

                               

    Foreign currency translation adjustments (1)

   

(5,343

)

   

959

     

(14,860

)

   

1,066

 

    Net unrealized cash flow hedging gain (loss) (2)

   

783

     

(371

)

   

4,088

     

(2,278

)

Total other comprehensive loss (income), net of tax

   

(4,560

)

   

588

     

(10,772

)

   

(1,212

)

Comprehensive (loss) income

   

(39,487

)

   

(26,346

)

   

(128,103

)

   

8,098

 

Net loss attributable to noncontrolling interests

   

(481

)

   

(491

)

   

(1,396

)

   

(897

)

Comprehensive (loss) income attributable to
   Elizabeth Arden shareholders

$

(39,006

)

$

(25,855

)

$

(126,707

)

$

8,995

                                 

(1)

Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.

(2)

Net of tax expense of $75 for the three months ended March 31, 2015, and net of tax benefit of $187 for the three months ended March 31, 2014. Net of tax expense of $698 for the nine months ended March 31, 2015, and net of tax benefit of $251 for the nine months ended March 31, 2014.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 5 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

(Amounts in thousands)

 

Common Stock

   

Additional
Paid-In

   

Retained

Earnings
(Accumulated
Deficit)

   

Treasury Stock

   

Accumulated
Other
Comprehensive

   

Total
Elizabeth
Arden
Shareholders'

   

Noncontrolling

   

Total
Shareholders

 
 

Shares

   

Amount

   

Capital

       

Shares

   

Amount

   

Income(Loss)

   

Equity

   

Interest

   

Equity

 

Balance as of July 1, 2014

34,599

   

$

346

   

$

356,260

   

$

112,337

   

(4,841

)

 

$

(93,169

)

 

$

(4,785

)

 

$

370,989

   

$

--

   

$

370,989

 
                                                                           

Issuance of restricted stock, net of forfeitures
   and tax withholdings

54

     

1

     

(384

)

   

--

   

--

     

--

     

--

     

(383

)

   

--

     

(383

)

                                                                           

Amortization of share-based awards

--

     

--

     

4,027

     

--

   

--

     

--

     

--

     

4,027

     

--

     

4,027

 
                                                                           

Issuance of warrants to purchase common stock

--

     

--

     

14,144

     

--

   

--

     

--

     

--

     

14,144

     

--

     

14,144

 
                                                                           

Excess tax benefit from share-based awards

--

     

--

     

154

     

--

   

--

     

--

     

--

     

154

     

--

     

154

 
                                                                           

Net (loss) income (1)

--

     

--

     

--

     

(115,935

)

 

--

     

--

     

--

     

(115,935

)

   

17

     

(115,9188

)

                                                                           

Noncontrolling interest contribution at startup

--

     

--

     

--

     

--

   

--

     

--

     

--

     

--

     

55

     

55

 
                                                                           

Preferred stock accretion to redemption value

--

     

--

     

--

     

(20,151

)

 

--

     

--

     

--

     

(20,151

)

   

--

     

(20,151

)

                                                                           

Preferred stock dividends

--

     

--

     

--

     

(1,549

)

 

--

     

--

     

--

     

(1,549

)

   

--

     

(1,549

)

                                                                           

Foreign currency translation adjustments

--

     

--

     

--

     

--

   

--

     

--

     

(14,860

)

   

(14,860

)

   

--

     

(14,860

)

                                                                           

Net unrealized cash flow hedging gain

--

     

--

     

--

     

--

   

--

     

--

     

4,088

     

4,088

     

--

     

4,088

 

Balance as of March 31, 2015

34,653

   

$

347

   

$

374,201

   

$

(25,298

)

 

(4,841

)

 

$

(93,169

)

 

$

(15,557

)

 

$

240,524

     

72

   

$

240,596

 

(1)

Excludes the net loss for the redeemable noncontrolling interest which is recorded in the mezzanine section of the unaudited consolidated balance sheet. See Note 5.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 6 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(Dollars in thousands)

   

Nine Months Ended

 

   

March 31,
2015

   

March 31,
2014

 

Operating Activities:

               
 

Net (loss) income

 

$

(117,331

)

 

$

9,310

 
 

Adjustments to reconcile net (loss) income to net cash provided by (used in)
   operating activities:

               

Depreciation and amortization

36,971

38,906

 

Asset impairments

   

42,926

     

--

 
 

Amortization of senior note offering and credit facility costs

   

1,200

     

1,079

 
 

Amortization of senior note premium

   

(599

)

   

(127

)

 

Amortization of share-based awards

   

4,028

     

4,551

 
 

Debt extinguishment charges

   

239

     

--

 
 

Deferred income taxes

   

(51

)

   

(4,727

)

   Changes in assets and liabilities, net of acquisitions:

               
 

Decrease in accounts receivable

   

20,629

     

5,497

 
 

Decrease (increase) in inventories

   

64,911

     

(49,332

)

 

Decrease (increase) in prepaid expenses and other assets

   

16,344

     

(2,870

)

 

Decrease in accounts payable

   

(23,707

)

   

(24,206

)

 

Decrease in other payables, accrued expenses and other liabilities

   

(6,198

)

   

(14,085

)

Other

1,228

942

   

Net cash provided by (used in) operating activities

   

40,590

     

(35,062

)

Investing Activities:

               
 

Additions to property and equipment

   

(19,120

)

   

(37,028

)

 

Acquisition of businesses, intangibles and other assets

   

(6,264

)

   

(3,000

)

 

Cash received from consolidation of variable interest entity

   

55

     

574

 

   

Net cash used in investing activities

   

(25,329

)

   

(39,454

)

Financing Activities:

               
 

Payments on short-term debt

   

(16,418

)

   

(25,087

)

 

Proceeds from long-term debt

   

--

     

106,750

 
 

Proceeds from the issuance of preferred stock and warrants, net of issuance costs

   

43,993

     

--

 
 

Proceeds from the exercise of stock options

   

--

     

1,968

 
 

Financing fees paid

   

(1,959

)

   

(2,200

)

 

Preferred stock dividend

   

(487

)

   

--

 
 

Repurchase of common stock

   

--

     

(5,393

)

 

Proceeds from the issuance of common stock under the employee stock
   purchase plan

   

--

     

1,101

 
 

Payments of contingent consideration related to acquisition

   

--

     

(4,914

)

 

Payments to noncontrolling interests

   

--

     

(4,979

)

 

Payments under capital lease obligations

   

(88

)

   

(64

)

   

Net cash provided by financing activities

   

25,041

     

67,182

 

Effect of exchange rate changes on cash and cash equivalents

(4,793

)

(244

)

Net increase (decrease) in cash and cash equivalents

   

35,509

     

(7,578

)

Cash and cash equivalents at beginning of period

   

56,308

     

61,674

 

Cash and cash equivalents at end of period

 

$

91,817

   

$

54,096

 

Supplemental Disclosure of Non-Cash Information:

               

Additions to property and equipment not paid for (not included above)

$

1,652

$

1,384

Accretion on preferred stock (not included above)

$

20,151

$

--

Dividends on preferred stock not paid for (not included above)

$

1,062

$

--

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 7 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    BUSINESS AND BASIS OF PRESENTATION

          Elizabeth Arden, Inc. (the "Company" or "our") is a global prestige beauty products company that sells fragrances, skin care and cosmetic products to retailers in the United States and approximately 120 countries internationally.

          The unaudited consolidated financial statements include the accounts of the Company's wholly-owned domestic and international subsidiaries, as well as variable interest entities ("VIEs") of which the Company is the primary beneficiary in accordance with consolidation accounting guidance. See Note 5 for information on the consolidated VIEs. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission") for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statement presentation and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (the "2014 Annual Report"), filed with the Commission.

          The consolidated balance sheet of the Company as of June 30, 2014, is derived from the financial statements included in the 2014 Annual Report but does not include all disclosures required by accounting principles generally accepted in the United States. The other consolidated financial statements presented in this quarterly report are unaudited but include all adjustments that are of a normal recurring nature that management considers necessary for the fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of results for the full fiscal year.

          During the second quarter of fiscal 2015, the Company revised its forecast for its Canadian affiliate which is now projected to show a loss for fiscal 2015, in part due to the impact of the Company's 2014 Performance Improvement Plan described in Note 4 and to foreign exchange losses resulting from large fluctuations in currency conversion rates. Based on the projected cumulative taxable loss for the three fiscal years ending June 30, 2015, as well as the Company's consideration of the weight of positive and negative evidence, commencing with the second quarter of fiscal 2015, the Company has recorded valuation allowances against its Canadian deferred tax assets as a non-cash charge to income tax expense.

NOTE 2.    ACCUMULATED OTHER COMPREHENSIVE LOSS

          The Company's accumulated other comprehensive loss shown on the accompanying consolidated balance sheets consists of foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized gains (losses), net of taxes, related to the Company's foreign currency contracts.

          The components of accumulated other comprehensive loss were as follows:

(Amounts in thousands)

March 31,
2015

June 30,
2014

Cumulative foreign currency translation adjustments

$

(17,482

)

$

(2,622

)

Unrealized hedging gains (losses), net of taxes (1)

1,925

(2,163

)

Accumulated other comprehensive loss

$

(15,557

)

$

(4,785

)

(1)   Net of tax expense of $340 as of March 31, 2015 and net of tax benefit of $359 as of June 30, 2014.

NOTE 3.    NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ELIZABETH ARDEN COMMON SHAREHOLDERS

          Basic net (loss) income per share attributable to Elizabeth Arden common shareholders is computed by dividing the net (loss) income attributable to Elizabeth Arden common shareholders by the weighted average shares of the Company's outstanding common stock, $.01 par value per share ("Common Stock"). The calculation of net (loss) income attributable to Elizabeth Arden common shareholders per diluted share is similar to basic net (loss) income per share attributable to Elizabeth Arden common shareholders except that the denominator includes potentially dilutive Common Stock, such as stock options, non-vested restricted stock and restricted stock units, and warrants. For the three and nine months ended March 31, 2015 and the three months ended March 31, 2014, diluted net loss per share equals basic net loss per share as the assumed exercise of stock options, non-vested restricted stock units, and warrants would have an anti-dilutive effect.

- 8 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The following table represents the computation of net (loss) income per share attributable to Elizabeth Arden common shareholders:

(Amounts in thousands, except per
   share data)

 

Three Months Ended

   

Nine Months Ended

 

   

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Basic

                               
 

Net (loss) income attributable to Elizabeth Arden common shareholders

 

$

(35,061

)

 

$

(26,443

)

 

$

(137,635

)

 

$

10,207

 

 

Weighted average shares outstanding

   

29,812

     

29,697

     

29,801

     

29,664

 

 

Net (loss) income per basic share attributable
to Elizabeth Arden common shareholders

 

$

(1.18

)

 

$

(0.89

)

 

$

(4.62

)

 

$

0.34

 

Diluted

                               
 

Net (loss) income attributable to Elizabeth Arden common shareholders

 

$

(35,061

)

 

$

(26,443

)

 

$

(137,635

)

 

$

10,207

 

 

Weighted average shares outstanding

   

29,812

     

29,697

     

29,801

     

29,664

 

 

Potential common shares - treasury
   method

   

--

     

--

     

--

     

509

 

 

Weighted average shares and potential
   dilutive common shares

   

29,812

     

29,697

     

29,801

     

30,173

 

 

Net (loss) income per diluted share attributable to Elizabeth Arden common shareholders

 

$

(1.18

)

 

$

(0.89

)

 

$

(4.62

)

 

$

0.34

 

          The following table shows the number of common stock equivalents for the three and nine months ended March 31, 2015 and 2014 that were not included in the net (loss) income per diluted share attributable to Elizabeth Arden common shareholders calculation because to do so would have been anti-dilutive:

(Amounts in thousands)

 

Three Months Ended

   

Nine Months Ended

 

   

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Number of shares

   

3,564

     

665

     

3,275

     

104

 

NOTE 4.    2014 PERFORMANCE IMPROVEMENT PLAN

          The 2014 Performance Improvement Plan, approved by the Board of Directors on June 23, 2014, includes the exiting of certain unprofitable retail doors and fragrance license agreements, changes in customer, distribution and supply chain relationships, the discontinuation of certain products, the elimination of approximately 175 employee positions globally, and the closing of the Company's Puerto Rico affiliate. At June 30, 2014, the Company estimated that the 2014 Performance Improvement Plan would result in pre-tax charges beginning in the fourth fiscal quarter of 2014 and through fiscal 2015 of $65 million to $72 million. As a result of the Company's continuing reexamination of how it commercially executes its business, during the three months ended December 31, 2014, the Company made changes to its distribution strategy in China. Primarily as a result of this decision, in December 2014 the Company increased the range of estimated pre-tax charges to be incurred under the 2014 Performance Improvement Plan through fiscal 2015 and now expects the amounts to be between $92 million and $99 million.

          The current estimated pre-tax charges for the 2014 Performance Improvement Plan consist of:

 

(i)

approximately $35 million to $41 million for changes to the Company's distribution strategy in China, and for exit and contract termination costs related to the closing of the Company's Puerto Rico affiliate, the exiting of unprofitable doors and changes in customer, distribution and supply chain relationships;

- 9 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(ii)

approximately $12 million for employee severance and other related one-time costs (including those related to the closing of the Company's Puerto Rico affiliate); and

 

(iii)

approximately $45 million to $46 million related to asset impairments, including approximately $18 million to $19 million associated with intangible asset and inventory impairments and exit costs caused by the expiration, non-renewal or wind-down of fragrance license agreements, and $26 million associated with discontinuations of certain products, including $7.1 million related to certain Elizabeth Arden branded skincare and color products developed prior to the Elizabeth Arden brand repositioning.

          During the three and nine months ended March 31, 2015, we incurred approximately $0.2 million and $28.9 million, respectively, of pre-tax charges in connection with the 2014 Performance Improvement Plan. Since inception we have incurred approximately $84.8 million of pre-tax charges in connection with the 2014 Performance Improvement Plan. The pre-tax charges for the three and nine months ended March 31, 2015 and since inception consisted of the following:

Three Months Ended March 31, 2015:

                       

(Amounts in thousands)

 

Net Sales

   

Cost of
Goods
Sold

   

Selling,
General and
Administrative

   

Total

 

Returns and markdowns

 

$

(289

)

 

$

--

   

$

--

   

$

(289

)

Inventory write-downs

   

--

     

293

     

--

     

293

 

Asset impairments and related charges

   

--

     

--

     

(5

)

   

(5

)

Severance and other employee-related costs

   

--

     

--

     

97

     

97

 

Other

   

--

     

--

     

40

     

40

 

    Total

 

$

(289

)

 

$

293

   

$

132

   

$

136

 

Nine Months Ended March 31, 2015:

                       

(Amounts in thousands)

 

Net Sales

   

Cost of
Goods
Sold

   

Selling,
General and
Administrative

   

Total

 

Returns and markdowns

 

$

14,972

   

$

--

   

$

--

   

$

14,972

 

Inventory write-downs

   

--

     

4,873

     

--

     

4,873

 

Asset impairments and related charges

   

--

     

--

     

133

     

133

 

Severance and other employee-related costs

   

--

     

--

     

2,017

     

2,017

 

Other

   

--

     

--

     

6,875

     

6,875

 

    Total

 

$

14,972

   

$

4,873

   

$

9,025

   

$

28,870

 

Since Inception:

(Amounts in thousands)

 

Net Sales

   

Cost of
Goods
Sold

   

Selling,
General and
Administrative

   

Total

 

Returns and markdowns (1)

$

24,436

$

--

$

--

$

24,436

Inventory write-downs (2)

--

35,058

--

35,058

Asset impairments and related charges (3)

--

--

9,807

9,807

Severance and other employee-related costs (4)

--

--

8,060

8,060

Other(5)

--

--

7,401

7,401

    Total

$

24,436

$

35,058

$

25,268

$

84,762

(1)

Related to changes in the Company's distribution strategy in China, the closing of the Company's Puerto Rico affiliate, exiting of unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements.

(2)

Related to the expiration, non-renewal and wind-down of fragrance license agreements and discontinuation of certain products.

(3)

Related primarily to the non-renewal and expiration of fragrance license agreements.

- 10 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(4)

Severance and other employee-related costs associated with reduction in global headcount positions.

(5)

Consists primarily of transition expenses and customer and vendor contract termination costs.

          As of March 31, 2015, the related liability balance and activity for costs associated with the 2014 Performance Improvement Plan are as follows:

(Amounts in thousands)

 

Severance and
Other Employee-
Related Costs

   

Other

   

Total

 

Liability balance at June 30, 2014

$

5,427

$

531

$

5,958

Accruals (1)

   

1,151

     

2,163

     

3,314

 

Cash payments-First Quarter Fiscal 2015

   

(4,643

)

   

(2,694

)

   

(7,337

)

Liability balance at September 30, 2014

 

$

1,935

   

$

--

   

$

1,935

 

Accruals (1)

   

769

     

4,672

     

5,441

 

Cash payments-Second Quarter Fiscal 2015

   

(1,102

)

   

(2,026

)

   

(3,128

)

Liability balance at December 31, 2014

 

$

1,602

   

$

2,646

   

$

4,248

 

Accruals (1)

   

97

     

40

     

137

 

Cash payments-Third Quarter Fiscal 2015

   

(1,206

)

   

(699

)

   

(1,905

)

Liability balance at March 31, 2015 (2)

 

$

493

   

$

1,987

   

$

2,480

 

(1)

Included in selling, general and administrative expenses in the Company's consolidated statements of operations.

 

(2)

The Company expects to pay the balance of these liabilities during fiscal 2015.

 

          During the three and nine months ended March 31, 2015, and in addition to the items discussed above under the 2014 Performance Improvement Plan, the Company recorded approximately $43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs. See Note 7 for further discussion.

          All of the expenses discussed above, as described in Note 17, have not been attributed to any of the Company's reportable segments and are included in unallocated corporate expenses.

NOTE 5.    NONCONTROLLING INTERESTS

          On July 2, 2013, the Company, through a subsidiary (the "EA USC Subsidiary"), invested $6.0 million in US Cosmeceutechs, LLC ("USC"), a skin care company that develops and sells skin care products into the professional dermatology and spa channels. The investment, which is in the form of a collateralized convertible note (the "Convertible Note") that bears interest at 1.5%, was convertible into 50% of the fully diluted equity interest of USC at any time at the option of the EA USC Subsidiary and also converted automatically upon the satisfaction of certain conditions.

          On July 11, 2013, the EA USC Subsidiary purchased a 30% equity interest in USC from the sole equity member (the "Member") for $3.6 million under the terms of a put-call agreement with the USC Member. Under the terms of the put-call agreement, the EA USC Subsidiary has an option to purchase the Member's remaining equity interest in USC at specified prices under certain circumstances based on USC's performance, and similarly the Member has the ability to put its interest in USC to the Company at specified prices under certain circumstances based on USC's performance. Based on the terms of the put-call agreement, it is likely that the EA USC Subsidiary would exercise its call option prior to the Member exercising his put option. In accordance with Topic 480, Distinguishing Liabilities from Equity, the Company is required to classify the noncontrolling interest in USC as a "redeemable noncontrolling interest" in the mezzanine section of the Company's consolidated balance sheet.

          In December 2014, the EA USC Subsidiary invested an additional $2.0 million in USC and an existing $1.0 million demand loan to USC was incorporated as part of the Convertible Note. As a result of these transactions, the Convertible Note was amended and restated to reflect (i) an aggregate principal amount of $9 million (including the previously outstanding demand loan), and (ii) that once converted, the Convertible Note will result in the Company owning 85.45% of the fully diluted equity interests in USC (inclusive of EA USC's current equity interest).  The other terms of the Convertible Note remained unchanged. As a result of the December 2014 transactions, the Member's remaining equity interest in USC that is subject to the put and call option is now 14.55%. As of March 31, 2015, the Convertible Note had not been converted.

- 11 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          Under the terms of the operating agreement of USC, the EA USC Subsidiary has control of the board of managers of USC and the power to direct activities that could have a substantial impact on the economic performance of USC, including those that could result in the obligation to absorb losses or the right to receive benefits that could potentially be significant to USC. Based on the investment in USC and the EA USC Subsidiary's controlling rights under the operating agreement, the Company has determined that USC is a variable interest entity, or VIE, of which the Company is the primary beneficiary, requiring consolidation of USC's financial statements in accordance with Topic 810, Consolidation.

          The following provides an analysis of the change in the redeemable noncontrolling interest liability for the nine months ended March 31, 2015:

(Amounts in thousands)

   

Amount

 

Beginning as of June 30, 2014

$

5,553

Net loss attributable to noncontrolling interests

(1,414

)

Balance at March 31, 2015

 

$

4,139

 

          Effective January 4, 2015, the Company, through a subsidiary, entered into a joint venture in the United Arab Emirates (the "joint venture") with an unrelated third party. Based on the capitalization of the joint venture, the Company's subsidiary has a 60% ownership interest and the third party has a 40% ownership interest. The joint venture will be responsible for the sale, promotion and distribution of the Company's fragrance, skincare and cosmetics products in eleven Middle Eastern countries. Under the terms of the joint venture agreement, the Company's subsidiary has the option to purchase a 15% ownership interest from the third party after 15 years at a specified price based on the performance of the joint venture and also has the option to purchase the entire ownership interest of the third party upon the termination or expiration of the joint venture agreement at a specified price based on the performance of the joint venture.

          Based on the terms of the joint venture agreement, the Company's subsidiary has control of the board of managers and the power to direct activities that could have a substantial impact on the economic performance of the joint venture, including those that could result in the obligation to absorb losses or the right to receive benefits that could potentially be significant to the joint venture. Based on the Company's subsidiary's equity interest in the joint venture and the Company's subsidiary's controlling rights under the operating agreement, the Company has determined that the joint venture is a VIE, requiring consolidation of the joint venture's financial statements in accordance with Topic 810, Consolidation. The unrelated third party's interest in the joint venture is classified as a "noncontrolling interest" in the shareholders' equity section of the Company's consolidated balance sheet.

NOTE 6.    INVENTORIES

          The components of inventory were as follows:

(Amounts in thousands)

March 31,
2015

   

June 30,
2014

 

Raw materials

$

39,241

   

$

51,406

 

Work in progress

 

9,176

     

22,262

 

Finished goods

 

219,766

     

265,158

 

        Total

$

268,183

   

$

338,826

 

- 12 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.    EXCLUSIVE BRAND LICENSES, TRADEMARKS AND INTANGIBLES, NET AND GOODWILL

          The following summarizes the cost basis amortization and weighted average estimated life associated with the Company's intangible assets:

(Amounts in thousands)

March 31,
2015

   

June 30,
2014

   

June 30, 2014
Weighted Average
Estimated Life

 

Elizabeth Arden brand trademarks

$

122,415

   

$

122,415

   

Indefinite

 

Exclusive brand licenses and related trademarks

 

107,688

     

162,771

   

14

 

Exclusive brand trademarks

 

105,760

     

102,064

   

16

 

Other intangibles (1)

 

18,580

     

18,580

   

18

 

Exclusive brand licenses, trademarks and intangibles, gross

 

354,443

     

405,830

       

Accumulated amortization:

                   

   Exclusive brand licenses and related trademarks

 

(64,873

)

   

(72,018

)

     

   Exclusive brand trademarks

 

(54,910

)

   

(52,185

)

     

   Other intangibles

 

(7,480

)

   

(6,623

)

     

Exclusive brand licenses, trademarks and intangibles, net

$

227,180

   

$

275,004

       

(1)   Primarily consists of customer relationships, customer lists, non-compete agreements and product formulas.

          At March 31, 2015, the Company had goodwill of $31.6 million recorded on its consolidated balance sheet. The entire amount of the goodwill in all periods presented relates to the North America segment. The Company did not record any impairments during the three and nine months ended March 31, 2015, as there were no events that triggered an impairment analysis.

          During the second quarter of fiscal 2015, net sales of Justin Bieber and Nicki Minaj fragrances fell significantly below expectations. The Company reviewed these license agreements for potential impairment. Given the significant decline in net sales during the second quarter of fiscal 2015, and the expectation for a continued decline of sales in future periods, the Company determined that these intangible assets were fully impaired. As a result, the Company recorded a total impairment charge of approximately $39.6 million during the second quarter of fiscal 2015 to write off the carrying values of both the Justin Bieber and Nicki Minaj licenses.

          Amortization expense was $3.0 million and $4.8 million for the three months ended March 31, 2015 and 2014, respectively, and $12.1 million and $14.6 million for the nine months ended March 31, 2015 and 2014, respectively. At March 31, 2015, the Company estimated annual amortization expense for each of the next five fiscal years as shown in the following table. Future acquisitions, renewals or impairment events could cause these amounts to change.

(Amounts in millions)

Remainder
of 2015

   

2016

   

2017

   

2018

   

2019

 

Amortization expense

$

3.0

   

$

11.5

   

$

10.2

   

$

9.8

   

$

9.4

 

NOTE 8.    OTHER PAYABLES AND ACCRUED EXPENSES

          A summary of the Company's other payables and accrued expenses is as follows:

(Amounts in thousands)

March 31,
2015

   

June 30,
2014

 

Accrued advertising, promotion and royalties

$

31,134

   

$

29,613

 

Accrued employee-related benefits

 

23,066

     

21,325

 

Accrued value added taxes

 

3,031

     

5,077

 

Accrued interest

 

1,426

     

7,939

 

Freight

 

2,508

     

4,005

 

Other accruals

 

33,875

     

43,994

 

Total other payables and accrued expenses

$

95,040

   

$

111,953

 

- 13 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.    SHORT-TERM DEBT

          At March 31, 2015, the Company had a $300 million revolving bank credit facility ("the Credit Facility") with a syndicate of banks, for which JPMorgan Chase Bank is the administrative agent, which generally provides for borrowings on a revolving basis, with a sub-limit of $25 million for letters of credit. In December 2014, the Credit Facility was amended to among other things, (i) extend its maturity date from January 2016 to December 2019, and (ii) revise the interest rate and unused commitment fee applicable under the Credit Facility. Under the terms of the Credit Facility, the Company may, at any time, increase the size of the Credit Facility up to $375 million without entering into a formal amendment requiring the consent of all of the banks, subject to the Company's satisfaction of certain conditions.

          The Credit Facility is guaranteed by all of the Company's U.S. subsidiaries and is collateralized by a first priority lien on all of the Company's U.S. accounts receivable and inventory. Borrowings under the Credit Facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of the Company's inventory, as determined pursuant to the terms of the Credit Facility; provided, however, that from August 15 to October 31 of each year the Company's borrowing base may be temporarily increased by up to $25 million.

          The Credit Facility, as amended, has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if (a) average borrowing base capacity (calculated on a rolling three-day basis) is equal to or less than ten percent (10%) of total borrowing availability under the Credit Facility, or (b) the Company's borrowing availability under the Credit Facility, plus domestic cash and cash equivalents, is less than $20 million at any time. The Company's average borrowing base capacity and borrowing availability during the quarter ended December 31, 2014, did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended March 31, 2015.

          Under the terms of the Credit Facility, as amended, the Company may pay dividends or repurchase common stock if (a) it maintains a debt service coverage ratio of not less than 1.1 to 1.0 and maintains borrowing base capacity plus domestic cash and cash equivalents, in each case after giving effect to the applicable payment, of (i) at least $30 million from February 1 to August 31, and (ii) at least $35 million from September 1 to January 31, or (b) it maintains borrowing base capacity plus domestic cash and cash equivalents of (i) at least $40 million from February 1 to August 31, and (ii) at least $45 million from September 1 to January 31.

          Borrowings under the credit portion of the Credit Facility continue to bear interest at a floating rate based on an "Applicable Margin" that is determined by reference to a debt service pricing ratio. At the Company's option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate. As amended, the Applicable Margin charged on LIBOR loans now ranges from 1.50% to 2.50%, as compared to 1.75% to 2.50% previously, and ranges from 0% to 1.0%, as compared to 0.25% to 1.0% previously, for base rate loans. The Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in the Company's borrowing base is in effect, is 1.0% higher. The unused commitment fee rate is now 0.375% per annum, as compared to a range of 0.375% to 0.50% per annum previously, and is based on quarterly average utilization.

          At March 31, 2015, the Applicable Margin was 2.50% for LIBOR loans and 1.00% for base rate loans. For the nine months ended March 31, 2015 and 2014, the weighted average annual interest rate on borrowings under the Credit Facility was 2.7% and 2.0%, respectively.

          The Company also has a second lien credit agreement (the "Second Lien Facility") with JPMorgan Chase Bank, N.A. providing the Company the ability to borrow up to $30 million on a revolving basis. The Second Lien Facility matures on January 2016. The Second Lien Facility is collateralized by a second priority lien on all of the Company's U.S. accounts receivable and inventories, and the interest on borrowings charged under the Second Lien Facility is either (i) LIBOR plus an applicable margin of 3.25% or (ii) the base rate specified in the Second Lien Facility (which is comparable to prime rates) plus a margin of 1.75%. The unused commitment fee applicable to the Second Lien Facility ranges from 0.25% to 0.375% based on the quarterly average unused portion of the Second Lien Facility. To the extent the Company borrows amounts under the Second Lien Facility, the Company has the option to prepay all or a portion of such borrowings, provided the borrowing base capacity under the Credit Facility is in excess of $35 million after giving effect to the applicable prepayment each day for the 30 day period ending on the date of the prepayment.

- 14 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          At March 31, 2015, the Company had $64.0 million in outstanding borrowings and approximately $3.1 million in letters of credit outstanding under the Credit Facility, compared with $78.0 million in borrowings and $3.3 million in letters of credit outstanding at June 30, 2014. At both March 31, 2015 and June 30, 2014, the Company had no outstanding borrowings under the Second Lien Facility. At March 31, 2015, based on eligible accounts receivable and inventory available as collateral, an additional $82.1 million in the aggregate could be borrowed under the Credit Facility and the Second Lien Facility. In periods when there are outstanding borrowings, the Company classifies the Credit Facility and Second Lien Facility as short term debt on its balance sheet because it expects to reduce outstanding borrowings over the next twelve months.

          In connection with the amendment of the Credit Facility in December 2014, the Company (i) recorded approximately $0.2 million of debt extinguishment costs in the second quarter of fiscal 2015, and (ii) incurred and capitalized approximately $2.0 million of bank related costs. Such amounts are reflected in debt financing costs, net, on the consolidated balance sheet.

NOTE 10.    LONG-TERM DEBT

          The Company's long-term debt consisted of the following:

(Amounts in thousands)

 

March 31,
2015

   

June 30,
2014

 

7 3/8% Senior Notes due March 2021

 

$

350,000

   

$

350,000

 

Unamortized premium on long-term debt

   

5,833

     

6,432

 

Total long-term debt

 

$

355,833

   

$

356,432

 

          On January 21, 2011, the Company issued $250 million aggregate principal amount of 7 3/8% Senior Notes due March 2021 (the "7 3/8% Senior Notes"). Interest on the 7 3/8% Senior Notes accrues at a rate of 7.375% per annum and is payable semi-annually on March 15 and September 15 of every year. The 7 3/8% Senior Notes rank pari passu in right of payment to indebtedness under the Credit Facility and any other senior debt, and will rank senior to any future subordinated indebtedness provided, however, that the 7 3/8% Senior Notes are effectively subordinated to the Credit Facility and the Second Lien Facility to the extent of the collateral securing the Credit Facility and the Second Lien Facility. The indenture applicable to the 7 3/8% Senior Notes (the "Indenture") generally permits the Company (subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness, pay dividends, purchase or redeem its Common Stock or redeem subordinated indebtedness. The Indenture generally limits the Company's ability to create liens, merge or transfer or sell assets. The Indenture also provides that the holders of the 7 3/8% Senior Notes have the option to require the Company to repurchase their notes in the event of a change of control involving the Company (as defined in the Indenture). The 7 3/8% Senior Notes are not currently guaranteed by any of the Company's subsidiaries but could become guaranteed in the future by any domestic subsidiary of the Company that guarantees or incurs certain indebtedness in excess of $10 million. In addition, as part of the offering of the 7 3/8% Senior Notes, the Company incurred and capitalized approximately $6.0 million of related debt financing costs on the consolidated balance sheet, which will be amortized over the life of the 7 3/8% Senior Notes.

          On January 30, 2014, the Company consummated the private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), of an additional $100 million aggregate principal amount of 7 3/8% Senior Notes (the "Additional 7 3/8% Senior Notes") issued under a supplement to the Indenture. The original 7 3/8% Senior Notes issued on January 21, 2011 and the Additional 7 3/8% Senior Notes issued on January 30, 2014 are treated as a single series under the Indenture. The Additional 7 3/8% Senior Notes have the same terms as the original 7 3/8% Senior Notes. In connection with the offering of the Additional 7 3/8% Senior Notes, the Credit Facility and the Second Lien Facility were each amended to permit the issuance of additional 7 3/8% Senior Notes under the Indenture.

          The Additional 7 3/8% Senior Notes were sold at 106.75% of their principal amount, and the premium received will be amortized over the remaining life of the 7 3/8% Senior Notes. In addition, as part of the issuance of the Additional 7 3/8% Senior Notes, the Company incurred and capitalized approximately $2.2 million of related debt financing costs on the consolidated balance sheet, which will be amortized over the remaining life of the 7 3/8% Senior Notes. In March 2014, the Additional 7 3/8% Senior Notes were exchanged for an equivalent principal amount of notes registered under the Securities Act and containing identical terms to the Additional 7 3/8% Senior Notes.

- 15 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11.    COMMITMENTS AND CONTINGENCIES

          During fiscal 2013 and 2014, the Company invested $9.7 million, including transaction costs, for a minority investment in Elizabeth Arden Salon Holdings, LLC, an unrelated party whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons ("Salon Holdings"). The investment, which is in the form of a collateralized convertible note bearing interest at 2%, has been accounted for using the cost method and at March 31, 2015, is included in other assets on the consolidated balance sheet. The Company entered into a co-investment agreement with another minority investor of Salon Holdings under which the minority investor had the ability to put its interest in Salon Holdings to the Company under certain circumstances, at a specified price based on the performance of Salon Holdings over the previous 12 month period.

          On February 2, 2015, the minority investor put its interest in Salon Holdings to the Company. Based on the performance of Salon Holdings over the previous 12-month period, the Company paid the minority investor approximately $4 million in cash during the third quarter of fiscal 2015.

          In July 2013, the Company acquired a 20% equity interest in a company that is developing a beauty device (the "Device Company"). Under the terms of the equity interest purchase agreement, the Company had an obligation to purchase an additional 20% equity interest at a cost of $6 million upon the achievement of certain milestones related to the development and shipment to customers of a beauty device. In conjunction with the purchase of the equity interest, the Company entered into a license with the Device Company to become the exclusive worldwide manufacturer, marketer and distributor of the beauty device. In addition, the Company also had an option to purchase the remaining 60% equity interest in the Device Company at a specified price under certain circumstances based on the sales performance of the device. In February 2015, the equity interest purchase agreement was amended to, among other things, remove both (i) the obligation the Company had to purchase an additional 20% equity interest at a cost of $6 million upon the achievement of certain milestones, and (ii) the Company's option to purchase the remaining 60% equity interest in the Device Company. The amendment also terminated the Company's exclusive license to become the worldwide manufacturer, marketer and distributor of the beauty device.

          The Company is a party to a number of legal actions, proceedings, audits, tax audits, claims and disputes, arising in the ordinary course of business, including those with current and former customers over amounts owed. While any action, proceeding, audit or claim contains an element of uncertainty and may materially affect the Company's cash flows and results of operations in a particular quarter or year, based on current facts and circumstances, the Company's management believes that the outcome of such actions, proceedings, audits, tax audits, claims and disputes will not have a material adverse effect on the Company's business, prospects, results of operations, financial condition or cash flows.

          The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company also files tax returns for its international affiliates in various foreign jurisdictions. The statute of limitations for the Company's U.S. federal tax returns remains open for the year ended June 30, 2010 and subsequent fiscal years. During the second quarter of fiscal 2014, the IRS began an examination of the Company's U.S. federal tax returns for the fiscal years ended June 30, 2010, 2011 and 2012. The year ended June 30, 2010, and subsequent fiscal years remain subject to examination for various state tax jurisdictions. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations generally ranging from one to five years. The year ended June 30, 2009, and subsequent fiscal years remain subject to examination for various foreign jurisdictions.

NOTE 12.    REDEEMABLE PREFERRED STOCK AND WARRANTS

          On August 19, 2014, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P. (each a "Purchaser" and together, the "Purchasers"), investment funds affiliated with Rhône Capital L.L.C. Pursuant to the Securities Purchase Agreement, for aggregate cash consideration of $50 million, the Company issued to the Purchasers an aggregate of 50,000 shares of the Company's newly designated Series A Serial Preferred Stock, par value $0.01 per share (the "Preferred Stock"), with detachable warrants to purchase up to 2,452,267 shares of the Company's Common Stock (the "Warrants"). Concurrently with the execution of the Securities Purchase Agreement, the Company also entered into a Shareholders Agreement with the Purchasers (the "Shareholders Agreement"). The issuance and sale of the Preferred Stock and Warrants were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act.

- 16 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Series A Serial Preferred Stock

          Dividends on the Preferred Stock are due on January 1, April 1, July 1 and October 1 of each year, commencing on October 1, 2014. The Preferred Stock will also participate in dividends declared or paid, whether in cash, securities or other property, on the shares of Common Stock for which the outstanding Warrants are exercisable. Dividends are payable at the per annum dividend rate of 5% of the liquidation preference, which is initially $1,000 per share (the "Liquidation Preference"). If and to the extent that the Company does not pay the entire dividend to which holders of the Preferred Stock are entitled for a particular period in cash on the applicable dividend payment date, preferential cash dividends will accrue on such unpaid amounts (and on any unpaid dividends in respect thereof) at 5% per annum, and will compound on each dividend payment date, until paid. No cash dividend may be declared or paid on Common Stock or other classes of stock over which the Preferred Stock has preference unless full cumulative dividends have been or contemporaneously are declared and paid in cash on the Preferred Stock. The Preferred Stock has an aggregate liquidation preference of $50 million, and ranks junior to all of the Company's liabilities and obligations to creditors with respect to assets available to satisfy claims against the Company and senior to all other classes of stock over which the Preferred Stock has preference, including the Common Stock. The Preferred Stock will not be convertible into Common Stock at any time.

          Pursuant to the Shareholders Agreement, each quarter the Company will declare and pay in cash no less than fifty percent (50%) of each dividend to which holders of Preferred Stock are entitled under the articles of amendment designating the rights of the Preferred Stock (the "Articles of Amendment"), unless payment of such dividend in cash (i) is prohibited by or would result in a default or event of default under the Company's indenture, credit facilities and certain other debt documents or (ii) would result in a breach of the legal or fiduciary obligations of the Board, in which case the Company will declare and pay in cash the maximum amount permitted to be paid in cash.

          The Preferred Stock is redeemable at the option of the holder at 100% of the Liquidation Preference plus an amount per share equal to accrued but unpaid dividends on the Preferred Stock up to the date of redemption, at any time after August 19, 2022. The Preferred Stock is also redeemable at the option of the Company at the following redemption prices and times:

Percentage of Liquidation Preference of each
share of Preferred Stock to be redeemed *

 

Timing of Redemption Right

103%

 

On or after August 19, 2016 but prior to August 19, 2019

102%

 

On or after August 19, 2019 but prior to August 19, 2020

101%

 

On or after August 19, 2020 but prior to August 19, 2021

100%

 

On or after August 19, 2021

* In each case, plus an amount per share equal to accrued but unpaid dividends on such share of Preferred Stock up to, but excluding, the earlier of the date of the redemption or the date of constructive redemption.

          In the event of a Change of Control of the Company (as defined in the Company's Articles of Amendment) at a price per share of Common Stock below $24.00, the holders of the Preferred Stock will have the right to require the Company to repurchase each share of Preferred Stock held by such holder for cash at the following prices and times (provided that doing so does not cause a default or event of default under the Company's indenture, credit facilities and certain other debt documents and there are sufficient funds legally available therefor):

Percentage of Liquidation Preference of each
share of Preferred Stock to be repurchased *

 

Change of Control Date

120%

 

Prior to August 19, 2015

110%

 

On or after August 19, 2015 but prior to August 19, 2016

105%

 

On or after August 19, 2016 but prior to August 19, 2017

101%

 

On or after August 19, 2017

* In each case, plus an amount per share equal to accrued but unpaid dividends on such share of Preferred Stock up to, but excluding, the earlier of the date of the redemption or the date of constructive redemption.

          So long as the Purchasers (or their affiliates) beneficially own a majority of the outstanding shares of Preferred Stock, the holders of a majority of such outstanding shares, voting separately as a class, will have the right (the "Designation Rights") to elect the following number of directors to the board of directors of the Company at any meeting of shareholders of the Company (or by written

- 17 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

consent) at which directors are to be elected, designated or appointed (the "Board"): (i) if the Percentage Interest (as defined in the Shareholders Agreement) as of the record date for such meeting (or action by written consent) is equal to or more than the percentage of Common Stock represented by the shares underlying the Warrants as of the date of issuance (approximately 7.6%) but less than 20%, one member of the Board; or (ii) if the Percentage Interest as of the record date for such meeting (or action by written consent) is equal to or greater than 20%, two members of the Board. As of October 24, 2014, the Purchasers' Percentage Interest was approximately 20.2%. Effective on October 28, 2014, the Purchasers elected M. Steven Langman and Franz-Ferdinand Buerstedde to serve on the Board.

          Except as required by law or otherwise provided in the Articles of Amendment, the holders of shares of Preferred Stock will be entitled to vote together as one class with holders of the Company's Common Stock on all matters submitted to a vote of the Company's shareholders. Each share of Preferred Stock is entitled to a number of votes (rounded down to the nearest whole number) equal to (i) the aggregate number of shares of Common Stock for which the outstanding Warrants are exercisable (regardless of whether or not such Warrants could legally be exercised at such time and regardless of whether the holder of the Preferred Stock is also the holder of Warrants) divided by (ii) the number of outstanding shares of Preferred Stock, determined as of the record date for the determination of holders of Common Stock entitled to vote on any such matter.

Warrants

          The exercise price for the Warrants is $20.39 per share (the "Warrant Price"), and they mature on August 19, 2024. The Warrant Price may be paid, at the option of the holder, in cash or by surrendering to the Company shares of Preferred Stock having an aggregate liquidation preference plus accrued and unpaid dividends equal to the aggregate exercise price. Alternatively, subject to certain exceptions in the case of a Mandatory Exercise (as defined below), if the market price (as determined pursuant to the Warrant) (the "Market Price") of the Common Stock is greater than the Warrant Price, the holder may elect to surrender the Warrant and receive shares of Common Stock in respect of the Warrant equal to the value, as determined pursuant to the Warrant, of the Warrant, subject to certain restrictions.

          After August 19, 2019, the Company may require the exercise of the Warrants if the volume weighted average sale price for the Common Stock, as determined pursuant to the Warrant, exceeds 150% of the exercise price for ten (10) consecutive trading days (a "Mandatory Exercise"). Payment of the exercise price in the case of a Mandatory Exercise is required to be made first by surrender of shares of Preferred Stock held by the Warrant holder.

          The exercise price of the Warrants and the number of shares issuable upon exercise of the Warrants are subject to adjustment, as provided in the Warrants, including if the Company, on or after August 19, 2017, issues or sells Common Stock for a price lower than the Market Price of the Common Stock and the exercise price of the Warrants.

Shareholders Agreement

          Under the terms of the Shareholders Agreement, from and after the date the Purchasers are no longer entitled, in their capacity as holders of Preferred Stock, to elect directors to the Board pursuant to their Designation Rights, the Purchasers will have the right to jointly designate for election one member to the Company's Board of Directors for so long as the Purchasers' Percentage Interest (as defined in the Shareholders Agreement) is equal to or more than the percentage of Common Stock represented by the shares underlying the Warrants as of the date of issuance (approximately 7.6%) but less than 20%, and the right to designate for election an additional member to the Company's Board if the Purchasers have an aggregate Percentage Interest equal to or exceeding 20% of the Company's outstanding Common Stock.

          The Shareholders Agreement also imposes restrictions under certain circumstances on the Company's ability to, among other things, (i) amend the Company's articles of incorporation and bylaws, (ii) prior to August 19, 2017, issue or sell any Common Stock at a price per share less than the Warrant Price, and (iii) make certain restricted payments under the Indenture relating to the Company's Senior Notes. In addition, the Purchasers are entitled to preemptive rights under certain circumstances, as well as customary demand and "piggyback" registration rights relating to the shares of Common Stock underlying the Warrants.

Financial Statement Presentation

          Upon issuance, the Preferred Stock has been classified as mezzanine equity on the consolidated balance sheet. Based on its terms, the Preferred Stock is considered contingently redeemable. The accounting guidance under Topic 480, Distinguishing Liabilities from Equity, requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent

- 18 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

equity if they are redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer. The Warrants have been classified as equity on the balance sheet.

          Under Topic 480, if preferred shares are issued in conjunction with other securities, such as warrants, and the other securities meet the requirements for equity classification, the sales proceeds from the issuance should be allocated to each security based on their relative fair values. The fair value of the Preferred Stock was based on the present value of the dividends expected to be paid at the 5% annual rate over the next eight years until August 19, 2022, the first date that the preferred stock may be redeemed at the option of the holder at par, as well as the payment of the redemption amount of $50 million and any unpaid dividends due on August 19, 2022. In determining the fair value of the Warrants, given the possibility that the Warrants may be exercised at the Company's discretion under certain circumstances after August 19, 2019, as discussed above, the Company utilized a Monte Carlo simulation model using the assumptions below:

Assumptions

Expected dividend yield

 

0.00

%

Expected price volatility

 

43.20

%

Risk-free interest rate

 

2.40

%

Expected term in years

 

10

 

          Based on the guidance under Topic 480, the initial value of the Preferred Stock and Warrants recorded on the consolidated balance sheet equaled the sales proceeds received from the issuance of the Preferred Stock, net of any direct issuance costs. The Company incurred approximately $6 million of costs directly associated with this transaction. The net proceeds of approximately $44 million were allocated to the Preferred Stock and Warrants as follows:

(Amounts in thousands)

Allocation of Net Proceeds

Preferred Stock

$

29,849

 

Warrants

 

14,144

 

Total

$

43,993

 

          Under current accounting guidance, because the Preferred Stock is not redeemable currently, but because it is probable it will become redeemable, the Preferred Stock should be adjusted to its maximum redemption amount at each balance sheet date. In addition, the Company had the option to choose to either (i) accrete changes in the redemption value of the Preferred Stock over the period from the date of issuance to the earliest redemption date of the security, or (ii) recognize changes in the redemption value of the Preferred Stock immediately and adjust the carrying value of the Preferred Stock to equal the redemption value at the end of each reporting period (this method would view the end of the reporting period as if it were also the redemption date for the Preferred Stock). The Company selected the second option and recognized the accretion immediately and recorded the full accretion in the first quarter of fiscal 2015.

          Through March 31, 2015, the Board has declared dividends of approximately $1,548,600 on the Preferred Stock of which approximately $487,300 have been paid as of March 31, 2015. In addition, a dividend payment of approximately $287,000 was made in April 2015. Accrued dividends payable as of March 31, 2015, were approximately $1,061,300, and dividend arrearage as of March 31, 2015, was approximately $446,100.

          The following table sets forth the accretion and accrued dividends on the redeemable Preferred Stock for the three and nine months ended March 31, 2015:

(Amounts in thousands)

 

Three Months Ended
March 31,
2015

   

Nine Months Ended
March 31,
2015

 

Preferred stock accretion to redemption value

 

$

--

   

$

20,151

 

Dividends accrued

   

615

     

1,549

 

Total

 

$

615

   

$

21,700

 

- 19 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.    FAIR VALUE MEASUREMENTS

          Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standards also have established a fair value hierarchy, which prioritizes the inputs to valuation techniques used in measuring fair value into three broad levels as follows:

Level 1 -

Quoted prices in active markets for identical assets or liabilities

Level 2 -

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly

Level 3 -

Unobservable inputs based on the Company's own assumptions

          The Company's long-term debt consists of $350 million aggregate principal amount of its 7 3/8% Senior Notes. At March 31,
2015 and June 30, 2014, the estimated fair value of the 7 3/8% Senior Notes was as follows:

(Amounts in thousands)

March 31,
2015

   

June 30,
2014

 

7 3/8% Senior Notes due March 2021 (Level 2)

$

311,080

   

$

369,250

 

        The Company determined the estimated fair value amounts by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value, primarily due to the illiquid nature of the capital markets in which the 7 3/8% Senior Notes are traded. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

          The Company's derivative assets and liabilities are currently composed of foreign currency contracts. Fair values are based on market prices or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions.

          The following table presents the fair value hierarchy for the Company's financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2015 and June 30, 2014:

(Amounts in thousands)

March 31, 2015

 

June 30, 2014

 

Asset

   

Liability

   

Asset

   

Liability

 

Level 2

 

2,228

     

24

     

--

     

2,522

 

Total

$

2,228

   

$

24

   

$

--

   

$

2,522

 

          See Note 14 for a discussion of the Company's foreign currency contracts.

          Accounting standards require non-financial assets and liabilities to be recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. During the second quarter of fiscal 2015, the Company recorded an asset impairment charge of approximately $39.6 million to write-off the carrying values of both the Justin Bieber and Nicki Minaj licenses. See Note 7. As of March 31, 2015, other than the carrying values of these licenses, the Company did not have any non-financial assets and liabilities measured at fair value.

NOTE 14.    DERIVATIVE FINANCIAL INSTRUMENTS

          The Company operates in several foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of the Company's foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. The Company also enters into cash flow hedges for a portion of its forecasted inventory purchases to reduce the exposure of its Canadian and Australian subsidiaries' cost of sales to such fluctuations, as well as cash flow hedges for a portion of its subsidiaries' forecasted Swiss franc operating costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. The Company does not enter into derivative financial contracts for speculative or trading purposes.

- 20 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The Company's derivative financial instruments are recorded in the consolidated balance sheets at fair value determined using pricing models based on market prices or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the consolidated statements of cash flows.

          Foreign currency contracts used to hedge forecasted revenues are designated as cash flow hedges. These contracts are used to hedge forecasted revenues generally over approximately 12 to 24 months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive (loss) income within shareholders' equity to the extent such contracts are effective, and are recognized in net sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and nine months ended March 31, 2015 or in fiscal 2014 relating to foreign currency contracts used to hedge forecasted revenues resulting from hedge ineffectiveness. As of March 31, 2015, the Company had notional amounts of 3.0 million British pounds and 3.7 million Euros under foreign currency contracts that expire between April 30, 2015 and May 31, 2015 to reduce the exposure of our foreign subsidiary revenues to fluctuations in currency rates.

          Foreign currency contracts used to hedge forecasted cost of sales or operating costs are designated as cash flow hedges. These contracts are used to hedge the forecasted cost of sales of the Company's Canadian and Australian subsidiaries or operating costs of the Company's Swiss subsidiaries generally over approximately 12 to 24 months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive (loss) income within shareholders' equity, to the extent such contracts are effective, and are recognized in cost of sales or selling, general and administrative expenses in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and nine months ended March 31, 2015 or in fiscal 2014 relating to foreign currency contracts used to hedge forecasted cost of sales or forecasted operating costs resulting from hedge ineffectiveness. As of March 31, 2015, the Company had notional amounts under foreign currency contracts of (i) 1.3 million Canadian dollars and 2.2 million Australian dollars used to hedge forecasted cost of sales that expire between April 30, 2015 and May 31, 2015, and (ii) 17.4 million Swiss francs used to hedge forecasted operating costs that expire between April 30, 2015 and May 31, 2016.

          When appropriate, the Company also enters into and settles foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce exposure of the Company's foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire. For the three and nine months ended March 31, 2015, the Company recorded gains of $1.4 million and $3.6 million, respectively in selling, general and administrative expenses related to these contracts. For the three and nine months ended March 31, 2014, the Company recorded losses of $0.6 million and $1.3 million, respectively in selling, general and administrative expenses related to these contracts. As of March 31, 2015, there were no such foreign currency contracts outstanding. There were no amounts recorded in the three and nine months ended March 31, 2015 or in fiscal 2014 relating to foreign currency contracts to hedge subsidiary balance sheets resulting from hedge ineffectiveness.

          The following tables illustrate the fair value of outstanding foreign currency contracts and the gains (losses) associated with the settlement of these contracts:

(Amounts in thousands)

Fair Value of Derivative Instruments Designated as Effective Hedges

 

Balance Sheet Location

March 31,
2015

   

June 30,
2014

 

Other assets

$

2,228

   

$

--

 

Other payables

$

24

   

$

2,522

 

- 21 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Gain (Loss) Reclassified from Accumulated Other Comprehensive (Loss) Income into (Loss) Income, Net of Tax (Effective Portion)

(Amounts in thousands)

Three Months Ended

   

Nine Months Ended

 

March 31,
2015

March 31,
2014

March 31,
2015

March 31,
2014

Currency Contracts - Net Sales (1)

$

897

   

$

(352

)

 

$

1,294

   

$

(714

)

Currency Contracts - Cost of Sales (2)

 

357

     

96

     

378

     

64

 

Currency Contracts - Selling, General and
   Administrative Expenses (3)

 

(33

)

   

186

     

(41

)

   

368

 

Total (4)

$

1,221

   

$

(70

)

 

$

1,631

   

$

(282

)

(1)

Recorded in net sales on the consolidated statements of operations.

(2)

Recorded in cost of sales on the consolidated statements of operations.

(3)

Recorded in selling, general and administrative expenses on the consolidated statements of operations.

(4)

Net of tax expense of $255 and $29 for the three months ended March 31, 2015 and 2014, respectively. Net of tax expense of $338 for the nine months ended March 31, 2015, and net of tax benefit of $14 for the nine months ended March 31, 2014.

Net (Loss) Gain Recognized in Other Comprehensive (Loss) Income on Derivatives, Net of Tax (Effective Portion)

(Amounts in thousands)

Three Months Ended

 

Nine Months Ended

 

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Currency Contracts - Net Sales

$

(548

)

 

$

455

   

$

2,174

   

$

(1,654

)

Currency Contracts - Cost of Sales

 

(370

)

   

(359

)

   

265

     

(70

)

Currency Contracts - Selling, General and
   Administrative Expenses

 

480

     

(397

)

   

18

     

(272

)

Total (1)

$

(438

)

 

$

(301

)

 

$

2,457

   

$

(1,996

)

(1)

Net of tax benefit of $180 and $216 for the three months ended March 31, 2015 and 2014, respectively. Net of tax expense of $360 for the nine months ended March 31, 2015, and net of tax benefit of $237 for the nine months ended March 31, 2014.

NOTE 15.    REPURCHASES OF COMMON STOCK

          The Company has an existing stock repurchase program pursuant to which the Company's Board has authorized the repurchase of $120 million of Common Stock and that was scheduled to expire on November 30, 2014. On August 5, 2014, the Company's Board extended the stock repurchase program through November 30, 2016.

          For the nine months ended March 31, 2015, there were no share repurchases under the Common Stock repurchase program. As of March 31, 2015, the Company had repurchased 4,517,309 shares of Common Stock on the open market under the stock repurchase program since its inception in November 2005, at an average price of $18.88 per share and at a cost of approximately $85.3 million, including sales commissions, leaving approximately $34.7 million available for additional repurchases under the program. The acquisition of these shares was accounted for under the treasury method.

NOTE 16.    NEW ACCOUNTING STANDARDS AND TAX LEGISLATION

          On April 7, 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The updated standard requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. Prior to the issuance of the updated standard, debt issuance costs were required to be presented in the balance sheet as an asset. The guidance in the updated standard is limited to the presentation of debt issuance costs. The updated standard does not affect the recognition and measurement of debt issuance costs, and the amortization of such costs will continue to be calculated using the interest method and be reported as interest expense. The new guidance is effective for the Company beginning July 1, 2016, including interim periods within that reporting period. The new guidance is required to be applied retrospectively and early adoption is permitted.

- 22 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          In May 2014, the FASB and the International Accounting Standards Board jointly issued a converged standard, Topic 606, Revenue From Contracts With Customers. The new standard will require companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The new standard is effective for the Company beginning July 1, 2017, including interim periods within that reporting period. On April 1, 2015, the FASB voted to propose to defer the effective date of the new standard by one year. The new standard is required to be applied retrospectively. Early application is not permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements. The FASB plans to issue its decision related to the deferral of the effective date for public comment sometime during the second quarter of 2015.

          In June 2014, the FASB issued an update to Topic 718, Compensation-Stock Compensation. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is intended to resolve the diverse accounting treatment of those awards in practice, and requires that the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new standard is effective for the Company beginning July 1, 2016. The new guidance can be applied either prospectively or retrospectively and early application is permitted. As of March 31, 2015, the Company had no outstanding awards to which this new guidance would apply.

          On December 19, 2014, the Tax Increase Prevention Act of 2014 (H.R. 5771) was signed into law extending certain expiring provisions, including the Section 41 research credit. The new legislation applies retrospectively to January 1, 2014 through December 31, 2014 and resulted in a net tax benefit of $160,000 for fiscal year 2014, which was recorded on a discrete basis in the second and third quarters of fiscal 2015. This tax benefit was fully offset by a U.S. valuation allowance.

NOTE 17.    SEGMENT DATA AND RELATED INFORMATION

          Reportable operating segments, as defined by Codification Topic 280, Segment Reporting, include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the "Chief Executive") in deciding how to allocate resources and in assessing performance. As a result of the similarities in the procurement, marketing and distribution processes for all of the Company's products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Chief Executive.

          At March 31, 2015, the Company's operations were organized into the following two operating segments, which also comprise its reportable segments:

 

North America - The North America segment sells the Company's portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to prestige retailers, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes the Company's direct to consumer business, which is composed of the Elizabeth Arden branded retail outlet stores and the Company's e-commerce business. This segment also sells Elizabeth Arden products through the Red Door Spa beauty salons and spas, which are owned and operated by a third party licensee in which the Company has a minority investment.

 

International - The International segment sells a portfolio of owned and licensed brands, including Elizabeth Arden products, to perfumeries, boutiques, department stores, travel retail outlets and distributors in approximately 120 countries outside of North America.

          The Chief Executive evaluates segment profit based upon income from operations, which represents earnings before income taxes, interest expense and depreciation and amortization charges. The accounting policies for each of the reportable segments are the same as those described in the Company's 2014 Annual Report under Note 1 -- "General Information and Summary of Significant Accounting Policies."

          The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information regarding assets and liabilities of the Company's reportable segments is produced for the Chief Executive or included herein.

- 23 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          Segment net sales and (loss) profit exclude returns and markdowns related to the 2014 Performance Improvement Plan. In addition, segment (loss) profit excludes depreciation and amortization, interest expense, debt extinguishment charges, and consolidation and elimination adjustments and unallocated corporate costs and expenses, which are shown in the table reconciling segment (loss) profit to consolidated (loss) income before income taxes. Included in unallocated corporate costs and expenses are (i) restructuring charges that are related to an announced plan, (ii) restructuring costs for corporate operations, and (iii) costs and expenses related to the 2014 Performance Improvement Plan, including sales returns and markdowns. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any intersegment sales.

          The following table is a comparative summary of the Company's net sales and segment (loss) profit by operating segment for the three and nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Three Months Ended

   

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Segment Net Sales:

                             

    North America

$

107,511

   

$

121,877

   

$

507,145

   

$

616,183

 

    International

 

83,853

     

88,964

     

303,465

     

356,404

 

Total

$

191,364

   

$

210,841

   

$

810,610

   

$

972,587

 

Reconciliation:

                             

    Segment Net Sales

$

191,364

   

$

210,841

   

$

810,610

   

$

972,587

 

    Less:

                             

      Unallocated sales returns and markdowns

 

(289

) (1)

   

--

     

14,972

(1)

   

--

 

Net Sales

$

191,653

$

210,841

$

795,638

$

972,587

                               

Segment (Loss) Profit:

                             

    North America

$

1,500

   

$

3,394

   

$

44,886

   

$

66,241

 

    International

 

(17,245

)

   

(17,437

)

   

(26,791

)

   

(10,557

)

Total

$

(15,745

)

 

$

(14,043

)

 

$

18,095

   

$

55,684

 

Reconciliation:

                             

    Segment (Loss) Profit

$

(15,745

)

 

$

(14,043

)

 

$

18,095

   

$

55,684

 

    Less:

                             

      Depreciation and Amortization

 

11,504

     

13,253

     

36,971

     

38,906

 

      Interest Expense, net

 

7,055

     

6,605

     

22,523

     

18,371

 

      Consolidation and Elimination Adjustments

 

(14

)

   

125

     

1,501

     

(1,238

)

      Unallocated Corporate Expenses

 

137

(2)

   

1,534

(3)

   

72,874

(4)

   

(11,837

) (5)

(Loss) Income Before Income Taxes

$

(34,427

)

 

$

(35,560

)

 

$

(115,774

)

 

$

11,482

 

(1)

Amounts for the three months ended March 31, 2015, represent $(0.3) million of adjustments for returns and markdowns previously recorded under the Company's 2014 Performance Improvement Plan primarily due to changes to its customer and distribution arrangements. Amounts for the nine months ended March 31, 2015, represent $15.0 million of returns and markdowns under the Company's 2014 Performance Improvement Plan primarily due to changes to its distribution strategy in China, and other customer and distribution arrangements.

(2)

In addition to the adjustments for returns and markdowns described above in Note 1, amounts for the three months ended March 31, 2015, include:

 

*

$0.5 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $0.3 million of inventory write-downs due to discontinuation of certain products, and $0.2 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions.

(3)

Amounts for the three months ended March 31, 2014, include:

 

*

$1.5 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

- 24 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(4)

In addition to the returns and markdowns described above in Note 1, amounts for the nine months ended March 31, 2015, include:

 

*

$13.9 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $4.9 million of inventory write-downs due to discontinuation of certain products, $4.5 million primarily comprised of customer and vendor contract termination costs, $4.4 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.1 million in asset impairment charges;

 

*

$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses, and other costs; and

 

*

$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to the Credit Facility.

(5)

Amounts for the nine months ended March 31, 2014, include:

 

*

a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands, LLC based on the Company's determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met; and

 

*

$5.3 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

- 25 -


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes contained in this quarterly report and the Consolidated Financial Statements and related notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended June 30, 2014. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year period.

Overview

          We are a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our extensive product portfolio includes the following:

 

Elizabeth Arden Brand

* The Elizabeth Arden skin care brands: Visible Difference, Ceramide, Prevage, and Eight Hour Cream and Elizabeth Arden Pro
* Elizabeth Arden branded lipstick, foundation and other color cosmetics products
* Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden Green Tea and UNTOLD

 

Designer Fragrances

Juicy Couture, John Varvatos, and Wildfox Couture

 

Heritage Fragrances

Curve, Elizabeth Taylor, Britney Spears, Halston, Ed Hardy, Geoffrey Beene, Alfred Sung, Giorgio Beverly Hills, Lucky, PS Fine Cologne, White Shoulders, BCBGMAXAZRIA, Rocawear and Jennifer Aniston

 

Celebrity Fragrances

The fragrance brands of Justin Bieber, Taylor Swift, Nicki Minaj and Mariah Carey

          In addition to our owned and licensed fragrance brands, we distribute approximately 280 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

          During fiscal 2014, we began a comprehensive review of our entire business model and cost structure, as well as undertaking initiatives to improve the distribution of our brands globally. We continue to focus on two important initiatives to grow our business-- the global repositioning of the Elizabeth Arden brand and expanding the market penetration of our prestige fragrance portfolio in international markets. We understand that we must focus on improving our commercial execution in order to return to consistent and reliable sales and earnings growth. Our key areas of focus in fiscal 2015 for improving performance are (i) improving gross margin through improved product pricing, reduced price discounting and improved basic versus promotional product sales mix, (ii) improving our distribution quality by tightening product distribution to protect pricing and gross margins, (iii) simplifying and streamlining our organization to reduce overhead costs, and (iv) improving the pace and effectiveness of our innovation program, all with renewed emphasis on priority markets, channels and brands.

          In North America, we intend to better target brand investment, accelerate the pace of our product innovation, and seek new brand opportunities to drive long-term growth in fragrance sales in the U.S. market. Internationally, in addition to continuing our efforts to expand the growth of our prestige fragrance portfolio, we plan to capitalize on the global repositioning of the Elizabeth Arden brand to expand our market share in priority markets. In conjunction with these efforts, we expect to rely more heavily on regional joint ventures in certain foreign markets, as opposed to distributors, particularly as we enter new markets. This should allow us to cost-effectively leverage established commercial infrastructures with strong retail market share and expertise to help us grow both the Elizabeth Arden brand and our prestige fragrance portfolio internationally.

          As part of the review of our business and cost structure, during the fourth quarter of fiscal 2014, our board of directors approved a broad restructuring and cost savings program that is intended to reduce the size and cost of our overhead structure and exit low-return businesses, customers and brands and to improve gross margins and profitability in fiscal 2015 and in the long term (the "2014 Performance Improvement Plan"). The 2014 Performance Improvement Plan includes the exiting of certain unprofitable retail doors and fragrance license agreements, changes in customer, distribution and supply chain relationships, the discontinuation of certain products, the elimination of approximately 175 employee positions globally and the closing of our affiliate in Puerto Rico.

          At June 30, 2014, we estimated that the 2014 Performance Improvement Plan would result in pre-tax charges beginning in the fourth fiscal quarter of 2014 and through fiscal 2015 of $65 million to $72 million. As a result of our continuing reexamination of how we commercially execute our business, during the three months ended December 31 2014, we made changes to customer and

- 26 -


distributor relationships relating to our distribution strategy in China. Primarily as a result of this decision, in December 2014 we increased the range of estimated pre-tax charges to be incurred under the 2014 Performance Improvement Plan through fiscal 2015 and now expect the amounts to be between $92 million and $99 million. We anticipate annualized savings resulting from the 2014 Performance Improvement Plan activities of approximately $27 million to $35 million. See Note 4 of the Notes to Unaudited Consolidated Financial Statements.

          Since inception, we have incurred approximately $84.8 million of pre-tax charges in connection with the 2014 Performance Improvement Plan, including $0.2 million and $28.9 million during the three and nine months ended March 31, 2015, respectively. The 2014 Performance Improvement Plan is only part of our ongoing broad restructuring and cost savings program, and we are continuing to target annual savings in the range of $40 million to $50 million upon full implementation of our cost-reduction efforts. These efforts are expected to result in additional decisions that are likely to impact net sales, operating margins and/or earnings in future periods. The specific facts and circumstances surrounding any such future decisions will impact the timing and amount of any costs or expenses that may be incurred.

          On August 19, 2014, we entered into a securities purchase agreement with Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P. (which we call the Purchasers), investment funds affiliated with Rhône Capital L.L.C. Pursuant to the securities purchase agreement, for aggregate cash consideration of $50 million, we issued to the Purchasers an aggregate of 50,000 shares of our newly designated Series A Serial Preferred Stock, par value $0.01 per share, with detachable warrants to purchase up to 2,452,267 shares of the Company's common stock at an exercise price of $20.39 per share. See Note 12 to the Notes to Unaudited Consolidated Financial Statements.

          We have an investment through a subsidiary in US Cosmeceutechs, LLC, a skin-care company that develops and sells skin care products into the professional dermatology and spa channels. Based on our investment in US Cosmeceutechs, LLC and our subsidiary's controlling rights under the operating agreement, we have determined that US Cosmeceutechs, LLC is a variable interest entity, or VIE, of which we are the primary beneficiary, requiring our consolidation of US Cosmeceutechs, LLC financial statements in accordance with Topic 810, Consolidation. In addition, based on the terms of a put-call agreement with the other equity member of US Cosmeceutechs, LLC, we are required to classify the noncontrolling interest in USC as a "redeemable noncontrolling interest" in the mezzanine section of our consolidated balance sheet. See Note 5 to the Notes to Unaudited Consolidated Financial Statements.

          Effective January 4, 2015, through a subsidiary, we entered into a joint venture in the United Arab Emirates (the joint venture) with an unrelated third party. Based on the capitalization of the joint venture, our subsidiary has a 60% ownership interest and the third party has a 40% ownership interest. The joint venture will be responsible for the sale, promotion and distribution of our fragrance, skincare and cosmetics products in eleven Middle Eastern countries. Under the terms of the joint venture agreement, our subsidiary has the option to purchase a 15% ownership interest from the third party after 15 years at a specified price based on the performance of the joint venture and also has the option to purchase the entire ownership interest of the third party upon the termination or expiration of the joint venture agreement at a specified price based on the performance of the joint venture.

          Based on the terms of the joint venture agreement, our subsidiary has control of the board of managers and the power to direct activities that could have a substantial impact on the economic performance of the joint venture, including those that could result in the obligation to absorb losses or the right to receive benefits that could potentially be significant to joint venture. Based on its equity interest in the joint venture and our subsidiary's controlling rights under the operating agreement, we have determined that the joint venture is a variable interest entity, or VIE, requiring consolidation of the joint venture's financial statements in accordance with Topic 810, Consolidation. The unrelated third party's interest in the joint venture is classified as a "noncontrolling interest" in the shareholders' equity section of our consolidated balance sheet. See Note 5 to the Notes to Unaudited Consolidated Financial Statements.

          We manage our business by evaluating net sales, EBITDA (as defined later in this discussion), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable, operating cash flow and return on invested capital). We encounter a variety of challenges that may affect our business and should be considered as described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended June 30, 2014 and in the section of this quarterly report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results."

Seasonality

          Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2014, approximately 65% of our net sales were made during the first half of our fiscal year. We also experience seasonality in our working capital, with

- 27 -


peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our short-term borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

          Due to product innovation and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

Critical Accounting Policies and Estimates

          As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial, statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Our most critical accounting policies relate to revenue recognition, provisions for inventory obsolescence, allowances for sales returns markdowns and doubtful accounts, intangible and long-lived assets, income taxes, hedging contracts and share-based compensation.

          During the second quarter of fiscal 2015, net sales of Justin Bieber and Nicki Minaj fragrances fell significantly below expectations. We reviewed these license agreements for potential impairment. Given the significant decline in net sales during the second quarter of fiscal 2015, and the expectation for a continued decline of sales in future periods, we determined that these intangible assets were fully impaired. As a result, we recorded a total impairment charge of approximately $39.6 million during the second quarter of fiscal 2015 to write off the carrying values of both the Justin Bieber and Nicki Minaj licenses. See Note 7 to the Notes to Unaudited Consolidated Financial Statements. Since June 30, 2014, there have been no other significant changes to the assumptions and estimates related to those critical accounting policies.

Foreign Currency Contracts

          We operate in several foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of our foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. We also enter into cash flow hedges for a portion of our forecasted inventory purchases to reduce the exposure of our Canadian and Australian subsidiaries' cost of sales to such fluctuations, as well as cash flow hedges for a portion of our subsidiaries' forecasted Swiss franc operating costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. We do not enter into derivative financial contracts for speculative or trading purposes.

          Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity, to the extent such contracts are effective, and are recognized in net sales or cost of sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and nine months ended March 31, 2015 or in fiscal 2014 relating to foreign currency contracts used to hedge forecasted revenues, forecasted cost of sales or forecasted operating costs resulting from hedge ineffectiveness.

          When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce exposure of our foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire.

          The following table summarizes the effect of the pre-tax gain (loss) from our settled foreign currency contracts on the specified line items in our consolidated statements of operations for the three and nine months ended March 31, 2015 and 2014.

- 28 -


(Amounts in thousands)

Three Months Ended

Nine Months Ended

March 31,
2015

March 31,
2014

March 31,
2015

March 31,
2014

Net Sales

$

989

   

$

(387

)

 

$

1,427

   

$

(787

)

Cost of Sales

 

525

     

142

     

588

     

86

 

Selling, general and administrative

 

1,382

     

(381

)

   

3,606

     

(872

)

Total pre-tax gain (loss)

$

2,896

   

$

(626

)

 

$

5,621

   

$

(1,573

)

Results of Operations

          The following discussion compares the historical results of operations for the three and nine months ended March 31, 2015 and 2014. Results of operations as a percentage of net sales were as follows (dollar amounts in thousands; percentages may not add due to rounding):

 

 

Three Months Ended

 

Nine Months Ended

   

March 31,
2015

 

March 31,
2014

 

March 31,
2015

 

March 31,
2014

Net sales(1)

 

$

191,653

(1)

100.0

%

 

$

210,841

 

100.0

%

 

$

795,638

(2)

100.0

%

 

$

972,587

 

100.0

%

Cost of sales

   

110,058

 

57.4

     

119,205

 

56.6

     

460,146

 

57.8

     

538,115

 

55.3

 

Depreciation in cost of sales

   

1,957

 

1.0

     

1,967

 

0.9

     

5,916

 

0.8

     

5,784

 

0.6

 

   Gross profit

   

79,638

(1)

41.6

     

89,669

(3)

42.5

     

329,576

(2)

41.4

     

428,688

(4)

44.1

 

Selling, general and
   administrative expenses

   

97,463

 

50.9

     

107,338

 

50.9

     

391,533

 

49.2

     

365,713

 

37.6

 

Depreciation and amortization

   

9,547

 

5.0

     

11,286

 

5.3

     

31,055

 

3.9

     

33,122

 

3.4

 

(Loss) income from operations

   

(27,372

)(1)

(14.3

)

   

(28,955

)(3)

(13.7

)

   

(93,012

)(2)

(11.7

)

   

29,853

(4)

3.1

 

Interest expense, net

   

7,055

 

3.7

     

6,605

 

3.1

     

22,523

 

2.8

     

18,371

 

1.9

 

Debt extinguishment charges

   

--

 

--

     

--

 

--

     

239

 

--

     

--

 

--

 

(Loss) income before income
   taxes

   

(34,427

)

(18.0

)

   

(35,560

)

(16.8

)

   

(115,774

)

(14.5

)

   

11,482

 

1.2

 

Provision for (benefit from)
   income taxes

   

500

 

0.2

     

(8,626

)

(4.1

)

   

1,557

 

0.2

     

2,172

 

0.3

 

Net (loss) income (5)

   

(34,927

)

(18.2

)

   

(26,934

)

(12.7

)

   

(117,331

)

(14.7

)

   

9,310

 

0.9

 

Net loss attributable to
   noncontrolling interests (6)

   

(481

)

(0.2

)

   

(491

)

(0.2

)

   

(1,396

)

(0.1

)

   

(897

)

(0.1

)

Net (loss) income attributable
   to Elizabeth Arden
   shareholders

   

(34,446

)

(18.0

)

   

(26,443

)

(12.5

)

   

(115,935

)

(14.6

)

   

10,207

 

1.0

 

Less: Accretion and dividends
   on preferred stock

   

615

 

0.3

     

--

 

--

     

21,700

 

2.7

     

--

 

--

 

Net (loss) income attributable
   to Elizabeth Arden common
   shareholders

   

(35,061

)

(18.3

)

   

(26,443

)

(12.5

)

   

(137,635

)

(17.3

)

   

10,207

 

1.0

 

Other data:

                                               

   EBITDA and EBITDA margin (7)

 

$

(15,868

)

(8.3

)%

 

$

(15,702

)

(7.4

)%

 

$

(56,280

)

(7.1

)%

 

$

68,759

 

7.1

%

(1)

For the three months ended March 31, 2015, net sales include $(0.3) million of adjustments for returns and markdowns previously recorded under our 2014 Performance Improvement Plan primarily due to changes to our customer and distribution arrangements.

In addition to the adjustment for returns and markdowns described above, gross profit includes:

*

$0.3 million of inventory write-downs under our 2014 Performance Improvement Plan due to discontinuation of certain products.

In addition to the items above, loss from operations includes:

*

$0.2 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions.

(2)

For the nine months ended March 31, 2015, net sales include $15.0 million of returns and markdowns under our 2014 Performance Improvement Plan primarily due to changes to our distribution strategy in China, and other customer and distribution arrangements.

In addition to the returns and markdowns described above, gross profit includes:

*

$4.9 million of inventory write-downs under our 2014 Performance Improvement Plan due to discontinuation of certain products.

- 29 -


In addition to the items above, loss from operations includes:

*

$9.0 million in expenses under the 2014 Performance Improvement Plan primarily comprised of $4.5 million of customer and vendor contract termination costs, $4.4 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions and $0.1 million in asset impairment charges;

*

$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses, and other costs; and

*

$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to our credit facility.

(3)

For the three months ended March 31, 2014, gross profit includes $1.8 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand and $0.9 million of transition costs related to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

In addition to the item above, loss from operations includes:

*

$0.6 million of severance and other employee-related expenses and related transition costs with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

(4)

For the nine months ended March 31, 2014, gross profit includes $14.2 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand and $1.4 million of transition costs related to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

In addition to the item above, income from operations includes:

*

a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands, LLC based on our determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met;

*

$3.9 million of severance and other employee-related expenses and related transition costs with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013; and

*

$1.1 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand.

(5)

For the three and nine months ended March 31, 2015, the net loss includes items discussed in Notes 1 and 2 above, as well as a valuation allowance of $11.2 million and $39.7 million against our U.S. and Canadian deferred tax assets, respectively, recorded as a non-cash charge to income tax expense.

(6)

See Note 5 to Notes to Unaudited Consolidated Financial Statements.

(7)

For a definition of EBITDA and a reconciliation of net (loss) income to EBITDA, see "EBITDA" under Results of Operations -- Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014 and under Nine Months Ended March 31, 2015 compared to Nine Months Ended March 31, 2014. EBITDA margin represents EBITDA divided by net sales.

          At March 31, 2015, our operations were organized into the following two operating segments, which also comprise our reportable segments:

 

North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to prestige retailers, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes our direct to consumer business, which is composed of our Elizabeth Arden branded retail outlet stores and our e-commerce business. This segment also sells Elizabeth Arden products through the Red Door Spa beauty salons and spas, which are owned and operated by a third-party licensee in which we have a minority investment.

 

International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, to perfumeries, boutiques, department stores, travel retail outlets and distributors in approximately 120 countries outside of North America.

          Segment net sales and (loss) profit exclude returns and markdowns related to the 2014 Performance Improvement Plan. In addition, segment (loss) profit excludes depreciation and amortization, interest expense, debt extinguishment costs, and consolidation and elimination adjustments and unallocated corporate costs and expenses, which are shown in the table reconciling segment (loss) profit to consolidated (loss) income before income taxes. Included in unallocated corporate costs and expenses are (i) restructuring charges that are related to an announced plan, (ii) restructuring costs for corporate operations, and (iii) costs and expenses related to the 2014 Performance Improvement Plan, including returns and markdowns. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. We do not have any intersegment sales.

- 30 -


          The following table is a comparative summary of our net sales and segment (loss) profit by operating segment for the three and nine months ended March 31, 2015 and 2014 and reflects the basis of presentation described in Note 17 -- "Segment Data and Related Information" to the Notes to Unaudited Consolidated Financial Statements for all periods presented.

(Amounts in thousands)

Three Months Ended

   

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Segment Net Sales:

                             

    North America

$

107,511

   

$

121,877

   

$

507,145

   

$

616,183

 

    International

 

83,853

     

88,964

     

303,465

     

356,404

 

Total

$

191,364

   

$

210,841

   

$

810,610

   

$

972,587

 

Reconciliation:

                             

    Segment Net Sales

$

191,364

   

$

210,841

   

$

810,610

   

$

972,587

 

    Less

                             

        Unallocated sales returns and markdowns

 

(289

)(1)

   

--

     

14,972

(1)

   

--

 

Net Sales

$

191,653

$

210,841

$

795,638

$

972,587

Segment Profit (Loss):

                             

    North America

$

1,500

   

$

3,394

   

$

44,886

   

$

66,241

 

    International

(17,245

)

(17,437

)

(26,791

)

(10,557

)

    Less:

                             

        Depreciation and Amortization

 

11,504

     

13,253

     

36,971

     

38,906

 

        Interest Expense, net

 

7,055

     

6,605

     

22,523

     

18,371

 

        Consolidation and Elimination Adjustments

 

(14

)

   

125

     

1,501

     

(1,238

)

        Unallocated Corporate Expenses

 

137

(2)

   

1,534

(3)

   

72,874

(4)

   

(11,837

)(5)

(Loss) Income Before Income Taxes

$

(34,427

)

$

(35,560

)

$

(115,774

)

$

11,482

(1)

Amounts for the three months ended March 31, 2015, represent $(0.3) million of adjustments for returns and markdowns previously recorded under our 2014 Performance Improvement Plan primarily due to changes to our customer and distribution arrangements. Amounts for the nine months ended March 31, 2015, represent $15.0 million of returns and markdowns under our 2014 Performance Improvement Plan primarily due to changes to our distribution strategy in China, and other customer and distribution arrangements.

(2)

In addition to the returns and markdowns described above in Note 1, amounts for the three months ended March 31, 2015, include:

*

$0.5 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $0.3 million of inventory write-downs due to discontinuation of certain products, and $0.2 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions;

(3)

Amounts for the three months ended March 31, 2014, include:

*

$1.5 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

(4)

In addition to the returns and markdowns described above in Note 1, amounts for the nine months ended March 31, 2015, include:

*

$13.9 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $4.9 million of inventory write-downs due to discontinuation of certain products, $4.5 million primarily comprised of customer and vendor contract termination costs, $4.4 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.1 million in asset impairment charges;

*

$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs; and

*

$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to our credit facility.

(5)

Amounts for the nine months ended March 31, 2014, include:

*

a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands, LLC based on our determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met; and

*

$5.3 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013.

- 31 -


          The following is additional net sales information relating to the following product categories: the Elizabeth Arden Brand (skin care, cosmetics and fragrances) and Designer, Heritage, Celebrity, and Other Fragrances.

(Amounts in thousands)

Three Months Ended

   

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

   

March 31,
2015

   

March 31,
2014

 

Net Sales:

                             

    Elizabeth Arden Brand

$

88,711

   

$

85,857

   

$

295,902

   

$

348,539

 

    Designer, Heritage, Celebrity and
      Other Fragrances

 

102,942

     

124,984

     

499,736

     

624,048

 

Total

$

191,653

   

$

210,841

   

$

795,638

   

$

972,587

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.

          Net Sales.    Net sales decreased by 9.1%, or $19.2 million, for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, primarily due to an overall decline in sales of celebrity and heritage fragrances, a lower level of product innovation as compared to the prior year period and our efforts to tighten product distribution. Excluding the unfavorable impact of foreign currency, net sales decreased by 5.7%, or $12.0 million. Net sales reflect $0.3 million of adjustments for returns and markdowns previously recorded under our 2014 Performance Improvement Plan primarily due to changes to our customer and distribution arrangements. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

          Segment Net Sales:

          North America

          Net sales decreased by 11.8%, or $14.4 million primarily due to an overall decline in sales of celebrity and heritage fragrances, a lower level of product innovation as compared to the prior year period and our efforts to tighten product distribution. Excluding the unfavorable impact of foreign currency, net sales decreased by 10.9%, or $13.3 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $13.1 million due to lower net sales for almost all fragrance brands, including Juicy Couture, Ed Hardy and Justin Bieber fragrances. Partially offsetting these decreases were higher sales of Curve and John Varvatos fragrances. Net sales of Elizabeth Arden branded products increased by $1.1 million, due to higher sales of fragrance and skin care products. Net sales of distributed brands were $2.4 million lower than the prior year period, primarily due to the prior year launch of the One Direction Our Moment fragrance in department stores.

          International

          Net sales decreased by 5.7%, or $5.1 million primarily due to a decline in sales of certain celebrity and heritage fragrances and a lower level of product innovation as compared to the prior year period. Excluding the unfavorable impact of foreign currency, net sales increased by 1.1%, or $0.9 million. Net sales of licensed and non-Elizabeth Arden-branded, owned products decreased an aggregate of $8.5 million from the prior year period, primarily due to lower net sales of Britney Spears, Justin Bieber, Giorgio Beverly Hills and Nicki Minaj fragrances. Net sales of Elizabeth Arden branded products increased by 2.5%, or $1.5 million, primarily due to higher sales of skin care products in China as a result of shipments of product under our new distribution strategy, as well other Asia Pacific markets. Excluding the unfavorable impact of foreign currency, net sales of Elizabeth Arden branded products increased 10.8%, or $6.2 million. Net sales of Elizabeth Arden-branded cosmetics and certain fragrance products were lower in the current year period. Net sales in Europe were $12.2 million lower than the prior year period, due in part to the impact of foreign currency, and were partially offset by higher sales of $5.7 million in the Greater China region as compared to the prior year period.

          Product Category Net Sales:

          Elizabeth Arden Brand

          Net sales increased by 3.3%, or $2.8 million, due to $5.8 million of higher sales of skin care products primarily in the Asia Pacific region including China. Excluding the unfavorable impact of foreign currency, net sales increased by 9.7%, or $8.3 million. Net sales of color cosmetic and fragrance products decreased $2.2 million and $0.8 million, respectively, compared to the prior year period.

- 32 -


          Designer, Heritage, Celebrity and Other Fragrances

          Net sales decreased by 17.6% or $22.0 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 16.2% or $20.3 million. The decrease includes lower net sales for most fragrance brands including Britney Spears, Juicy Couture, Ed Hardy and Justin Bieber. Partially offsetting these decreases were higher sales of Curve and John Varvatos fragrances. Sales of distributed brands were $2.4 million lower than the prior year period primarily due to the prior year launch of the One Direction Our Moment fragrance in North American department stores.

          Gross Margin.   For the three months ended March 31, 2015 and 2014, gross margins were 41.6% and 42.5%, respectively. The current year gross margin was negatively impacted by higher product costs driven by the lower volume of inventory purchases. Gross margin in the prior year period was negatively impacted by $2.7 million, or 130 basis points, of product changeover costs associated with the Elizabeth Arden brand repositioning and transition costs related to restructuring activities.

          SG&A.   Selling, general and administrative expenses decreased by 9.2%, or $9.9 million, for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The decrease was primarily due to lower marketing and sales expenses of $13.2 million, partially offset by higher general and administrative expenses of $3.3 million due to higher incentive compensation expense and the impact of foreign currency translation of our affiliates' balance sheets.

          The decrease in marketing and sales expenses during the three months ended March 31, 2015 was primarily due to (i) $8.3 million in lower sales promotion, advertising and media spend, reflecting a spend rate consistent with the spend rate in the prior year period, (ii) $4.0 million of lower marketing and sales overheads expenses in part due to the elimination of certain sales and marketing positions, and (iii) $0.9 million of lower royalty expense primarily due to lower net sales of licensed products in the current year period.

          General and administrative expenses for the three months ended March 31, 2015, were impacted by higher incentive compensation expense of $4.1 million, and the impact of foreign currency translation of our affiliates' balance sheets as the current year included losses of $2.9 million compared to losses of $0.9 million in the prior year period. Partially offsetting these increase were lower payroll and related expenses of $1.9 million in the current year. For the three months ended March 31, 2015, general and administrative expenses included $0.2 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions under our 2014 Performance Improvement Plan. General and administrative expenses for the three months ended March 31, 2014, included $0.6 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013. For both the three months ended March 31, 2015 and 2014, total share-based compensation costs charged against income for all stock plans was $1.3 million.

          Segment Profit (Loss):

          North America

          Segment profit decreased 55.8%, or $1.9 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower segment selling, general and administrative expenses.

          International

          Segment loss decreased $0.2 million, as compared to the prior year. Lower sales and gross profit in the current year were offset by lower segment selling, general and administrative expenses.

          Depreciation and Amortization Expense.    Depreciation and amortization expense decreased by 15.4% or $1.7 million, for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, due to lower amortization expense for brand licenses, trademarks and intangibles.

          Interest Expense, Net.    Interest expense, net of interest income, was $0.5 million higher for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The increase was due to the issuance in January 2014 of an additional $100 million aggregate principal amount of 7 3/8% senior notes due in 2021, partially offset by higher interest income.

       Provision for Income Taxes.    The pre-tax (loss) from our domestic and international operations consisted of the following for the three months ended March 31, 2015 and 2014:

- 33 -


(Amounts in thousands)

Three Months Ended

 

March 31,
2015

   

March 31,
2014

 

Domestic pre-tax (loss)

$

(26,817

)

$

(23,440

)

Foreign pre-tax (loss)

 

(7,610

)

   

(12,120

)

Total (loss) before income taxes

$

(34,427

)

$

(35,560

)

Effective tax rate

(1.5

)%

24.3

%

          Commencing with the fourth quarter of fiscal 2014, we have recorded valuation allowances against our U.S. deferred tax assets as a non-cash charge to income tax expense. The valuation allowances for our net deferred tax assets have resulted in our inability to record tax benefits on future losses in our U.S. operations unless sufficient future taxable income is generated in such operations to support the realization of the deferred tax assets. As a result, we cannot recognize a tax benefit on our U.S. pre-tax loss for the three months ended March 31, 2015, and have instead recorded a valuation allowance of $11.2 million for the period. A valuation allowance reduces deferred tax assets to the amount expected to be realized. Recording the valuation allowances does not restrict our ability to utilize U.S. net operating losses associated with the deferred tax assets assuming taxable income of the appropriate character is recognized in periods prior to the expiration of such net operating losses. A return to sustained profitability in the U.S. could result in a potential reversal of all or a portion of the valuation allowance in future periods. However, there is no assurance that we will be able to reverse all or a portion of the valuation allowance in the future.

          During the second quarter of fiscal 2015, we revised our forecast for our Canadian affiliate which is now projected to show a loss for fiscal 2015, in part due to the impact of our 2014 Performance Improvement Plan and foreign exchange losses due to large fluctuations in currency conversion rates. Based on the projected three-year cumulative taxable loss for the three fiscal years ending June 30, 2015, as well as our consideration of the weight of positive and negative evidence, commencing with the second quarter of fiscal 2015, we have recorded valuation allowances against our Canadian deferred tax assets as a non-cash charge to income tax expense. The valuation allowance related to our Canadian operations was not material for the three months ended March 31, 2015.

          In general, we record income tax expense for interim periods based on our best estimate as to the full fiscal year's effective tax rate. For interim reporting, the effective tax rate is based on expected full year reported earnings and considers earnings contribution by tax jurisdiction. As facts and circumstances that could impact the full year expected earnings or the expected earnings contribution by tax jurisdiction change during the year, the effective tax rate is adjusted in the period in which such changes become known or are enacted into law. Additionally, discrete items that could impact the effective tax rate are reported in the interim period incurred. However, the U.S. and certain foreign jurisdictions were removed from the base calculation of the annual effective tax rate, as we expect these jurisdictions to generate losses for which no benefit will be recognized. A separate rate is calculated in those loss jurisdictions that includes tax expense for an increase in deferred tax liabilities associated with indefinite-lived assets, which cannot be used as a source of taxable income.

          In addition to the impact of the valuation allowances discussed above, the effective tax rate in the current year period was lower as compared to the prior year period, primarily due to a shift in the ratio of earnings contributions between jurisdictions. The effective tax rate for the full fiscal year ended June 30, 2014 was (62.9)%.

          A substantial portion of our consolidated taxable income (loss) is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income (loss). As a result, any material shift in the relative proportion of our consolidated taxable income (loss) that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate.

          Net (Loss) Attributable to Elizabeth Arden Common Shareholders.    Net loss attributable to Elizabeth Arden common shareholders for the three months ended March 31, 2015, was $35.1 million, compared to $26.4 million for the three months ended March 31, 2014. The decrease in results compared to the prior year was due to lower net sales and gross profit and the valuation allowances recorded as part of our tax provision, partially offset by lower selling, general and administrative expenses as well as lower depreciation and amortization expense. The current year amount also includes dividends of $0.6 million related to our issuance of preferred stock in August 2014. See Note 12 to Notes to Unaudited Consolidated Financial Statements.

          EBITDA.    EBITDA (net income attributable to Elizabeth Arden common shareholders plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense, plus net income or (net loss) attributable to noncontrolling interest), plus dividends on preferred stock) for the three months ended March 31, 2015, was $(15.9) million compared to the prior year amount of $(15.7) million. The lower gross profit in the current year was mostly offset by lower selling, general and administrative expenses. EBITDA for the three months ended March 31, 2015, includes:

- 34 -


 

*

$(0.3) million of adjustments for returns and markdowns previously recorded under our 2014 Performance Improvement Plan primarily as a result of changes to our customer and distribution arrangements;

 

*

$0.3 million of inventory write-downs under our 2014 Performance Improvement Plan, due to discontinuation of certain products;

 

*

$0.2 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions;

          EBITDA for the three months ended March 31, 2014 included:

 

*

$1.8 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand; and

 

*

$1.5 million of severance and other employee-related expenses and related transition costs and expenses incurred with respect to the elimination of certain sales and staff positions announced in the fall of 2013.

          EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Elizabeth Arden common shareholders (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance, or to net cash provided by operating, investing or financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, preferred stock accretion or dividends or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. This information has been disclosed here to permit a more complete comparative analysis of our operating performance relative to other companies and of our debt servicing ability. EBITDA may not, however, be comparable in all instances to other similar types of measures

          In addition, EBITDA has limitations as an analytical tool, including the fact that:

 

*

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

 

*

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt or the dividends or redemption value of our preferred stock;

 

*

it does not reflect any cash income taxes that we may be required to pay; and

 

*

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

          The following is a reconciliation of net (loss) income attributable to Elizabeth Arden shareholders, as determined in accordance with generally accepted accounting principles, to EBITDA:

(Amounts in thousands)

Three Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Net (loss) attributable to Elizabeth Arden common shareholders

$

(35,061

)

 

$

(26,443

)

Plus:

             

   Provision for (benefit from) income taxes

 

500

     

(8,626

)

   Interest expense, net

 

7,055

     

6,605

 

   Depreciation in cost of sales

 

1,957

     

1,967

 

   Depreciation and amortization

 

9,547

     

11,286

 

   Net loss applicable to noncontrolling interest (See Note 5 to Notes to
     Unaudited Consolidated Financial Statements)

 

(481

)

   

(491

)

   Dividends on preferred stock (See Note 12 to Notes to Unaudited
     Consolidated Financial Statements)

 

615

     

--

 

          EBITDA

$

(15,868

)

 

$

(15,702

)

- 35 -


Nine Months Ended March 31, 2015 Compared to Nine Months Ended March 31, 2014.

          Net Sales.    Net sales decreased by 18.2%, or $176.9 million, for the nine months ended March 31, 2015, compared to the nine months ended March 31, 2014, primarily due to our efforts to tighten product distribution, a lower level of product innovation as compared to the prior year period and an overall decline in sales of celebrity and heritage fragrances. Excluding the unfavorable impact of foreign currency, net sales decreased by 17.1%, or $166.1 million. Net sales reflect $15.0 million of returns and markdowns recorded as a result of our 2014 Performance Improvement Plan primarily due to changes to our distribution strategy in China, and customer and distribution arrangements. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

          Segment Net Sales:

          North America

          Net sales decreased by 17.7%, or $109.0 million primarily due to our efforts to tighten product distribution, a lower level of product innovation as compared to the prior year period and an overall decline in sales of celebrity and heritage fragrances. Excluding the unfavorable impact of foreign currency, net sales decreased by 17.3%, or $106.5 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $79.0 million due to lower net sales for almost all fragrance brands, including Justin Bieber, Britney Spears, Ed Hardy, Taylor Swift, Nicki Minaj and Juicy Couture fragrances. Net sales of Elizabeth Arden branded products decreased by $9.3 million, due to lower sales in all product categories. Net sales of distributed brands were $20.7 million lower than the prior year period, primarily due to the prior year launch of the One Direction Our Moment fragrance in department stores.

          International

          Net sales decreased by 14.9%, or $52.9 million primarily due to our efforts to tighten product distribution and lower sales of Elizabeth Arden skin care products in China as a result of changes to our distribution strategy in China. Excluding the unfavorable impact of foreign currency, net sales decreased by 12.5%, or $44.6 million. Net sales of Elizabeth Arden branded products decreased by $29.9 million, due to lower sales in all product categories. Net sales of licensed and non-Elizabeth Arden-branded, owned products decreased an aggregate of $25.7 million from the prior year period, primarily due to lower net sales of Justin Bieber and Britney Spears fragrances. Partially offsetting these decreases were higher sales of John Varvatos and Elizabeth Taylor fragrances. Net sales in Europe and in the Greater China region were $36.9 million and $15.1 million lower, respectively, as compared to the prior year period.

          Product Category Net Sales:

          Elizabeth Arden Brand

          Net sales decreased by 15.1%, or $52.6 million, due to lower sales in all product categories. Excluding the unfavorable impact of foreign currency, net sales decreased by 12.8%, or $44.6 million. Net sales of fragrances decreased 19.4%, or $26.2 million, primarily due to lower sales of Elizabeth Arden 5th Avenue, Elizabeth Arden Green Tea and the prior year launch of UNTOLD. Net sales of skin care products decreased by 12.5%, or $20.7 million, primarily due to weaker overall skincare sales in China as a result of changes to our distribution strategy in China, as well as lower sales of Visible Difference, and net sales of color cosmetic products decreased by 12.0%, or $5.7 million.

          Designer, Heritage, Celebrity and Other Fragrances

          Net sales decreased by 19.9% or $124.3 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 19.5% or $121.5 million. The decrease includes lower net sales for most fragrance brands including Justin Bieber, Britney Spears, Taylor Swift, Ed Hardy and Nicki Minaj fragrances. Sales of distributed brands were $20.3 million lower primarily due to the prior year launch of the One Direction Our Moment fragrance in North American department stores.

          Gross Margin.   For the nine months ended March 31, 2015 and 2014, gross margins were 41.4% and 44.1%, respectively. Gross margin in the current year period was negatively impacted by $19.8 million, or 170 basis points, of returns, markdowns and inventory write-downs under our 2014 Performance Improvement Plan. In addition, the current year gross margin was negatively impacted by a lower proportion of sales of higher margin products, including both Elizabeth Arden branded products and licensed fragrances, as lower margin distributed brands made up a higher proportion of our total net sales. We made a strategic decision for our

- 36 -


2015 fiscal year to reduce our levels of certain inventories at reduced margins, which also negatively impacted our gross margin in the current period. Gross margin in the prior year period was negatively impacted by $15.6 million, or 160 basis points, of product changeover costs associated with the Elizabeth Arden brand repositioning and transition costs related to restructuring activities.

          SG&A. Selling, general and administrative expenses increased by 7.1%, or $25.8 million, for the nine months ended March 31, 2015, compared to the nine months ended March 31, 2014. The increase was due to the asset impairment charges discussed below and higher general and administrative expenses totaling $76.7 million, partially offset by lower marketing and sales expenses of $50.9 million.

          During the nine months ended March 31, 2015, we recorded $43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs. In addition, for the nine months ended March 31, 2015, general and administrative expenses included $9.0 million in expenses under our 2014 Performance Improvement Plan, comprised of (i) $4.5 million primarily for customer and vendor contract termination costs, (ii) $4.4 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and (iii) $0.1 million in asset impairment charges. General and administrative expenses for the nine months ended March 31, 2015, were also impacted by higher incentive compensation expense of $12.0 million primarily due to prior year reversal of certain incentive accruals, and the impact of foreign currency translation of our affiliates' balance sheets as the current year included losses of $7.5 million compared to losses of $0.5 million in the prior year period. Partially offsetting these increases were lower payroll and related costs of $5.1 million in the current year. The nine months ended March 31, 2014, also included (i) a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands, LLC based on our determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met, (ii) $3.9 million of severance and other employee-related expenses and related transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013, and (iii) $1.1 million of product changeover expenses related to the Elizabeth Arden brand repositioning. For the nine months ended March 31, 2015 and 2014, total share-based compensation costs charged against income for all stock plans was $4.0 million and $4.5 million, respectively.

          The decrease in marketing and sales expenses during the nine months ended March 31, 2015 was primarily due to (i) $33.5 million in lower media, advertising and sales promotion spend reflecting a spend rate consistent with the spend rate in the prior year period, (ii) $10.9 million of lower marketing and sales overhead expenses in part due to the elimination of certain sales and marketing positions, and (iii) $6.4 million of lower royalty expense primarily due to lower net sales of licensed products in the current year period.

          Segment Profit (Loss):

          North America

          Segment profit decreased 32.2%, or $21.4 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower segment selling, general and administrative expenses.

          International

          Segment loss increased by $16.2 million, as compared to the prior year. The increase in segment loss was due to lower sales and gross profit, partially offset by lower segment selling, general and administrative expenses.

          Depreciation and Amortization Expense.    Depreciation and amortization expense decreased by 6.2%, or $2.1 million, for the nine months ended March 31, 2015, compared to the nine months ended March 31, 2014, due to lower amortization expense for brand licenses, trademarks and intangibles.

          Interest Expense, Net.    Interest expense, net of interest income, was $4.2 million higher for the nine months ended March 31, 2015, compared to the nine months ended March 31, 2014. The increase was due to the issuance in January 2014 of an additional $100 million aggregate principal amount of 7 3/8% senior notes due in 2021.

          Debt Extinguishment Charges.    For the nine months ended March 31, 2015, we recorded approximately $0.2 million of debt extinguishment charges related to the December 2014 amendment of our revolving bank credit facility. See Note 9 to the Notes to Unaudited Consolidated Financial Statements.

- 37 -


          Provision for Income Taxes.    The pre-tax (loss) income from our domestic and international operations consisted of the following for the nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Nine Months Ended

 

March 31,
2015

   

March 31,
2014

 

Domestic pre-tax (loss)

$

(92,003

)

 

$

(7,454

)

Foreign pre-tax (loss) income

 

(23,771

)

   

18,936

 

Total (loss) income before income taxes

$

(115,774

)

 

$

11,482

 

Effective tax rate

(1.3

)%

18.9

%

          Commencing with the fourth quarter of 2014, we have recorded valuation allowances against our U.S. deferred tax assets as a non-cash charge to income tax expense. The valuation allowances for our net deferred tax assets have resulted in our inability to record tax benefits on future losses in our U.S. operations unless sufficient future taxable income is generated in such operations to support the realization of the deferred tax assets. As a result, we cannot recognize a tax benefit on our U.S. pre-tax loss for the nine months ended March 31, 2015, and have instead recorded a valuation allowance of $37.2 million for the period. A valuation allowance reduces deferred tax assets to the amount expected to be realized. Recording the valuation allowances does not restrict our ability to utilize U.S. net operating losses associated with the deferred tax assets assuming taxable income of the appropriate character is recognized in periods prior to the expiration of such net operating losses. A return to sustained profitability in the U.S. could result in a potential reversal of all or a portion of the valuation allowance in future periods. However, there is no assurance that we will be able to reverse all or a portion of the valuation allowance in the future.

          During the second quarter of fiscal 2015, we revised our forecast for our Canadian affiliate which is now projected to show a loss for fiscal 2015, in part due to the impact of our 2014 Performance Improvement Plan and foreign exchange losses due to large fluctuations in currency conversion rates. Based on the projected three-year cumulative taxable loss for the three fiscal years ending June 30, 2015, as well as our consideration of the weight of positive and negative evidence, commencing with the second quarter of fiscal 2015, we have recorded valuation allowances against our Canadian deferred tax assets as a non-cash charge to income tax expense. For the nine months ended March 31, 2015, we have recorded a valuation allowance of $2.5 million, of which $2.1 million was recorded on a discrete basis.

          In general, we record income tax expense for interim periods based on our best estimate as to the full fiscal year's effective tax rate. For interim reporting, the effective tax rate is based on expected full year reported earnings and considers earnings contribution by tax jurisdiction. As facts and circumstances that could impact the full year expected earnings or the expected earnings contribution by tax jurisdiction change during the year, the effective tax rate is adjusted in the period in which such changes become known or are enacted into law. Additionally, discrete items that could impact the effective tax rate are reported in the interim period incurred. However, the U.S. and certain foreign jurisdictions were removed from the base calculation of the annual effective tax rate, as we expect these jurisdictions to generate losses for which no benefit will be recognized. A separate rate is calculated in those loss jurisdictions that includes tax expense for an increase in deferred tax liabilities associated with indefinite-lived assets, which cannot be used as a source of taxable income.

          In addition to the impact of the valuation allowances discussed above, the effective tax rate in the current year period was lower as compared to the prior year period, primarily due to a shift in the ratio of earnings contributions between jurisdictions, partially offset by a net tax benefit of approximately $0.9 million recorded on a discrete basis primarily related to (i) a $0.8 million offsetting benefit in a foreign jurisdiction related to IRS examinations, and (ii) a $0.1 million net benefit related to smaller tax adjustments for changes in estimates and other tax related items. The effective tax rate for the full fiscal year ended June 30, 2014 was (62.9)%.

          A substantial portion of our consolidated taxable income (loss) is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income (loss). As a result, any material shift in the relative proportion of our consolidated taxable income (loss) that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate.

          Net (Loss) Income Attributable to Elizabeth Arden Common Shareholders.     Net loss attributable to Elizabeth Arden common shareholders for the nine months ended March 31, 2015, was $137.6 million, compared to net income of $10.2 million for the nine months ended March 31, 2014. The decrease in results compared to the prior year was due to the lower net sales and gross profit, higher selling, general and administrative expenses due primarily to the asset impairment write-offs, charges under our 2014

- 38 -


Performance Plan, and the valuation allowances recorded as part of our tax provision. The current year amount also includes accretion of $20.1 million for the change in redemption value and dividends of $1.5 million related to our issuance of preferred stock in August 2014. We decided to recognize the accretion immediately and recorded the full accretion in the first quarter of fiscal 2015. See Note 12 to Notes to Unaudited Consolidated Financial Statements.

          EBITDA.   EBITDA (net income attributable to Elizabeth Arden common shareholders plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense, plus net income or (net loss) attributable to noncontrolling interest), plus accretion and dividends on preferred stock) for the nine months ended March 31, 2015, was $(56.3) million and, represents a decrease of $125.1 million compared to the prior year amount of $68.8 million due to lower gross profit and higher selling, general and administrative expenses in the current period. EBITDA for the nine months ended March 31, 2015, includes:

 

*

$15.0 million of returns and markdowns under our 2014 Performance Improvement Plan primarily as a result of changes to our distribution strategy in China and other customer and distribution arrangements;

 

*

$4.9 million of inventory write-downs under our 2014 Performance Improvement Plan, due to discontinuation of certain products;

 

*

$9.0 million in expenses under the 2014 Performance Improvement Plan primarily comprised of $4.5 million for customer and vendor contract termination costs, $4.4 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions and $0.1 million in asset impairment charges;

 

*

$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs; and

 

*

$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to our credit facility.

          EBITDA for the nine months ended March 31, 2014, was $68.8 million and includes:

 

*

a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands, LLC based on our determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met;

 

*

$15.3 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand; and

 

*

$5.3 million of severance and other employee-related expenses and related transition costs and expenses incurred with respect to the elimination of certain sales and staff positions announced in the fall of 2013.

          EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Elizabeth Arden common shareholders (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance, or to net cash provided by operating, investing or financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, preferred stock accretion or dividends or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. This information has been disclosed here to permit a more complete comparative analysis of our operating performance relative to other companies and of our debt servicing ability. EBITDA may not, however, be comparable in all instances to other similar types of measures

          In addition, EBITDA has limitations as an analytical tool, including the fact that:

 

*

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

 

*

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt or the dividends or redemption value of our preferred stock;

 

*

it does not reflect any cash income taxes that we may be required to pay; and

 

*

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

- 39 -


          The following is a reconciliation of net (loss) income attributable to Elizabeth Arden shareholders, as determined in accordance with generally accepted accounting principles, to EBITDA:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Net (loss) income attributable to Elizabeth Arden common shareholders

$

(137,635

)

 

$

10,207

 

Plus:

             

   Provision for income taxes

 

1,557

     

2,172

 

   Interest expense, net

 

22,523

     

18,371

 

   Depreciation in cost of sales

 

5,916

     

5,784

 

   Depreciation and amortization

 

31,055

     

33,122

 

   Net loss applicable to noncontrolling interest (See Note 5 to
      Notes to Unaudited Consolidated Financial Statements)

 

(1,396

)

   

(897

)

   Accretion and dividends on preferred stock (See Note 12 to Notes to
      Unaudited Consolidated Financial Statements)

 

21,700

     

--

 

          EBITDA

$

(56,280

)

 

$

68,759

 

          The following is a reconciliation of net cash flow provided by (used in) operating activities, as determined in accordance with generally accepted accounting principles, to EBITDA:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Net cash provided by (used in) operating activities

$

40,590

   

$

(35,062

)

Changes in assets and liabilities, net of acquisitions

 

(73,207

)

   

84,054

 

Interest expense, net

 

22,523

     

18,371

 

Amortization of senior note offering and credit facility costs

 

(1,200

)

   

(1,079

)

Amortization of senior note premium

 

599

     

127

 

Provision for income taxes

 

1,557

     

2,172

 

Deferred income taxes

 

51

     

4,727

 

Amortization of share-based awards

 

(4,028

)

   

(4,551

)

Asset impairments

 

(42,926

)

   

--

 

Debt extinguishment charges

 

(239

)

   

--

 

          EBITDA

$

(56,280

)

 

$

68,759

 

Liquidity and Capital Resources

          The following chart summarizes our cash flows (outflows) from operating, investing and financing activities for the nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Net cash provided by (used by) operating activities

$

40,590

   

$

(35,062

)

Net cash used in investing activities

 

(25,329

)

   

(39,454

)

Net cash provided by financing activities

 

25,041

     

67,182

 

Net increase (decrease) in cash and cash equivalents

 

35,509

     

(7,578

)

- 40 -


Operating Activities

          Cash provided by (used in) our operating activities is driven by net (loss) income adjusted for non-cash expenses and changes in working capital. The following chart illustrates our net cash provided by (used in) operating activities for the nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Net (loss) income

$

(117,331

)

 

$

9,310

 

Net adjustments to reconcile net (loss) income to net cash provided by
   (used in) operating activities

 

84,714

     

39,682

 

Net change in assets and liabilities, net of acquisitions ("working capital
   changes")

 

73,207

     

(84,054

)

Net cash provided by (used in) operating activities

$

40,590

   

$

(35,062

)

          For the nine months ended March 31, 2015, net cash provided by operating activities was $40.6 million, as compared to net cash used in operations of $35.1 million for the nine months ended March 31, 2014. Net loss was $117.3 million for the nine months ended March 31, 2015, as compared to net income of $9.3 million for the prior year period, representing a decrease of $126.6 million. Net adjustments to reconcile net (loss) income to cash provided by operating activities increased by $45.0 million as compared to the prior year. Working capital changes provided cash of $73.2 million in the current year period as compared to $84.1 million of cash utilized in the prior year. Cash provided by working capital changes in the current period was primarily driven by lower inventory purchases and lower accounts receivable balances as compared to the prior year period.

Investing Activities

          The following chart illustrates our net cash used in investing activities for the nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Additions to property and equipment

$

(19,120

)

 

$

(37,028

)

Acquisition of businesses, intangibles and other assets

 

(6,264

)

   

(3,000

)

Cash received from consolidation of variable interest entity

 

55

     

574

 

Net cash used in investing activities

$

(25,329

)

 

$

(39,454

)

          For the nine months ended March 31, 2015, net cash used in investing activities of $25.3 million was composed of (i) $2.3 million for the acquisition of the trademark and patents for ingredients used in certain skin care products, (ii) $4.0 million paid to a minority investor who put their interest in Elizabeth Arden Salon Holdings, LLC to us, and (iii) $19.1 million of capital expenditures principally for computer hardware and software related to implementation of the last phase of our Oracle global enterprise system and for in-store counters and displays. In addition, net cash used in investing activities includes $55,000 of cash received in connection with the formation of a joint venture in the United Arab Emirates and the requirement to consolidate its financial statements. For the nine months ended March 31, 2014, net cash used in investing activities of $28.2 million was composed of (i) $37.0 million of capital expenditures, (ii) $3.0 million associated with the purchase of an equity interest in a company that is developing a beauty device, and (iii) $0.6 million of cash received in connection with the investment in US Cosmeceutechs, LLC and the requirement to consolidate its financial statements. The decrease in capital expenditures for the nine months ended March 31, 2015, is primarily due to expenditures in the prior year period for (i) in-store counters and displays related to the Elizabeth Arden brand repositioning, (ii) leasehold improvements associated with the opening of the Elizabeth Arden Red Door Spa at our New York office location, and (iii) computer hardware and software related to the implementation of the last phase our Oracle global enterprise system.

- 41 -


Financing Activities

          The following chart illustrates our net cash provided by financing activities for the nine months ended March 31, 2015 and 2014:

(Amounts in thousands)

Nine Months Ended

 

 

March 31,
2015

   

March 31,
2014

 

Payments on short-term debt

$

(16,418

)

 

$

(25,087

)

Proceeds from the issuance of preferred stock and convertible warrants,
   net of issuance costs

 

43,993

     

--

 

Proceeds from long-term debt

 

--

     

106,750

 

Proceeds from the exercise of stock options

 

--

     

1,968

 

Financing fees paid

 

(1,959

)

   

(2,200

)

Preferred stock dividend

 

(487

)

   

--

 

Repurchase of common stock

 

--

     

(5,393

)

Payments to noncontrolling interests

 

--

     

(4,979

)

Payments of contingent consideration related to acquisition

 

--

     

(4,914

)

All other financing activities

 

(88

)

   

1,037

 

Net cash provided by financing activities

$

25,041

   

$

67,182

 

          For the nine months ended March 31, 2015, net cash provided by financing activities was $25.0 million, as compared to $67.2 million for the nine months ended March 31, 2014. Net cash provided by financing activities for the nine months ended March 31, 2015, includes $44.0 million received in connection with the issuance of our preferred stock and convertible warrants, net of payments of approximately $6.0 million in issuance costs incurred as part of the transaction and $0.5 million in preferred stock dividends paid. See Note 12 to the Notes to Unaudited Consolidated Financial Statements.

          During the nine months ended March 31, 2015, borrowings under our credit facility decreased by $14.0 million from a balance of $78.0 million at June 30, 2014. During the nine months ended March 31, 2015, we also paid the outstanding borrowings under a credit facility agreement between a foreign subsidiary and HSBC Bank plc, representing a decrease of $2.4 million from the June 30, 2014 balance. For the nine months ended March 31, 2015, net cash provided by financing activities includes financing fees paid of approximately $2.0 million related to the December 2014 amendment of our credit facility. See Note 9 to the Notes to Unaudited Consolidated Financial Statements for further information on the amendment to our credit facility. During the nine months ended March 31, 2014, borrowings under our credit facility decreased by $25.3 million from a balance of $88.0 million at June 30, 2013, and $2.2 million of short term debt was repaid by US Cosmeceutechs, LLC following our investment. Additionally, for the nine months ended March 31, 2014, short-term debt included $2.4 million in outstanding borrowings under a credit facility agreement between a foreign subsidiary and HSBC Bank plc.

          For the nine months ended March 31, 2014, net cash provided by financing activities includes proceeds from long term debt of $106.8 million. In January 2014, we consummated the private placement pursuant to Rule 144A under the Securities Act of 1933, as amended, of an additional $100 million aggregate principal amount of 7 3/8% senior notes. The additional 7 3/8% senior notes were sold at 106.75% of their principal amount, and the premium received is being amortized over the remaining life of the 7 3/8% senior notes. We incurred approximately $2.2 million of debt financing costs in connection with the offering. See Note 10 to the Notes to Unaudited Consolidated Financial Statements.

          In addition, during the prior year period, (i) repurchases of common stock totaled $5.4 million, (ii) payments of contingent consideration related to the 2012 acquisition of global licenses and certain other assets of Give Back Brands LLC totaled $4.9 million, (iii) payments related to the noncontrolling interests in US Cosmeceutechs, LLC totaled $5.0 million, and (iv) proceeds from the exercise of stock options were $2.0 million.

          Interest paid during the nine months ended March 31, 2015, included $25.8 million of interest payments on the 7 3/8% senior notes due 2021 and $3.0 million of interest paid on the borrowings under our credit facility. Interest paid during the nine months ended March 31, 2014, included $19.4 million of interest payments on the 7 3/8% senior notes due 2021, $2.8 million of interest paid on the borrowings under our credit facility and $0.1 million of interest paid on our second lien term facility. The higher interest payments on our 7 3/8% senior notes in the current year was due to the issuance in January 2014 of an additional $100 million aggregate principal amount of such senior notes.

 

- 42 -


          At March 31, 2015, we had approximately $91.8 million of cash, of which approximately $88 million was held outside of the United States, with approximately $47 million in Switzerland, and the remaining balance primarily in China, the UK, Brazil, South Africa and Spain. The cash held outside the U.S. was needed to meet local working capital requirements and therefore considered permanently reinvested outside the U.S.

          Future Liquidity and Capital Needs.    Our principal future uses of funds are for working capital requirements, including brand and product development and marketing expenses, new product launches, additional brand acquisitions or product licensing and distribution arrangements, capital expenditures, debt service and preferred stock dividends. In addition, we may use funds to repurchase material amounts of our common stock and senior notes through open market purchases, privately negotiated transactions or otherwise, depending upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We have historically financed our working capital needs primarily through internally generated funds, our credit facilities and external financing. We collect cash from our customers based on our sales to them and their respective payment terms.

          We have a $300 million revolving bank credit facility with a syndicate of banks, for which JPMorgan Chase Bank is the administrative agent, which generally provides for borrowings on a revolving basis, with a sub-limit of $25 million for letters of credit. Under the terms of the credit facility, we may, at any time, increase the size of the credit facility up to $375 million without entering into a formal amendment requiring the consent of all of the banks, subject to satisfaction of certain conditions. The credit facility matures in December 2019.

          The credit facility is guaranteed by all of our U.S. subsidiaries and is collateralized by a first priority lien on all of our U.S. accounts receivable and inventory. Borrowings under the credit facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of our inventory, as determined pursuant to the terms of the credit facility; provided, however, that from August 15 to October 31 of each year, our borrowing base may be temporarily increased by up to $25 million.

          The credit facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if (a) average borrowing base capacity (calculated on a rolling three-day basis) is equal to or less than ten percent (10%) of total borrowing availability under the credit facility, or (b) our borrowing availability under the credit facility, plus domestic cash and cash equivalents, is less than $20 million at any time. Our average borrowing base capacity and borrowing availability for the quarter ended March 31, 2015, did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended March 31, 2015. We were in compliance with all applicable covenants under the credit facility for the quarter ended March 31, 2015.

          Under the terms of the credit facility, we may pay dividends or repurchase common stock if (a) we maintain a debt service coverage ratio of not less than 1.1 to 1.0 and maintain borrowing base capacity plus domestic cash and cash equivalents, in each case after giving effect to the applicable payment, of (i) at least $30 million from February 1 to August 31, and (ii) at least $35 million from September 1 to January 31, or (b) maintain borrowing base capacity plus domestic cash and cash equivalents of (i) at least $40 million from February 1 to August 31, and (ii) at least $45 million from September 1 to January 31. The credit facility restricts us from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

          Borrowings under the credit portion of the credit facility bear interest at a floating rate based on an "Applicable Margin" that is determined by reference to a debt service pricing ratio. At our option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate. The Applicable Margin charged on LIBOR loans ranges from 1.50% to 2.50%, and ranges from 0% to 1.0% for base rate loans, except that the Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in our borrowing base is in effect, is 1.0% higher. We are required to pay an unused commitment fee of 0.375% per annum based on the quarterly average utilization. The interest rates payable by us on our 7 3/8% senior notes and on borrowings under our revolving credit facility and second lien facility are not impacted by credit rating agency actions.

          At March 31, 2015, the Applicable Margin was 2.50% for LIBOR loans and 1.00% for prime rate loans. For the nine months ended March 31, 2015 and 2014, the weighted average annual interest rate on borrowings under the credit facility was 2.7% and 2.0%, respectively.

          We also have a second lien facility agreement with JPMorgan Chase Bank, N.A. providing us the ability to borrow up to $30 million on a revolving basis. The second lien facility matures in January 2016. The second lien facility is collateralized by a second priority lien on all of our U.S. accounts receivable and inventories, and the interest on borrowings charged under the second lien facility is either (i) LIBOR plus an applicable margin of 3.25% or (ii) the base rate specified in the second lien facility (which is comparable to prime rates) plus a margin of 1.75%. The unused commitment fee applicable to the second lien facility ranges from

- 43 -


0.25% to 0.375% based on the quarterly average unused portion of the second lien facility. To the extent we borrow amounts under the second lien facility, we have the option to prepay all or a portion of such borrowings, provided the borrowing base capacity under the credit facility is in excess of $35 million after giving effect to the applicable prepayment each day for the 30 day period ending on the date of the prepayment.

          At March 31, 2015, we had $64.0 million in borrowings and $3.1 million in letters of credit outstanding under the credit facility and no borrowings under our second lien facility. At March 31, 2015, based on eligible accounts receivable and inventory available as collateral, an additional $82.1 million in the aggregate could be borrowed under our credit facility and our second lien facility. The borrowing base capacity under the credit facility typically declines in the second half of our fiscal year as our higher accounts receivable balances resulting from holiday season sales are likely to decline due to cash collections.

          At March 31, 2015, we had outstanding $350 million aggregate principal amount of 7 3/8% senior notes due March 2021. Interest on the 7 3/8% senior notes accrues at a rate of 7.375% per annum and is payable semi-annually on March 15 and September 15 of every year. The 7 3/8% senior notes rank pari passu in right of payment to indebtedness under our credit facility and any other senior debt, and will rank senior to any future subordinated indebtedness; provided, however, that the 7 3/8% senior notes are effectively subordinated to the credit facility and the second lien facility to the extent of the collateral securing the credit facility and second lien facility. The indenture applicable to the 7 3/8% senior notes generally permits us (subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness, pay dividends, purchase or redeem our common stock or redeem subordinated indebtedness. The indenture generally limits our ability to create liens, merge or transfer or sell assets. The indenture also provides that the holders of the 7 3/8% senior notes have the option to require us to repurchase their notes in the event of a change of control involving us (as defined in the indenture). The 7 3/8% senior notes initially will not be guaranteed by any of our subsidiaries but could become guaranteed in the future by any domestic subsidiary of ours that guarantees or incurs certain indebtedness in excess of $10 million.

          On August 19, 2014, we entered into a securities purchase agreement with the Purchasers, Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P., investment funds affiliated with Rhône Capital L.L.C. Pursuant to the securities purchase agreement, for aggregate cash consideration of $50 million, we issued to the Purchasers an aggregate of 50,000 shares of our newly designated preferred stock, with detachable warrants to purchase up to 2,452,267 shares of our common stock at an exercise price of $20.39 per share.

          Dividends on the preferred stock are due on January 1, April 1, July 1 and October 1 of each year. The preferred stock will also participate in dividends declared or paid, whether in cash, securities or other property, on the shares of common stock for which the outstanding warrants are exercisable. Dividends are payable at the per annum dividend rate of 5% of the liquidation preference, which is initially $1,000 per share. Pursuant to a shareholders' agreement entered into concurrently with the securities purchase agreement, each quarter we will declare and pay in cash no less than fifty percent (50%) of each dividend to which holders of preferred stock are entitled, unless payment of such dividend in cash (i) is prohibited by or would result in a default or event of default under our indenture for the 7 3/8% senior notes, credit facilities and certain other debt documents or (ii) would result in a breach of the legal or fiduciary obligations of the board, in which case we will declare and pay in cash the maximum amount permitted to be paid in cash. If and to the extent that we do not pay the entire dividend to which holders of preferred stock are entitled for a particular period in cash on the applicable dividend payment date, preferential cash dividends will accrue on such unpaid amounts (and on any unpaid dividends in respect thereof) at 5% per annum, and will compound on each dividend payment date, until paid. No cash dividend may be declared or paid on our common stock or other classes of stock over which the preferred stock has preference unless full cumulative dividends have been or contemporaneously are declared and paid in cash on the preferred stock. Accrued dividends payable as of March 31, 2015, were approximately $1,061,300. Dividend arrearage as of March 31, 2015, was approximately $446,100. In April 2015, we paid 50%, or approximately $287,000 of the dividend declared in January 2015. After giving effect to the January 2015 dividend payment, dividend arrearage was approximately $774,300. See Note 12 to the Notes to Unaudited Consolidated Financial Statements.

          Based upon our internal projections, we believe that existing cash and cash equivalents, internally generated funds and borrowings under our credit facility and second lien facility will be sufficient to cover debt service, preferred stock dividends, working capital requirements and capital expenditures for the next twelve months, other than additional working capital requirements that may result from further expansion of our operations through acquisitions of additional brands or licensing or distribution arrangements.

          As noted above, our credit facility has only one financial covenant, a debt service coverage ratio that applies only if we do not have the requisite average borrowing base capacity and borrowing availability as set forth under the credit facility. Based upon our internal projections, we do not anticipate that our borrowing base capacity or borrowing availability will fall below the applicable thresholds during the next twelve months. A deterioration in the economic and retail environment or continued challenges in our operating performance, however, could cause us to default under our credit facility if we do not have the requisite average borrowing

- 44 -


base capacity or borrowing availability and also fail to meet the financial maintenance covenant set forth in the credit facility. In such an event, we would not be allowed to borrow under the credit facility or second lien facility and may not have access to the capital necessary for our business. In addition, a default under our credit facility or second lien facility that causes acceleration of the debt under either facility could trigger a default under our outstanding 7 3/8% senior notes. In the event we are not able to borrow under either borrowing facility, we would be required to develop an alternative source of liquidity. There is no assurance that we could obtain replacement financing or what the terms of such financing, if available, would be.

          We have discussions from time to time with manufacturers and owners of prestige fragrance brands regarding our possible acquisition of additional trademark, exclusive licensing and/or distribution rights. We currently have no material agreements or commitments with respect to any such acquisition, although we periodically execute routine agreements to maintain the confidentiality of information obtained during the course of discussions with such manufacturers and brand owners. There is no assurance that we will be able to negotiate successfully for any such future acquisitions or that we will be able to obtain acquisition financing or additional working capital financing on satisfactory terms for further expansion of our operations.

          Repurchases of Common Stock.    We have an existing stock repurchase program pursuant to which our board of directors has authorized the repurchase of $120 million of common stock and that was scheduled to expire on November 30, 2014. On August 5, 2014, our board of directors extended the stock repurchase program through November 30, 2016.

          For the nine months ended March 31, 2015, there were no share repurchases under the common stock repurchase program. As of March 31, 2015, we had repurchased 4,517,309 shares of common stock on the open market under the stock repurchase program since its inception in November 2005, at an average price of $18.88 per share and at a cost of approximately $85.3 million, including sales commissions, leaving approximately $34.7 million available for additional repurchases under the program. The acquisition of these shares was accounted for under the treasury method.

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

          The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses and/or cost savings, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A -- "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014:

*

our ability to implement our 2014 Performance Improvement Plan, our ability to realize the anticipated benefits of our 2014 Performance Improvement Plan and/or changes in the timing of such benefits;

*

whether we will incur higher than anticipated costs, expenses or charges related to the implementation of our 2014 Performance Improvement Plan or any additional restructuring or cost savings activities, and/or changes in the expected timing of such costs, expenses or charges;

*

decisions or actions resulting from our continued reexamination of our business, including implementing any additional restructuring activities, and the timing and amount of any costs, expenses or charges that may be incurred as a result or the benefits anticipated to result from any such decisions or actions;

*

our ability to realize benefits from the strategic investment made by affiliates of Rhône Capital L.L.C. in our company;

*

factors affecting our relationships with our customers or our customers' businesses, including the absence of contracts with customers, our customers' financial condition, reduction in consumer traffic or demand, and changes in the retail, fragrance and cosmetic industries, such as the consolidation of retailers and the associated closing of retail doors as well as retailer inventory control practices, including, but not limited to, levels of inventory carried at point of sale and practices used to control inventory shrinkage;

*

risks of international operations, including foreign currency fluctuations, hedging activities, economic and political consequences of terrorist attacks, disruptions in travel, unfavorable changes in U.S. or international laws or regulations, diseases and pandemics, and political instability in certain regions of the world;

*

our reliance on license agreements with third parties for the rights to sell many of our prestige fragrance brands;

*

our reliance on third-party manufacturers for substantially all of our owned and licensed products and our absence of contracts with suppliers of distributed brands or raw materials and components for manufacturing of owned and licensed brands;

- 45 -


*

delays in shipments, inventory shortages and higher supply chain costs due to the loss of or disruption in our distribution facilities or at key third party manufacturing or fulfillment facilities that manufacture or provide logistic services for our products;

*

our ability to respond in a timely manner to changing consumer preferences and purchasing patterns and other international and domestic conditions and events that impact retailer and/or consumer confidence and demand, such as domestic or international recessions or economic uncertainty;

*

our ability to protect our intellectual property rights;

*

the success, or changes in the timing or scope, of our new product launches, advertising and merchandising programs;

*

our ability to successfully manage our inventories;

*

the quality, safety and efficacy of our products;

*

the impact of competitive products and pricing;

*

our ability to (i) implement our growth strategy and acquire or license additional brands or secure additional distribution arrangements, (ii) successfully and cost-effectively integrate acquired businesses or new brands, (iii) successfully expand our geographic presence and distribution channels, and (iv) finance our growth strategy and our working capital requirements;

*

our level of indebtedness, our ability to realize sufficient cash flows from operations to meet our debt service obligations, working capital requirements and preferred stock dividend requirements, and restrictive covenants in our revolving credit facility, second lien facility and the indenture for our 7 3/8% senior notes;

*

changes in product mix to less profitable products;

*

the retention and availability of key personnel;

*

changes in the legal, regulatory and political environment that impact, or will impact, our business, including changes to customs or trade regulations, laws or regulations relating to ingredients or other chemicals or raw materials contained in products or packaging, or accounting standards or critical accounting estimates;

*

the success of our Elizabeth Arden brand repositioning efforts and global business strategy;

*

the impact of tax audits, including the ultimate outcome of the pending Internal Revenue Service examination of our U.S. federal tax returns for the fiscal years ended June 30, 2010, 2011 and 2012, changes in tax laws or tax rates, and our ability to utilize our deferred tax assets, and/or the establishment of valuation allowances related thereto;

*

our ability to effectively implement, manage and maintain our global information systems and maintain the security of our confidential data and our employees' and customers' personal information, including our ability to successfully and cost-effectively implement the last phase of our Oracle global enterprise system;

*

our reliance on certain third parties for certain outsourced business services, including information technology operations, logistics management and employee benefit plan administration;

*

the potential for significant impairment charges relating to our trademarks, goodwill, investments in other entities or other intangible assets, including license agreements, that could result from a number of factors, including such entities' or brands' business performance or downward pressure on our stock price; and

*

other unanticipated risks and uncertainties.

          We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

          As of March 31, 2015, we had $64.0 million in borrowings and $3.1 million in letters of credit outstanding under our revolving credit facility and no outstanding balances under our second lien facility. Borrowings under our revolving credit facility are seasonal, with peak borrowings typically in the months of September, October and November. Borrowings under the credit facility and second lien facility are subject to variable rates and, accordingly, our earnings and cash flow will be affected by changes in interest rates. Based upon our average borrowings under our revolving credit facility and second lien facility during the nine months ended March 31, 2015, and assuming there had been a two percentage point (200 basis point) change in the average interest rate for these borrowings, it is estimated that our interest expense for the nine months ended March 31, 2015 would have increased or decreased by approximately $1.5 million. See Note 9 to the Notes to Unaudited Consolidated Financial Statements.

- 46 -


Foreign Currency Risk

         We sell our products in approximately 120 countries around the world. During the fiscal year ended June 30, 2014, we derived approximately 43% of our net sales from our international operations. We conduct our international operations in a variety of different countries and derive our sales in various currencies including the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar, as well as the U.S. dollar. Most of our skin care and cosmetic products are produced in third-party manufacturing facilities located in the U.S. Our operations may be subject to volatility because of currency changes, inflation and changes in political and economic conditions in the countries in which we operate. With respect to international operations, our sales, cost of goods sold and expenses are typically denominated in a combination of local currency and the U.S. dollar. Our results of operations are reported in U.S. dollars. Fluctuations in currency rates can affect our reported sales, margins, operating costs and the anticipated settlement of our foreign denominated receivables and payables. A weakening of the foreign currencies in which we generate sales relative to the currencies in which our costs are denominated, which is primarily the U.S. dollar, may adversely affect our ability to meet our obligations and could adversely affect our business, prospects, results of operations, financial condition or cash flows. Our competitors may or may not be subject to the same fluctuations in currency rates, and our competitive position could be affected by these changes.

          As of March 31, 2015, we had notional amounts of 3.0 million British pounds and 3.7 million Euros under open foreign currency contracts that expire between April 30, 2015 and May 31, 2015 to reduce the exposure of our foreign subsidiary revenues to fluctuations in currency rates. As of March 31, 2015, we had notional amounts under foreign currency contracts of (i) 1.3 million Canadian dollars and 2.2 million Australian dollars used to hedge forecasted cost of sales that expire between April 30, 2015 and May 31, 2015, and (ii) 17.4 million Swiss francs to hedge forecasted operating costs that expire between April 30, 2015 and May 31, 2016. We have designated each qualifying foreign currency contract as a cash flow hedge. The gains and losses of these contracts will only be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. The realized gain, net of taxes, recognized during the three and nine months ended March 31, 2015, from settled contracts was approximately $1.1 million and $1.6 million, respectively. At March 31, 2015, the unrealized gain, net of taxes, associated with these open contracts of approximately $1.9 million is included in accumulated other comprehensive (loss) income in our consolidated balance sheet. See Notes 2 and 14 to the Notes to Unaudited Consolidated Financial Statements.

          When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce the exposure of our foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. As of March 31, 2015, there were no such foreign currency contracts outstanding. The realized gain, net of taxes, recognized during the three and nine months ended March 31, 2015, from the settlement of these contracts was $1.1 million and $3.1 million, respectively.

          We do not utilize foreign exchange contracts for trading or speculative purposes. There can be no assurance that our hedging operations or other exchange rate practices, if any, will eliminate or substantially reduce risks associated with fluctuating exchange rates.

ITEM 4.    CONTROLS AND PROCEDURES

          E. Scott Beattie, our Chairman, President and Chief Executive Officer, and Rod R. Little, our Executive Vice President and Chief Financial Officer, who are the principal executive officer and principal financial officer, respectively, have evaluated the effectiveness and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based upon such evaluation, they have concluded that, as of the Evaluation Date, our disclosure controls and procedures are functioning effectively.

          There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 47 -


PART II.    OTHER INFORMATION

ITEM 1A.    RISK FACTORS

          Risk factors describing the major risks to our business can be found under Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014. There has been no material change in our risk factors from those previously discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

ITEM 6.    EXHIBITS

Exhibit
Number

 

Description

3.1

 

Amended and Restated Articles of Incorporation of the Company dated November 17, 2005 (incorporated herein by reference to Exhibit 3.1 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2005 (Commission File No. 1-6370)).

3.2

 

Articles of Amendment to the Amended and Restated Articles of Incorporation of Elizabeth Arden, Inc. Designating Series A Serial Preferred Stock (incorporated herein by reference to Exhibit 3.1 filed as part of the Company's Form 8-K dated August 19, 2014 (Commission File No. 1-6370)).

3.3

 

Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.2 filed as part of the Company's Form 8-K dated August 19, 2014 (Commission File No. 1-6370)).

4.1

 

Indenture, dated as of January 21, 2011, respecting Elizabeth Arden, Inc.'s 7 3/8% Senior Notes due 2021, among Elizabeth Arden, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K dated January 21, 2011 (Commission File No. 1-6370)).

4.2

 

First Supplemental Indenture, dated as of January 30, 2014, to the Indenture dated January 21, 2011, respecting Elizabeth Arden, Inc.'s 7 3/8% Senior Notes due 2021, among Elizabeth Arden, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 filed as part of the Company's Form 8-K dated January 30, 2014) (Commission File No. 1-6370)).

4.3

 

Shareholders Agreement dated as of August 19, 2014, by and among Elizabeth Arden, Inc., Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P. (incorporated herein by reference to Exhibit 4.2 filed as part of the Company's Form 8-K dated August 19, 2014 (Commission File No. 1-6370)).

4.4

 

Form of Warrant to purchase Common Stock, issued pursuant to the Securities Purchase Agreement dated as of August 19, 2014, by and between Elizabeth Arden, Inc., Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P. (incorporated herein by reference to Exhibit 4.1 filed as part of the Company's Form 8-K dated August 19, 2014 (Commission File No. 1-6370)).

10.1

 

Third Amended and Restated Credit Agreement, dated as of January 21, 2011, among Elizabeth Arden, Inc., as borrower, JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as collateral agent and syndication agent, Wells Fargo Capital Finance, LLC, HSBC Bank USA, N.A. and U.S. Bank National Association, as co-documentation agents, JPMorgan Chase Bank, N.A., and Bank of America, N.A. as joint lead arrangers, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 filed as part of the Company's Form 8-K dated January 21, 2011 (Commission File No. 1-6370)).

10.2

 

Amended and Restated Security Agreement dated as of January 29, 2001, made by the Company and certain of its subsidiaries in favor of Fleet National Bank (n/k/a Bank of America, N.A.), as administrative agent (incorporated herein by reference to Exhibit 4.5 filed as part of the Company's Form 8-K dated January 23, 2001 (Commission File No. 1-6370)).

10.3

 

Letter Agreement dated September 18, 2013, amending that certain Amended and Restated Security Agreement dated as of January 29, 2001, made by the Company and certain of its subsidiaries in favor of Fleet National Bank (n/k/a Bank of America, N.A.), as administrative agent (incorporated herein by reference to Exhibit 10.3 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2013 (Commission File No. 1-6370)).

10.4

 

First Amendment to Third Amended and Restated Credit Agreement dated as of June 12, 2012, among Elizabeth Arden, Inc., as Borrower, JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America, N.A., as the collateral agent, and the other banks party thereto (incorporated by reference to Exhibit 10.3 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

- 48 -


Exhibit
Number

 

Description

10.5

 

Second Amendment to Third Amended and Restated Credit Agreement dated as of January 16, 2014 among Elizabeth Arden, Inc., as Borrower, JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America, N.A., as the collateral agent, and the other banks party thereto (incorporated by reference to Exhibit 10.5 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2013 (Commission File No. 1-6370)).

10.6

 

Third Amendment to the Third Amended and Restated Credit Agreement, dated as of December 17, 2014, among Elizabeth Arden, Inc., as borrower, JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as collateral agent and the other banks party thereto (incorporated by reference to Exhibit 4.1 filed as part of the Company's Form 8-K dated December 17, 2014 (Commission File No. 1-6370)).

10.7

 

Increased Commitment Supplement, dated as of January 8, 2015, among Elizabeth Arden, Inc., as Borrower, Goldman Sachs Bank USA as New Bank and JPMorgan Chase Bank, N.A. as Administrative Agent, in respect of the Third Amended and Restated Credit Agreement dated as of January 21, 2011, as amended (incorporated by reference to Exhibit 10.7 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2014 (Commission File No. 1-6370)).

10.8

 

Credit Agreement (Second Lien) dated as of June 12, 2012, between Elizabeth Arden, Inc. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.4 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

10.9

 

First Amendment to Credit Agreement (Second Lien) dated as of February 11, 2013, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A. (incorporated by reference to Exhibit 10.5 filed as part of the Company's Form 10-Q for the quarter ended March 31, 2013 (Commission File No. 1-6370)).

10.10

 

Second Amendment to Credit Agreement (Second Lien) dated as of January 16, 2014, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A. (incorporated by reference to Exhibit 10.5 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2013 (Commission File No. 1-6370)).

10.11

Third Amendment to Credit Agreement (Second Lien) dated as of March 28, 2014, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A. (incorporated by reference to Exhibit 10.9 filed as part of the Company's Form 10-Q for the quarter ended March 31, 2014 (Commission File No. 1-6370)).

10.12

 

Amended and Restated Deed of Lease dated as of January 17, 2003, between the Company and Liberty Property Limited Partnership (incorporated herein by referenced to Exhibit 10.5 filed as a part of the Company's Form 10-Q for the quarter ended April 26, 2003 (Commission File No. 1-6370)).

10.13

Amendment to the Amended and Restated Deed of Lease dated as of June 30, 2012, between the Company and Liberty Property Limited Partnership (incorporated by reference to Exhibit 10.6 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

10.14 +

 

2004 Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.12 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2007 (Commission File No. 1-6370)).

10.15 +

 

2004 Non-Employee Director Stock Option Plan, as amended and restated (incorporated herein by reference to Exhibit 10.13 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2014 (Commission File No. 1-6370)).

10.16 +

Elizabeth Arden, Inc. 2011 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.3 filed as part of the Company's Form S-8, Registration No. 333-177839, dated November 9, 2011 (Commission File No. 1-6370)).

10.17 +

 

Form of Stock Option Agreement for stock option awards under the Company's 2004 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.14 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.18 +

 

Form of Stock Option Agreement for stock option awards under the Company's 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.19 filed as a part of the Company's Form 10-K for the year ended June 30, 2005 (Commission File No. 1-6370)).

- 49 -


Exhibit
Number

 

Description

10. 19 +

 

Elizabeth Arden, Inc. Severance Policy, as amended and restated on February 3, 2014 (incorporated by reference to Exhibit 10.5 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2013 (Commission File No. 1-6370)).

10.20 +

 

Form of Indemnification Agreement for Directors and Officers of Elizabeth Arden, Inc. (incorporated by reference to Exhibit 10.1 filed as part of the Company's Form 8-K dated August 11, 2009 (Commission File No. 1-6370)).

10.21 +

 

Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Company's 2010 Stock Award and Incentive Plan (incorporated herein by reference to Exhibit 10.22 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2011 (Commission File No. 1-6370)).

10.22 +

 

Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Company's 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.26 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2012 (Commission File No. 1-6370)).

10.23

 

Securities Purchase Agreement dated as of August 19, 2014, by and between Elizabeth Arden, Inc., Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P. (incorporated herein by reference to Exhibit 10.1 filed as part of the Company's Form 8-K dated August 19, 2014 (Commission File No. 1-6370)).

10.24 +

 

Elizabeth Arden, Inc. 2010 Stock Award and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 filed as part of the Company's Form S-8, Registration No. 333-200703, dated December 3, 2014 (Commission File No. 1-6370)).

10.25 +

 

Elizabeth Arden, Inc. 2014 Non-Employee Director Stock Award Plan (incorporated by reference to Exhibit 10.1 filed as part of the Company's Form S-8, Registration No. 333-200700, dated December 3, 2014 (Commission File No. 1-6370)).

10.26 +

 

Form of Stock Option Grant for stock option awards under the Company's 2014 Non-Employee Director Stock Award Plan (incorporated by reference to Exhibit 10.26 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2014 (Commission File No. 1-6370)).

31.1 *

 

Section 302 Certification of Chief Executive Officer.

31.2 *

 

Section 302 Certification of Chief Financial Officer.

32 *

 

Section 906 Certifications of the Chief Executive Officer and the Chief Financial Officer.

101.INS **

 

XBRL Instance Document

101.SCH **

 

XBRL Taxonomy Extension Schema Document

101.CAL **

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE **

 

XBRL Taxonomy Extension Presentation Linkbase Document

+

Management contract or compensatory plan or arrangement.

*

Filed herewith.

**

Filed herewith as Exhibit 101 are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) unaudited condensed consolidated balance sheets as of March 31, 2015 and June 30, 2014, (ii) unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2015, and 2014, respectively, (iii) unaudited condensed consolidated statements of comprehensive (loss) income for the three and nine months ended March 31, 2015, and 2014, respectively, (iv) unaudited condensed consolidated statements of cash flows for the nine months ended March 31, 2015, and 2014, respectively, and (v) the notes to the unaudited condensed consolidated financial statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

ELIZABETH ARDEN, INC.

     

Date:   May 7, 2015

 

/s/ E. Scott Beattie

 

 

E. Scott Beattie

 

 

Chairman, President and Chief Executive Officer

     
     

Date:   May 7, 2015

 

/s/ Rod R. Little

 

 

Rod R. Little

 

 

Executive Vice President and Chief Financial Officer

     

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EXHIBIT INDEX

Exhibit
Number

 

Description

31.1

Section 302 Certification of Chief Executive Officer.

31.2

Section 302 Certification of Chief Financial Officer.

32

Section 906 Certifications of the Chief Executive Officer and the Chief Financial Officer.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

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