10-K 1 d241372d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended June 30, 2016

OR

 

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

For the transition period from              to             

Commission file number 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.)

880 SW 145 Avenue, Suite 200, Pembroke Pines, Florida   33027
(Address of principal executive offices)   (Zip Code)

(954) 364-6900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Security

 

Name of Exchange on Which Registered

Elizabeth Arden Common Stock, $.01 par value per share   Nasdaq Global Select Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x

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 definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The aggregate market value of voting Common Stock held by non-affiliates of the registrant was approximately $235 million based on the closing price of the Common Stock on the NASDAQ Global Select Market of $9.90 per share on December 31, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, based on the number of shares outstanding on that date less the number of shares held by the registrant’s directors, executive officers and holders of at least 10% of the outstanding shares of Common Stock.

As of August 11, 2016, the registrant had 29,949,317 shares of Common Stock outstanding.

Documents Incorporated by Reference

The information required to be included in Part III of this Annual Report on Form 10-K will be provided in accordance with Instruction G(3) to Form 10-K.


Table of Contents

ELIZABETH ARDEN, INC.

TABLE OF CONTENTS

 

         Page  

Part I

  

Item 1.

 

Business

     3   

Item 1A.

 

Risk Factors

     13   

Item 1B.

 

Unresolved Staff Comments

     24   

Item 2.

 

Properties

     24   

Item 3.

 

Legal Proceedings

     24   

Item 4.

 

Mine Safety Disclosures

     26   

Part II

  

Item 5.

 

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     27   

Item 6.

 

Selected Financial Data

     29   

Item 7.

 

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

     33   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 8.

 

Financial Statements and Supplementary Data

     58   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     102   

Item 9A.

 

Controls and Procedures

     102   

Item 9B.

 

Other Information

     102   

Part III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

     103   

Item 11.

 

Executive Compensation

     103   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     103   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     103   

Item 14.

 

Principal Accounting Fees and Services

     103   

Part IV

  

Item 15.

 

Exhibits, Financial Statement Schedules

     103   

Signatures

     108   

 

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PART I

 

ITEM 1. BUSINESS

General

Elizabeth Arden, Inc. is 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, Eight Hour Cream, SUPERSTART 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, Christina Aguilera, 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 Nicki Minaj, Mariah Carey and Taylor Swift

In addition to our owned and licensed fragrance brands, we distribute approximately 260 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

We sell our prestige beauty products to retailers and other outlets in the United States and internationally, including;

 

   

U.S. prestige retailers and specialty stores such as Macy’s, Dillard’s, Ulta, Belk, Sephora, Bloomingdales and Nordstrom;

 

   

U.S. mass retailers, including mid-tier and chain drug retailers, such as Walmart, Target, Kohl’s, Walgreens, CVS, and TJ Maxx and Marshalls; and

 

   

International retailers such as Boots, Debenhams, Superdrug Stores, The Perfume Shop, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas, Sephora, Karstadt and various travel retail outlets such as Dufry, Nuance, and Heinemann.

In the United States, we sell our Elizabeth Arden skin care and cosmetics products primarily in prestige retailers, and our fragrances in prestige and mass retailers. We also sell our Elizabeth Arden fragrances, skin care and cosmetics products and other fragrance lines in approximately 120 countries worldwide primarily through department stores, perfumeries, pharmacies, specialty retailers, and other retail shops and “duty free” and travel retail locations. We also sell our Elizabeth Arden products and certain other prestige fragrances directly to consumers through our Elizabeth Arden branded retail outlet stores and our website.

At June 30, 2016, 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 in North America. 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.

Financial information relating to our reportable segments is included in Note 21 to the Notes to Consolidated Financial Statements.

 

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Our net sales to customers in the United States and in foreign countries (in U.S. dollars) and net sales as a percentage of consolidated net sales for the years ended June 30, 2016, 2015 and 2014, are listed in the following chart:

 

     Year Ended June 30,  
     2016     2015     2014  
(Amounts in millions)    Sales      %     Sales      %     Sales      %  

United States

   $ 547.4         57   $ 556.4         57   $ 662.5         57

Foreign

     419.3         43     414.7         43     501.8         43
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 966.7         100   $ 971.1         100   $ 1,164.3         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our largest foreign countries in terms of net sales for the years ended June 30, 2016, 2015 and 2014, are listed in the following chart:

 

     Year Ended June 30,  
(Amounts in millions)    2016      2015      2014  

United Kingdom

   $ 65.6       $ 58.6       $ 66.2   

Canada

     37.5         37.0         44.8   

Australia

     32.3         35.1         34.4   

China

     31.6         20.6         33.4   

Spain

     21.0         21.5         24.2   

South Africa

     19.2         22.1         21.6   

The financial results of our international operations are subject to volatility due to fluctuations in foreign currency exchange rates, inflation, terrorist attacks and/or civil unrest, disruptions in travel and changes in political and economic conditions in the countries in which we operate. The value of our international assets is also affected by fluctuations in foreign currency exchange rates. For information on the breakdown of our long-lived assets in the United States and internationally, and risks associated with our international operations, see Note 21 to the Notes to Consolidated Financial Statements.

Our principal executive offices are located at 880 SW 145 Avenue, Suite 200, Pembroke Pines, Florida 33027, and our telephone number is (954) 364-6900. We maintain a website with the address www.elizabetharden.com. We are not including information contained on our website as part of, nor incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with or furnish such material to the Securities and Exchange Commission.

Information relating to corporate governance at Elizabeth Arden, Inc., including our Corporate Governance Guidelines and Principles, Code of Ethics for Directors and Executive and Finance Officers, Code of Business Conduct and charters for our Lead Independent Director, the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, is available on our website under the section “Corporate-Investor Relations—Corporate Governance.” We will provide the foregoing information without charge upon written request to Secretary, Elizabeth Arden, Inc., 880 SW 145 Avenue, Suite 200, Pembroke Pines, FL 33027.

Pending Revlon Merger

On June 16, 2016, we announced that we entered into an agreement and plan of merger (which we refer to as the “Merger Agreement”) with Revlon, Inc., Revlon Consumer Products Corporation, a wholly-owned subsidiary of Revlon, Inc. (which we refer to as “RCPC”, and together with Revlon, Inc., “Revlon”) and RR Transaction Corp., a Florida corporation and a wholly owned direct subsidiary of RCPC (which we refer to as the “Revlon Sub”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions as described below, the Revlon Sub will merge with and into us. As a result of the Revlon Merger, the Revlon Sub will cease to exist and we will survive as a wholly-owned subsidiary of RCPC. We refer to this pending transaction as the “Revlon Merger.” See Note 3 to the Notes to Consolidated Financial Statements.

Under the terms of the Merger Agreement, Revlon will acquire all of the outstanding shares of our common stock for $14.00 per share in cash (which we refer to as the “Merger Consideration”). At the closing of the Revlon Merger and pursuant to a Preferred Stock Repurchase and Warrant Cancellation Agreement among us, Revlon, the Revlon Sub, Nightingale Onshore Holdings, L.P. and Nightingale Offshore Holdings, L.P., Revlon will also provide funding for the redemption of our Series A Serial Preferred Stock (our “preferred stock”) for $55 million plus accrued unpaid dividends, and all outstanding warrants for the purchase of our common stock will be canceled. In addition, Revlon has indicated that it intends to repay and retire substantially all of our outstanding debt on or after the closing of the Revlon Merger. See Note 3 to the Notes to Consolidated Financial Statements.

 

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The consummation of the Revlon Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the adoption and approval of the Merger Agreement by the holders of a majority of our outstanding common stock and preferred stock entitled to vote thereon (voting together and voting as separate classes), (ii) the receipt of certain foreign antitrust approvals and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of a material adverse effect with respect to us, (iv) the absence of a court or regulatory authority order prohibiting the closing of the Revlon Merger, and (v) other customary closing conditions, including (x) the accuracy of the representations and warranties of the other party (subject to certain specified standards) and (y) the performance in all material respects by the other party of its obligations under the Merger Agreement. We currently expect the Merger to be completed by the end of 2016.

The Merger Agreement contains various representations and warranties and covenants of us, Revlon and Revlon Sub. These covenants include interim operating covenants that, subject to certain exceptions, (i) require us (and our subsidiaries) to operate in the ordinary course of business and in a manner consistent with past practice, (ii) require us (and our subsidiaries) to use commercially reasonable efforts to (a) preserve intact our and our subsidiaries’ business organization and reputation, (b) keep available the services of our key managers, key officers and key employees and (c) maintain existing relations and goodwill with governmental authorities, material customers, material suppliers, material creditors, material lessors, material licensors and other persons having significant business relationships with us and (iii) restrict our ability to take certain actions prior to the closing of the Revlon Merger without Revlon’s consent (which consent shall not be unreasonably withheld, delayed or conditioned). Revlon has also agreed to use commercially reasonable efforts to obtain the debt financing contemplated by a debt financing commitment letter, or such alternative financing as contemplated by the Merger Agreement, but the obligation of Revlon, Inc. and Revlon Sub to complete the merger is not conditioned on Revlon’s receipt of financing.

The Merger Agreement generally prohibits us and our representatives from soliciting alternative acquisition proposals from third parties, including proposals for transactions that (i) would result in a person or group acquiring securities representing more than 20% of the outstanding shares of any class of our voting securities or (ii) involve the acquisition or disposition of any of our or our subsidiaries’ assets or business (whether in a single transaction or a series of related transactions) (a) that constitutes or accounts for more than 20% of our consolidated net revenues or (b) for a price that is more than 20% of our enterprise value giving effect to the amount of Merger Consideration (an “Acquisition Proposal “) subject to the exceptions set forth below. The Merger Agreement restricts our ability and and that of our representatives to furnish non-public information to, or to participate in any discussions or negotiations with, any third party with respect to any Acquisition Proposal, subject to certain limited exceptions.

The Merger Agreement also contains covenants that require (i) us to file a proxy statement with the U.S. Securities and Exchange Commission (known as the SEC), which was filed on August 5, 2016, and hold a shareholder meeting with respect to obtaining approval for the Merger Agreement (which meeting is scheduled for September 7, 2016) and (ii) our board of directors (which we refer to as “our board”) to recommend that our shareholders adopt the Merger Agreement, in each case, subject to certain limited exceptions set forth below. At any time prior to receipt of the requisite shareholder approval, in certain circumstances and after following certain procedures set forth in the Merger Agreement, our board is permitted to change its recommendation to our shareholders in response to (i) an unsolicited Acquisition Proposal that our board has concluded in good faith after consultation with our outside counsel and financial advisors constitutes a Superior Proposal (as defined in the Merger Agreement) (taking into account all amendments or revisions to the Merger Agreement proposed by Revlon) or (ii) in response to an Intervening Event (as defined in the Merger Agreement), in each case, if our board has concluded in good faith after consultation with our outside counsel and financial advisors that the failure of our board to make such change of recommendation would be inconsistent with the directors’ fiduciary duties under applicable legal requirements.

The Merger Agreement contains certain termination rights for both Revlon and us, including the ability of either party (subject to certain exceptions) to terminate the Merger Agreement if (i) the Revlon Merger is not consummated within six months of the date of the Merger Agreement, (ii) a governmental authority issues an order enjoining the Revlon Merger or (iii) our shareholders do not approve the Merger Agreement. In connection with the termination of the Merger Agreement under specified circumstances, (i) we may be required to pay Revlon a termination fee of $14.0 million (including in the event Revlon terminates the Merger Agreement following an adverse recommendation change by our board or in the event we terminate the Merger Agreement in order to enter into an agreement for a Superior Proposal) or (ii) Revlon may be required to pay us a termination fee of $40.0 million (in the event the Merger Agreement is terminated under circumstances where all closing conditions have been satisfied but Revlon’s debt financing is not available to complete the Merger).

The description of the Merger Agreement in this section is not intended to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement. For more information regarding the pending Revlon Merger, including a copy of the Merger Agreement, please see our Current Report on Form 8-K dated June 16, 2016, and our Definitive Proxy Statement on Schedule 14A dated August 5, 2016.

 

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Business Strategy

Our business strategy remains focused on two important initiatives — driving the growth of the Elizabeth Arden brand, particularly in North America and in our key international markets, and growing our fragrance portfolio with a focus on key global and regional brands. The success of these two initiatives is predicated on our ability to (i) improve our go-to-market capability and execution by enhancing our distribution quality, (ii) grow margins by simplifying and streamlining our organization to optimize costs and reduce complexity, and (iii) attract, retain and develop strong employee talent. For fiscal 2017, we will continue to focus on these initiatives and target our resources and efforts on those markets, channels and brands that we believe afford us the best opportunity for profitable growth.

In July 2015, we hired a president of the Elizabeth Arden brand, and began to better focus resources on a worldwide basis to help deliver sustainable and profitable growth for the Elizabeth Arden brand. In fiscal 2016, we introduced several new products across the Elizabeth Arden skin care, color and fragrance categories, and continued to build the Elizabeth Arden brand through a new communication platform and marketing campaign intended to better convey the Elizabeth Arden brand’s relevance to new and existing customers. We also continue to enhance our social media presence, including through the recent launch of “From the Desk of Liz Arden,” a social media marketing campaign designed to convey and reinforce our brand messaging for new and existing consumers. We have also improved our digital and social media capabilities by partnering with certain publications to upgrade our digital (as well as print) exposure.

In fiscal 2017, we also expect to launch several new products across the Elizabeth Arden skin care, color and fragrance categories including Prevage City Smart + DNA Enzyme ComplexTM + Anti-pollution + Antioxidants Broad Spectrum SPF 50 Hydrating Shield, Advanced Ceramide Capsules Youth Restoring Serum, Eight Hour Miracle Hydrating Mist, Prevage Anti-aging Foundation Broad Spectrum Sunscreen SPF 30, White Tea and new fragrances under Elizabeth Arden 5th Avenue and Elizabeth Arden Green Tea.

In fiscal 2016, we reorganized our fragrance selling and marketing organizations to better develop and commercialize our prestige fragrance portfolio globally and hired a new president of global fragrances to better focus resources on a global basis to help deliver sustainable and profitable growth to our prestige fragrance portfolio. We also acquired the U.S. and international trademarks for the Giorgio of Beverly Hills fragrance brands. Prior to the acquisition of the trademarks, we manufactured and sold the Giorgio Beverly Hills fragrances under a license agreement. In July 2016, we acquired the global license and certain assets related to the Christina Aguilera fragrance business from Procter & Gamble International Operations SA for approximately $16 million. See “Trademarks, Licenses, Patents and Other Intellectual Property.” In fiscal 2017, we plan to launch several new fragrances under our existing licenses, including I Love Juicy Couture, John Varvatos Dark Rebel Rider and Britney Spears Private Show.

We also have continued to take steps to improve our international go-to-market capability and improve distribution quality. In fiscal 2016, we entered into a joint venture for the Southeast Asia region, including Hong Kong, with an unrelated third party for the sale, promotion and distribution of certain of our fragrance, skincare and cosmetics products in Southeast Asia. We have also consolidated our Asia Pacific region under a single regional structure. These steps further build on the changes we made in fiscal 2015 which included changes in our distribution strategy in China, including in the e-commerce channel, and entering into a joint venture in the United Arab Emirates with an unrelated third party for the sale, promotion and distribution of our fragrance, skincare and cosmetics products in Middle Eastern and certain other countries. See Note 12 to the Notes to Consolidated Financial Statements.

We believe that the actions that we have taken to date to improve our international go-to-market capability and execution and to grow our margins by simplifying and streamlining our organization to optimize costs and reduce complexity have begun to positively impact our financial results. In fiscal 2016, we increased our gross margins as a result of better sales mix, improved commercial execution and the implementation of a more efficient cost structure. We also lowered our selling, general and administrative expenses by reducing our indirect costs, while simultaneously reinvesting a portion of such savings in targeted advertising for key brands in key channels and markets to accelerate revenue growth.

As discussed further below, we also continue to focus on simplifying our organization, processes and overhead structure to reduce complexity and identify cost savings opportunities that can improve the performance of our business.

2014 Performance Improvement Plan and 2016 Business Transformation Program

During fiscal 2014, we began a comprehensive review of our entire business model and cost structure to identify initiatives to reduce the size and complexity of our overhead structure and to exit low-return businesses, customers and brands, in order to improve gross margins and profitability in the long term. As a result of this review, we implemented several restructuring and cost savings initiatives at the end of fiscal 2014 and during fiscal 2015 that we refer to as the “2014 Performance Improvement Plan.”

 

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During fiscal 2014 and 2015, we incurred a total of approximately $150.5 million of pre-tax charges under the 2014 Performance Improvement Plan. All charges associated with the 2014 Performance Improvement Plan had been recorded as of June 30, 2015. For further discussion of the 2014 Performance Improvement Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

As we continued to look for ways of improving our business and financial performance, and achieving our targeted goal of $40 to $50 million in annualized savings, during the fourth quarter of fiscal 2015, we identified certain additional restructuring and cost savings initiatives that we implemented during fiscal 2016, with some remaining pre-tax charges to be incurred in fiscal 2017. We collectively refer to these initiatives as our “2016 Business Transformation Program.” The 2016 Business Transformation Program was intended to further align our organizational structure and distribution arrangements with the current needs and demands of our business in order to improve our go-to-market capability and execution and to streamline our organization. We expect to incur approximately $25 million to $26 million in pre-tax charges under the 2016 Business Transformation Program, of which an estimated $20 million to $22 million is expected to be comprised of cash expenditures. During the fiscal year ended June 30, 2016, we incurred approximately $21.9 million of pre-tax charges under the 2016 Business Transformation Program, and since inception have incurred approximately $24.3 million of pre-tax charges. For further discussion see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Note 4 to the Notes to Consolidated Financial Statements.

We currently expect that the actions and initiatives identified and executed under the 2014 Performance Improvement Plan and the 2016 Business Transformation Program will result in approximately $51 million of annualized savings, exceeding the top end of our originally targeted range of annualized savings of $40 million to $50 million. If the Revlon Merger is not completed, we may pursue additional cost savings initiatives to further improve our business and financial performance. These efforts may result in additional decisions that may 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.

Investment by Rhône Capital L.L.C. Affiliates

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 $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 the Company’s common stock at an exercise price of $20.39 per share. See 13 to the Notes to Consolidated Financial Statements. At the closing of the Revlon Merger, the preferred stock will be redeemed by us (with funds to be provided to, or paid on behalf of, us by Revlon) for $55 million plus accrued but unpaid dividends, and the warrants will be canceled. See Note 3 to the Notes to Consolidated Financial Statements.

Products

Our net sales of products and net sales of products as a percentage of consolidated net sales for the years ended June 30, 2016, 2015 and 2014, are listed in the following chart:

 

     Year Ended June 30,  
     2016     2015     2014  
(Amounts in millions)    Sales      %     Sales      %     Sales      %  

Fragrance

   $ 725.0         75   $ 736.8         76   $ 901.6         77

Skin Care

     191.3         20     183.2         19     203.8         18

Cosmetics

     50.4         5     51.1         5     58.9         5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 966.7         100   $ 971.1         100   $ 1,164.3         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Fragrance. We offer a wide variety of fragrance products for both men and women, including perfume, colognes, eau de toilettes, eau de parfums, and gift sets. Our fragrances are classified into the Elizabeth Arden branded fragrances, designer branded fragrances, heritage fragrances and celebrity branded fragrances. Each fragrance is sold in a variety of sizes and packaging assortments. In addition, we sell bath and body products that are based on the particular fragrance to complement the fragrance lines, such as soaps, deodorants, body lotions, gels, creams, body and hair mists, and dusting powders. We sell fragrance products worldwide, primarily to prestige retailers, mass retailers, perfumeries, boutiques, distributors and travel retail outlets. We tailor the size and packaging of the fragrance to suit the particular target customer.

Skin Care. Our skin care lines are sold under the Elizabeth Arden name and include products such as serums, moisturizers, and cleansers. Our core Elizabeth Arden branded products include the Visible Difference, Ceramide, Prevage, Superstart and Eight Hour Cream lines. In connection with our Elizabeth Arden brand repositioning, we streamlined our portfolio and updated the look of the products. The Visible Difference brand is a line of essential skincare items that serve as an entry price point to Elizabeth Arden skin care products. Our Ceramide skin care line now targets women who are 30 and over. Prevage is our premium cosmeceutical skin care line that targets skin aging caused by environmental exposure. Our iconic Eight Hour Cream franchise continues to have a loyal following particularly in international markets. We also license our Elizabeth Arden trademarks to U.S. Cosmeceutechs, LLC for their sale of a salon/spa line, Elizabeth Arden Pro, that is offered by professional estheticians. See Note 12 to the Notes to Consolidated Financial Statements. We sell skin care products worldwide, primarily in department and specialty stores, perfumeries and travel retail outlets.

 

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Cosmetics. We offer a variety of cosmetics under the Elizabeth Arden name, including foundations, lipsticks, mascaras, eye shadows and powders. We offer these products in a wide array of shades and colors. The largest component of our cosmetics business is foundations, which we develop and market in conjunction with our skin care products. We sell our cosmetics internationally and in the United States, primarily in department and specialty stores, perfumeries and travel retail outlets.

Trademarks, Licenses, Patents and Other Intellectual Properties

We own or have rights to use the trademarks and other intellectual properties necessary for the manufacturing, marketing, distribution and sale of numerous fragrance, cosmetic and skin care brands, including Elizabeth Arden’s Red Door and 5th Avenue fragrances, Visible Difference, and Prevage among others. These trademarks are registered or have pending applications in the United States and in certain of the countries in which we sell these product lines. We consider the protection of our trademarks to be important to our business.

During the third quarter of fiscal 2016, we acquired the U.S. and international trademarks for the Giorgio Beverly Hills fragrances from The Procter & Gamble Company and certain of its affiliates for $10.5 million. Prior to the acquisition of the trademarks, we manufactured and sold the Giorgio Beverly Hills fragrances under a license agreement with The Procter & Gamble Company. In July 2016, we acquired the global license and certain assets related to the Christina Aguilera fragrance business from Procter & Gamble International Operations SA for approximately $16 million.

We are the exclusive worldwide trademark licensee for a number of fragrance brands including:

 

   

the Juicy Couture fragrances Juicy Couture, Viva la Juicy, Couture La La and I am Juicy Couture;

 

   

the Britney Spears fragrances fantasy Britney Spears, midnight fantasy Britney Spears, Britney Spears believe, radiance Britney Spears, cosmic radiance Britney Spears and fantasy Britney Spears Intimate Edition;

 

   

the Elizabeth Taylor fragrances White Diamonds, Elizabeth Taylor’s Passion, Violet Eyes Elizabeth Taylor, White Diamonds Lustre and White Diamonds Night;

 

   

the Mariah Carey fragrances M by Mariah Carey, Forever Mariah Carey, Lollipop Bling, Lollipop Splash and Mariah Carey Dreams;

 

   

the Lucky fragrances;

 

   

the Taylor Swift fragrances Wonderstruck, Wonderstruck Enchanted, Taylor by Taylor Swift and Taylor Swift Incredible Things;

 

   

the Nicki Minaj fragrances Pink Friday Nicki Minaj, Minajesty, Onika Nicki Minaj and Pink Print Nicki Minaj;

 

   

the Ed Hardy fragrances Ed Hardy, Ed Hardy Hearts & Daggers, Ed Hardy Love & Luck and Ed Hardy Skull & Roses;

 

   

the John Varvatos fragrances John Varvatos, John Varvatos Vintage, John Varvatos Classic, John Varvatos Artisan, John Varvatos Star USA and John Varvatos Dark Rebel; and

 

   

the heritage fragrance brands of Alfred Sung, BCBGMAXAZRIA, Geoffrey Beene and the designer fragrance brand Wildfox Couture.

The Elizabeth Taylor license agreement terminates in October 2022 and is renewable by us, at our sole option, for unlimited 20-year periods. The license agreement with Liz Claiborne Inc. and its affiliates relating to the Liz Claiborne, Lucky and Juicy Couture fragrances expires in December 2017 and is renewable by us for three additional five-year terms, provided specified conditions, including certain sales targets, are met. With the exception of the Taylor Swift, Mariah Carey and Nicki Minaj licenses that expire in 2016, our other license agreements have terms with expirations ranging from 2017 to 2031, and, typically, have renewal terms dependent on sales targets being achieved. Many of our license agreements are subject to our obligation to make required minimum royalty payments, minimum advertising and promotional expenditures and/or, in some cases, meet minimum sales requirements.

We also have the right under various exclusive distributor and license agreements and other arrangements to distribute other fragrances in various territories and to use the trademarks of third parties in connection with the sale of these products.

Certain of our skin care and cosmetic products, including the Prevage skin care line, incorporate patented or patent-pending formulations. In addition, several of our packaging methods, packages, components and products are covered by design patents, patent applications and copyrights. Substantially all of our trademarks and patents are held by us or by one of our wholly-owned United States subsidiaries.

 

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Sales and Distribution

We sell our prestige beauty products to retailers in the United States, including prestige retailers such as Macy’s, Dillard’s, Saks, Belk, Bloomingdale’s and Nordstrom; specialty stores such as Ulta and Sephora; and mass retailers such as Walmart, Target, Kohl’s, Walgreens, CVS, and Marshalls and TJ Maxx; and to international retailers such as Boots, Debenhams, Superdrug Stores, The Perfume Shop, Hudson’s Bay, Shoppers Drug Mart, Loblaws, Myer and Douglas, Karstadt, and various travel retail outlets such as Dufry, Nuance, and Heinemann. We also sell products to independent fragrance, cosmetic, gift and other stores. We currently sell our skin care and cosmetics products in North America primarily in department and specialty stores. We also sell our fragrances, skin care and cosmetic products in approximately 120 other countries worldwide primarily through department stores, perfumeries, pharmacies, specialty retailers, and other retail shops and “duty free” and travel retail locations. We also sell our Elizabeth Arden products and certain other prestige fragrances directly to consumers through our Elizabeth Arden branded retail outlet stores and our website www.elizabetharden.com. In certain countries, we maintain a dedicated sales force that solicits orders and provides customer service. In other countries and jurisdictions, we sell our products through joint ventures, local distributors or sales representatives under contractual arrangements. We manage our operations outside of North America from our offices in Geneva, Switzerland.

In addition, our Elizabeth Arden products are sold in the Red Door Spa beauty salons, which are owned and operated by Elizabeth Arden Salon-Holdings, Inc., an entity in which we have a minority interest and whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons. In addition to the sales price of our products sold to the operator of these salons, we receive a royalty based on the net sales from each of the salons for the use of the “Elizabeth Arden” and “Red Door” trademarks.

Our sales personnel are organized by geographic market and by customer account. In addition, in North America, we have sales personnel who routinely visit prestige retailers to assist in the merchandising, layout and stocking of selling areas. For many of our mass retailers in the United States and Canada, we sell basic products in customized packaging designed to deter theft and permit the products to be sold in open displays. Our fulfillment capabilities enable us to reliably process, assemble and ship small orders, as well as large orders, on a timely basis. In the United States and Canada, we use this ability to assist our customers in their retail distribution by shipping in multiple formats including “cross dock shipping” where we pack by store and ship to the customer’s distribution center, bulk shipment directly to distribution centers and direct-to-store shipment.

As is customary in the beauty industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of prestige beauty products, our expertise in marketing and new product introduction, and our ability to provide value-added services, including our category management services, to U.S. mass retailers.

Our ten largest customers accounted for approximately 39% of net sales for the year ended June 30, 2016. The only customer that accounted for more than 10% of our net sales during that period was Walmart (including Sam’s Club), which accounted for approximately 12% of our consolidated net sales and approximately 20% of our North America segment net sales. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The industry practice for businesses that market beauty products has been to grant certain retailers (primarily North American prestige department stores and specialty beauty stores), subject to our authorization and approval, the right to either return merchandise or to receive a markdown allowance for certain products. We establish estimated return reserves and markdown allowances at the time of sale based upon our level of sales, historical and projected experience with product returns and markdowns in each of our business segments and with respect to each of our product types, current economic trends and changes in customer demand and customer mix. Our return reserves and markdown allowances are reviewed and updated as needed during the year, and additions to these reserves and allowances may be required. Additions to these reserves and allowances may have a negative impact on our financial results.

Marketing

Our marketing approach is focused on generating strong retailer and consumer demand across our key brands. We emphasize a competitive marketing mix for each brand and ensure that our brand positioning is carried through all consumer touch points. We employ traditional consumer reach vehicles, such as television and magazine print advertising, and are increasingly leveraging new media, such as social networking and mobile and digital applications, so that we are able to engage with our consumers through their preferred technologies. We have developed and launched a new communication platform and marketing campaign intended to better convey the Elizabeth Arden brand’s relevance to new and existing customers, and have also taken steps to enhance our digital and social media marketing presence, including through the launch of “From the Desk of Liz Arden,” and through the addition of experienced personnel and increased investment. As part of the Elizabeth Arden brand repositioning, our communications platform and marketing campaigns have been designed to reflect a consistent, equity-building, modern point of view to drive new relevance among consumers.

 

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Our top priority is to drive growth of the Elizabeth Arden brand, focusing on skin care and the growth of the global skin care market, including new incorporating technologies into our skin care products, and leveraging our unique Red Door Spa heritage to generate both organic and innovation-driven growth. We understand that innovation is critical in the beauty category, and we intend to focus our innovation resources on what we view as the most significant opportunities for growth, while also emphasizing profitability.

The structure of our marketing function is intended to meet the changing needs of the global beauty marketplace. We maintain a global marketing group in New York, which is accountable for strategic planning and the development needs of most of our brands in order to build and maintain brand equity. We also maintain regional marketing teams responsible for executing and customizing marketing strategies to the needs of the many local markets around the world in which we sell our products. We believe this organizational structure supports our growth strategies and is consistent with best practices in the industry. We also work with the Red Door Spa organization to co-leverage its unique association with the Elizabeth Arden brand.

Our marketing programs are also integrated with significant cooperative advertising programs that we plan and execute with our retailers, often linked with new product innovation and promotions. In our department store and perfumery accounts, we periodically promote our brands with “gift with purchase” and “purchase with purchase” programs. At in-store counters, sales representatives offer personal demonstrations to market individual products. We also engage in extensive sampling programs.

During fiscal 2016, we introduced several new products across the Elizabeth Arden skin care, color and fragrance categories including Superstart Skin Renewal Booster, Ceramide Youth Restoring Essence, Eight Hour Cream All-Over Miracle Oil, Prevage Anti-Aging Antioxidant Infusion Essence, the Golden Opulence Fall Color Story and new Elizabeth Arden Green Tea and 5th Avenue fragrances. We also debuted new products for certain fragrance brands including Viva La Juicy Rosé, I Am Juicy Couture, John Varvatos Dark Rebel, John Varvatos Artisan Blu, Giorgio Gold (developed for the Middle Eastern market), Maui fantasy Britney Spears, White Diamonds Night and Wildfox, the debut fragrance under our license agreement with Wildfox Couture. In fiscal 2017, we plan to launch several new products across the Elizabeth Arden skin care, color and fragrance categories including Prevage City Smart + DNA Enzyme ComplexTM + Anti-pollution + Antioxidants Broad Spectrum SPF 50 Hydrating Shield, Advanced Ceramide Capsules Youth Restoring Serum, Eight Hour Miracle Hydrating Mist, Prevage Anti-aging Foundation Broad Spectrum Sunscreen SPF 30, White Tea and new fragrances under Elizabeth Arden 5th Avenue and Elizabeth Arden Green Tea. We also plan to launch several new fragrances under our existing licenses including I Love Juicy Couture, John Varvatos Dark Rebel Rider and Britney Spears Private Show.

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, 2016, approximately 60% of our net sales were made during the first half of our fiscal year. Due to product innovations and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, and additions or expirations of license agreements, 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.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital 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.

Manufacturing, Supply Chain and Logistics

We use third-party suppliers and contract manufacturers in the United States and Europe to obtain substantially all of our raw materials, components and packaging products and to manufacture substantially all of our finished products for our owned and licensed brands. We use third parties in the United States to manufacture our fragrance, skin and cosmetic products. Cosmetic Essence LLC (CEI), an unrelated third party, is our primary manufacturer in the United States through plants located in New Jersey and Roanoke, Virginia. Additionally, third parties in Europe also manufacture certain of our fragrance and cosmetic products.

 

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We primarily use a “turnkey” manufacturing model with the majority of our contract manufacturers in the United States and Europe, including CEI. Under the “turnkey” manufacturing model, our contract manufacturers assume administrative responsibility for planning and purchasing raw materials and components, while we continue to direct strategic sourcing and pricing with important raw materials and components vendors.

We enter into supply agreements for finished goods with the most significant “turnkey” manufacturers of our owned and licensed brands. Historically, however, we have not entered into agreements with component manufacturers, raw material, fragrance oil or blend suppliers, or suppliers of our distributed brands, and have generally purchased these items through purchase orders. We believe that we have good relationships with manufacturers of our owned and licensed brands and other suppliers and that there are alternative sources should one or more of these manufacturers or suppliers become unavailable. We receive our distributed brands in finished goods form directly from fragrance manufacturers, as well as from other sources. Sales of fragrance brands that we distribute on a non-exclusive basis accounted for approximately 13% of our net sales for fiscal 2016. The loss of, or a significant adverse change in our relationship with, any of our key manufacturers for our owned and licensed brands, such as CEI, or suppliers of components, fragrance oil or blends or distributed fragrance brands, or any other supply chain disruption, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our fulfillment operations for the United States and certain other areas of the world are conducted out of a leased distribution facility in Roanoke, Virginia. The 400,000 square-foot Roanoke facility accommodates our distribution activities and houses a large portion of our inventory, and we also lease approximately 482,000 square feet in a warehouse facility in Salem, Virginia, that we primarily use as a return center and to house promotional inventory. During fiscal 2016, we entered into a logistics services agreement for our fulfillment operations for Europe with ID Logistics, an unrelated third party, at ID Logistics’ facility in Tilburg, Netherlands. The ID Logistics agreement expires in February 2020. While we insure our inventory and the Roanoke facility, the loss of any of these facilities or the inventory stored in those facilities, would require us to find replacement facilities or inventory and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Government Regulation

We and our products are subject to regulation by the Food and Drug Administration, the Federal Trade Commission and state regulatory authorities in the United States, as well as by various other federal, local and international regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the ingredients, manufacturing, labeling, packaging and marketing of our products. We believe that we are in substantial compliance with such regulations, as well as with applicable federal, state, local and international rules and regulations governing the discharge of materials hazardous to the environment. Changes in such regulations, or in the manner in which such regulations are interpreted, applied, or enforced, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Management Information Systems

Our primary information technology systems discussed below provide a complete portfolio of business systems, business intelligence systems, and information technology infrastructure services to support our global operations:

 

   

Logistics and supply chain systems, including purchasing, materials management, specifications management, manufacturing, inventory management, order management, customer service, pricing, demand planning, warehouse management and shipping;

 

   

Financial and administrative systems, including general ledger, payables, receivables, personnel, payroll, tax, treasury and asset management;

 

   

Electronic data interchange systems to enable electronic exchange of order, status, invoice, and financial information with our customers, financial service providers and our partners within the extended supply chain;

 

   

Business intelligence and business analysis systems to enable management’s informational needs as they conduct business operations and perform business decision making; and

 

   

Information technology infrastructure services to enable integration of our global business operations through wide area networks (WAN), managed internet services (MIS), voice over internet protocol (VoIP), video and web conferencing, personal computing technologies, electronic mail, and service and cloud agreements providing outsourced computing operations.

 

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These management information systems and infrastructure provide on-line business process support for our global business operations. Further, many of these capabilities have been extended into the operations of certain of our U.S. customers and third party service providers to enhance these arrangements, with examples such as vendor managed inventory, third party distribution, third party manufacturing, inventory replenishment, customer billing, retail sales analysis, product availability, pricing information and transportation management.

We outsource a substantial portion of our data center operations to IBM, a leading global information services and technology provider. The IBM data center is located in a facility in Research Triangle Park, Raleigh, North Carolina. IBM also provides us with disaster recovery capabilities to enhance the reliability of our management information systems, which are designed to continue to operate if our primary computer systems should fail. We use service level agreements and operating metrics to help us monitor and assess the performance of our outsourced data center operations. We also have business interruption insurance to cover a portion of lost income or additional expenses associated with disruptions to our business, including our management information systems, resulting from certain casualties. Our business, results of operations, financial condition or cash flow may, however, be adversely affected if our outsourced data center operations facilities are damaged or otherwise fail and/or our disaster recovery capabilities do not or cannot perform as intended.

Competition

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. Competition in the beauty industry is based on brand strength, pricing and assortment of products, in store presence and visibility, innovation, perceived value, product availability, order fulfillment, service to the customer, promotional activities, advertising, special events, new product introductions, e-commerce and mobile commerce initiatives, and other activities.

We believe that we compete primarily on the basis of brand recognition, quality, product efficacy, price, and our emphasis on providing value-added customer services. There are products that are better-known and more popular than the products manufactured or supplied by us. Many of our competitors are substantially larger and more diversified, and have substantially greater financial and marketing resources than we do, as well as greater name recognition and the ability to develop and market products similar to, and competitive with, those manufactured by us.

Employees

As of August 9, 2016, we had approximately 1,900 full-time employees and approximately 500 part-time employees in the United States and 19 foreign countries. None of our employees in the United States are covered by a collective bargaining agreement. We believe that our relationship with our employees is satisfactory.

Executive Officers of the Company

The following sets forth the names and ages of each of our executive officers as of August 9, 2016, and the positions they hold:

 

Name

   Age   

Position with the Company

E. Scott Beattie

   57   

Chairman, President and Chief Executive Officer

Rod R. Little

   47   

Executive Vice President and Chief Financial Officer

George Cleary

   52   

President, Global Fragrances

Eric Lauzat

   64   

President, International

JuE Wong

   53   

President, Elizabeth Arden Brand

Oscar E. Marina

   57   

Executive Vice President, General Counsel and Secretary

Pierre Pirard

   48   

Executive Vice President – Global Supply Chain and Technical Services

Each of our executive officers holds office for such term as may be determined by our board of directors subject to earlier retirement, removal or resignation. Set forth below is a brief description of the business experience of each of our executive officers.

E. Scott Beattie has served as Chairman of our Board of Directors since April 2000, as our Chief Executive Officer since March 1998, and as one of our directors since January 1995. Mr. Beattie also has served as our President since August 2006, a position he also held from April 1997 to March 2003. In addition, Mr. Beattie served as our Chief Operating Officer from April 1997 to March 1998, and as Vice Chairman of the Board of Directors from November 1995 to April 1997. Mr. Beattie is a member of the executive committee of the board of directors of the Personal Care Products Council, the U.S. trade association for the global cosmetic and personal care products industry, a member of the advisory board of the Ivey School of Business, and board treasurer, a member of the executive committee, and chairperson of the audit and finance committee of the board of directors of PENCIL, a not-for-profit organization that benefits New York City public schools.

 

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Rod R. Little has served as our Executive Vice President and Chief Financial Officer since April 2014. Prior to joining us, Mr. Little spent 17 years with Procter & Gamble where he held numerous positions of increasing responsibility in Procter & Gamble’s divisional and corporate finance organization, ultimately serving as the chief finance officer of their global salon professional division from 2009 until 2014. Mr. Little served for five years in the United States Air Force prior to joining Procter & Gamble in 1997.

George Cleary joined us as President, Global Fragrances on March 14, 2016. Prior to joining us, Mr. Cleary served as Chief Executive Officer of Illuminage Beauty since January 2015. Previously, from April 2007 until December 2014, Mr. Cleary held several senior positions at Coty Inc., including most recently serving as President, Coty Beauty Americas. From 1992 until 2007, Mr. Cleary served in various general management and senior sales roles for Johnson & Johnson. Mr. Cleary began his career in sales and trade marketing with Nestle Food Company.

Eric Lauzat has been our President, International since July 2015. Previously, he served as our Executive Vice President, General Manager—International from October 2013 to June 2015. Prior to joining us, Mr. Lauzat was with the L’Oréal Group for over 30 years where he held numerous international commercial positions, including as head of Latin America, Middle East and Africa for L’Oréal Luxe from 2008 until 2012, and as president of Lancôme USA from 2005 until 2008.

JuE Wong joined us as President, Elizabeth Arden Brand on August 3, 2015. Prior to joining us, Ms. Wong served as Chief Executive Officer of StriVectin Operating Company since July 2012. From August 2009 to May 2012, Ms. Wong served as Chief Executive Officer of Astral Health and Beauty and from January 2008 to August 2009, Ms. Wong served as Executive Vice President- Global Sales and Business Development at Zo Skin Health by Dr. Obagi. Prior to January 2008, Ms. Wong held senior business development positions at N.V. Perricone MD. Ltd. Inc.

Oscar E. Marina has served as our Executive Vice President, General Counsel and Secretary since April 2004, as our Senior Vice President, General Counsel and Secretary from March 2000 to March 2004, and as our Vice President, General Counsel and Secretary from March 1996 to March 2000. From October 1988 to March 1996, Mr. Marina was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, Florida, becoming a partner of the firm in January 1995.

Pierre Pirard has served as our Executive Vice President, Global Supply Chain and Technical Services since November 2015. From February 2010 until November 2015, he served as our Executive Vice President, Product Innovation and Global Supply Chain. From November 2007 until February 2010, he served as our Senior Vice President, Global Supply Chain. Prior to joining us, Mr. Pirard spent 15 years at Johnson & Johnson where he held numerous positions, including serving as Regional Director, External Manufacturing North America – Consumer Sector, from 2005 until 2007; as Regional Director – Supply Chain Planning North America – Consumer Sector from 2001 to 2005; and in various positions in the finance, project management, supply chain and logistics groups for Johnson & Johnson Canada from 1992 to 2000.

 

ITEM 1A. RISK FACTORS

The risk factors in this section describe the major risks to our business, prospects, results of operations, financial condition and cash flows, and should be considered carefully. In addition, these factors constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and could cause our actual results to differ materially from those projected in any forward-looking statements (as defined in such act) made in this Annual Report on Form 10-K. Any statements that are not historical facts and that express, or involve discussions as to, expectations, beliefs, plans, objectives, targets, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,” “believes” and “projects”) may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. 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.

 

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There is no assurance when or if the Revlon Merger will be completed. Failure to complete the Revlon Merger could negatively impact our stock price and our future business and financial results.

Completion of the Revlon Merger is subject to the satisfaction or waiver of a number of conditions that must be satisfied or waived by December 16, 2016 (which we refer to as the “Merger Deadline”).We and Revlon may not be able to satisfy the closing conditions and closing conditions beyond our or their control may not be satisfied or waived and the Revlon Merger may not be consummated by reason of the failure to so satisfy such conditions. Any delay in completing the Revlon Merger could result in additional transaction costs, loss of revenue or other effects to us associated with uncertainty about the Revlon Merger, including a decline in the price of our common stock.

If the Revlon Merger is not completed by the Merger Deadline (as such deadline may be extended by agreement of the parties to the Merger Agreement), the parties to the Merger Agreement may not be obligated to complete the Revlon Merger. If the Revlon Merger is not completed for any reason, our ongoing business and financial results may be adversely affected, and we will be subject to a number of risks, including the following:

 

   

we may be required, under certain circumstances, to pay to Revlon a $14 million termination fee in connection with a termination of the Merger Agreement;

 

   

we will be required to pay certain other costs relating to the Revlon Merger, whether or not the Revlon Merger is completed, such as legal, accounting, financial advisor and printing fees; and

 

   

in addition to the litigation regarding the Revlon Merger discussed in Item 3, “Legal Proceedings,” we may be subject to further litigation related to any failure to complete the Revlon Merger.

If the Revlon Merger is not completed, these risks may materialize and may adversely affect our business, prospects, results of operations, financial condition and/or cash flows, as well as the price of our common stock, which may cause the value of shareholders’ investment to decline. We cannot provide any assurance that the Revlon Merger will be completed or that there will not be a delay in the completion of the Revlon Merger.

We could be subject to business disruptions and uncertainties during the pendency of the Revlon Merger that could materially and adversely affect our business.

The pendency of the Revlon Merger could cause disruptions to our current plans and operations and create uncertainty regarding our business. For example, the Merger Agreement restricts our ability to take certain specified actions, such as acquire or dispose of certain assets, without the prior written consent of Revlon. Uncertainty about the effect of the Revlon Merger on employees, customers, distributors, suppliers and business partners may impair our ability to attract, retain and motivate key personnel until the Revlon Merger is consummated and could cause customers, suppliers and others who deal with us to change their existing business relationships with us. Key employees may become distracted from day-to-day operations because matters related to the Revlon Merger may require substantial commitments of time and resources, or they may depart because of issues related to the uncertainty related to the Revlon Merger. Such disruptions and uncertainties may have a material and adverse effect on our business and financial results.

Our level of debt and debt service obligations and our obligations with respect to our redeemable preferred stock, the restrictive covenants in our revolving credit facility and second lien credit agreement and our indenture for our 7 3/8% senior notes, and the terms of our outstanding redeemable preferred stock, may reduce our operating and financial flexibility, including our ability to maintain sufficient liquidity to fund our operations and future growth, and could adversely affect our business and growth prospects.

At June 30, 2016, we had total debt of approximately $422 million which includes (i) $350 million in aggregate principal amount outstanding of our 7 3/8% senior notes (plus approximately $5 million in unamortized premium on our 7 3/8% senior notes), (ii) $42 million outstanding under our revolving bank credit facility, and (iii) $25 million under our second lien credit agreement. We also have $50 million of issued and outstanding redeemable preferred stock. The 7 3/8% senior notes, the revolving bank credit facility, the second lien agreement, and the terms and conditions associated with our redeemable preferred stock (and the shareholders agreement related thereto) have requirements that may limit our operating and financial flexibility. Our indebtedness and obligations under our redeemable preferred stock could adversely impact our business, prospects, results of operations, financial condition or cash flows by increasing our vulnerability to general adverse economic and industry conditions and restricting our ability to consummate acquisitions or fund working capital, capital expenditures and other general corporate requirements.

Specifically, our revolving credit facility, second lien credit agreement, our indenture for our 7 3/8% senior notes and the terms and conditions associated with our redeemable preferred stock (and the shareholders agreement related thereto) limit or otherwise affect our ability to, among other things:

 

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incur additional debt;

 

   

pay dividends or make other restricted payments;

 

   

create or permit certain liens, other than customary and ordinary liens;

 

   

sell assets other than in the ordinary course of our business;

 

   

invest in other entities or businesses; and

 

   

consolidate or merge with or into other companies or sell all or substantially all of our assets.

These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. Our revolving credit facility also requires us to maintain specified amounts of borrowing capacity and borrowing availability or maintain a debt service coverage ratio. Our ability to meet these conditions and our ability to service our debt and redeemable preferred stock obligations will depend upon our future operating performance, which can be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. If our actual results deviate significantly from our projections, we may not be able to service our debt or redeemable preferred stock or remain in compliance with the conditions contained in our revolving credit facility, and we would not be allowed to borrow under the revolving credit facility. If we were not able to borrow under our revolving credit facility, we would be required to develop an alternative source of liquidity. We cannot assure you that we could obtain replacement financing on favorable terms or at all.

A default under our revolving credit facility or second lien credit agreement could also result in a default under our indenture for our 7 3/8% senior notes. Upon the occurrence of an event of default under our indenture, all amounts outstanding under our other indebtedness may be declared to be immediately due and payable. If we were unable to repay amounts due on our revolving credit facility or second lien credit agreement, the lenders would have the right to proceed against the collateral granted to them to secure that debt.

We may be adversely affected by factors affecting our customers’ businesses.

Factors that adversely impact our customers’ businesses may also have an adverse effect on our business, prospects, results of operations, financial condition or cash flows. These factors may include:

 

   

any reduction in consumer traffic and demand at our customers as a result of economic downturns like domestic and international recessions, terrorist attacks or civil unrest, or changes in consumer preferences;

 

   

any credit risks associated with the financial condition of our customers;

 

   

the effect of consolidation or weakness in the retail industry or at certain retail customers, including the closure of customer doors and the resulting uncertainty; and

 

   

inventory reduction initiatives and other factors affecting customer buying patterns, including any reduction in retail space committed to fragrances, skin care products, and cosmetics and retailer practices used to control inventory shrinkage.

We do not have contracts with customers or with suppliers of our distributed brands, so if we cannot maintain and develop relationships with such customers and suppliers our business, prospects, results of operations, financial condition or cash flows may be materially adversely affected.

We do not have long-term or exclusive contracts with any of our customers and generally do not have long-term or exclusive contracts with our suppliers of distributed brands. Our ten largest customers accounted for approximately 39% of our net sales in the year ended June 30, 2016. Our only customer who accounted for more than 10% of our net sales in the year ended June 30, 2016 was Walmart (including Sam’s Club), which accounted for approximately 12% of our consolidated net sales and approximately 20% of our North America segment net sales. In addition, our suppliers of distributed brands, which represented approximately 13% of our net sales for fiscal 2016, generally can, at any time, elect to supply products to our customers directly or through another distributor. Our suppliers of distributed brands may also choose to alter the selection or volume of their products distributed by us. The loss of any of our key suppliers or customers, or a change in our relationship with any one of them, including reduced sales to key customers, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

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We depend on various brand licenses for a significant portion of our sales, and the loss of one or more licenses or agreements could have a material adverse effect on us.

Our rights to market and sell certain of our prestige fragrance brands are derived from licenses from unaffiliated third parties and our business is dependent upon the continuation and renewal of such licenses on terms favorable to us. Each license is for a specific term and may have optional renewal terms. In addition, such licenses may be subject to us making required minimum royalty payments, minimum advertising and promotional expenditures and meeting minimum sales requirements. Just as the loss of a license or other significant agreement may have a material adverse effect on us, a renewal on less favorable terms could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The failure to realize the anticipated benefits of our 2014 Performance Improvement Plan, 2016 Business Transformation Program, or other restructuring or cost saving initiatives could have a material adverse effect on us.

During fiscal 2015 and fiscal 2016, we undertook broad restructuring and cost savings programs that are intended to reduce the size and cost of our overhead structure and exit low-return businesses, customers and brands to improve gross margins and profitability in the long term. The 2014 Performance Improvement Plan included the exiting of certain unprofitable retail doors and fragrance license agreements, changes in customer, distribution and supply chain relationships, the discontinuation of certain products, headcount reductions, and the closing of our affiliate in Puerto Rico. The 2016 Business Transformation Program is intended to further align our organizational structure and distribution arrangements with the current needs and demands of our business in order to improve our go-to-market capability and execution and to streamline our organization. Although we believe that actions taken under the 2014 Performance Improvement Plan and 2016 Business Transformation Program will result in annual cost savings of approximately $51 million, and thus facilitate long-term growth in profitability, we may not realize, in full or in part, the anticipated benefits of these initiatives. The failure to realize such anticipated benefits, which could result from our inability to execute plans, global or local economic conditions, competition, changes in the beauty industry and other factors described herein, could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Fluctuations in foreign exchange rates could adversely affect our results of operations and cash flows.

We sell our products in approximately 120 countries around the world. During each of the years ended June 30, 2016 and 2015, 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, 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.

We rely on third-party manufacturers and component suppliers for substantially all of our owned and licensed products.

We do not own or operate any manufacturing facilities. We use third-party manufacturers and component suppliers to source and manufacture substantially all of our owned and licensed products. Over the past several years, we have reduced the number of third-party manufacturers and component and materials suppliers that we use, and have implemented a “turnkey” manufacturing process for substantially all of our products in which we now rely on our third-party manufacturers for certain supply chain functions that we previously handled ourselves, such as component and raw materials planning, purchasing and warehousing. Our business, prospects, results of operations, financial condition or cash flows could be materially adversely affected if we experience any supply chain disruptions caused by this “turnkey” manufacturing process or other supply chain projects, or if our manufacturers or raw material suppliers were to experience problems with product quality, credit or liquidity issues, or disruptions or delays in the manufacturing process or delivery of the finished products or the raw materials or components used to make such products.

The loss of or disruption in our distribution facilities may have a material adverse effect on our business.

We currently have one distribution facility in the United States and use a third-party fulfillment center in the Netherlands primarily for European distribution. These facilities house a large portion of our inventory. Although we insure our inventory, any loss, damage or disruption of these facilities, or loss or damage of the inventory stored in them, could adversely affect our business, prospects, results of operations, financial condition or cash flows.

 

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Our business is subject to regulation in the United States and internationally.

The manufacturing, distribution, formulation, packaging and advertising of our products and those we distribute for others are subject to numerous federal, state and foreign governmental regulations. The number of laws and regulations that are being enacted or proposed by state, federal and international governments and governmental authorities are increasing. Compliance with these regulations is difficult and expensive and may require reformulation, repackaging, relabeling or discontinuation of certain of our products. If we fail to adhere, or are alleged to have failed to adhere, to any applicable federal, state or foreign laws or regulations, or if such laws or regulations negatively affect sales of our products, our business, prospects, results of operation, financial condition or cash flows may be adversely affected. In addition, our future results could be adversely affected by changes in applicable federal, state and foreign laws and regulations, or the interpretation or enforcement thereof, including those relating to products or ingredients, packaging, product liability, trade rules and customs regulations, intellectual property, advertising, marketing, consumer laws, privacy laws, anti-corruption laws, as well as accounting standards and taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretations).

Adverse U.S. or international economic conditions could negatively impact our business, prospects, results of operations, financial condition or cash flows.

We believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income. Adverse U.S. or international economic conditions, such as the current economic environment in Europe and the economic uncertainty resulting from the proposed withdrawal of the United Kingdom from the European Union., or periods of inflation or high energy prices can contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and declining consumer confidence and demand, each of which poses risks to our business. A decrease in consumer spending and/or in retailer and consumer confidence and demand for our products could significantly negatively impact our net sales and profitability, including our operating margins and return on invested capital. Such economic conditions could cause some of our customers or suppliers to experience cash flow and/or credit problems and impair their financial condition, which could disrupt our business and adversely affect product orders, payment patterns and default rates and increase our bad debt expense. Adverse economic conditions could also adversely affect our access to the capital necessary for our business and our ability to remain in compliance with the financial covenant in our revolving credit facility that applies only in the event that we do not have the requisite average borrowing base capacity and borrowing availability, as set forth in our credit facility. If adverse U.S. or international economic conditions persist or deteriorate further, our business, prospects, results of operations, financial condition or cash flows could be negatively impacted.

We may be adversely affected by domestic and international events that impact consumer confidence and demand, financial markets and business operations.

Sudden disruptions in business conditions due to events such as terrorist attacks, diseases, severe weather or natural disasters may have a short-term, or sometimes long-term, adverse impact on consumer confidence and spending, financial markets and our business operations, which could negatively impact our business, prospects, results of operations, financial condition or cash flows. In addition, any reductions in travel or increases in restrictions on travelers’ ability to transport our products on airplanes due to general economic downturns, diseases, increased security levels, acts of war or terrorism could result in a material decline in the net sales and profitability of our travel retail business.

The beauty industry is highly competitive and if we cannot effectively compete, our business and results of operations will suffer.

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. Competition in the beauty industry is based on brand strength, pricing and assortment of products, in-store presence and visibility, innovation, perceived value, product availability and order fulfillment, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce and mobile commerce initiatives and other activities. It is difficult for us to predict the timing and scale of our competitors’ actions in these areas. The trend toward consolidation in the retail trade has also resulted in risks related to increased customer concentration, including becoming increasingly dependent on key retailers, including large-format retailers, who have increased their bargaining strength. We compete primarily with global prestige beauty companies and multinational consumer product companies, some of whom have greater resources than we have and brands with greater name recognition and consumer loyalty than our brands. In addition, the fragrances segment in the U.S. is being influenced by the high volume of new product introductions by diverse companies across several different distribution channels, including private label brands and lower cost brands that have increased pricing pressure. Our success depends on our products’ appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change, and on our ability to anticipate and respond in a timely and cost-effective manner to market trends through product innovations, product line extensions and marketing and promotional activities. As product life cycles shorten, we must continually work to develop, produce, and market new products and maintain and enhance the recognition of our brands. Net revenues and margins on beauty products tend to decline as they advance in their life cycles, so our net revenues and margins could suffer if we do not successfully and continuously develop new products. This issue is further compounded by the rapidly increasing use and proliferation of social and digital media by consumers, and the speed with which information and opinions are shared. Constant product innovation also can place a strain on our financial and personnel resources. We may incur expenses in connection with product innovation and development, marketing and advertising that are not subsequently supported by a sufficient level of sales, which could negatively affect our results of operations. These competitive factors, as well as new product risks, could have an adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

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The success of our global business strategy depends upon our ability to increase sales of the Elizabeth Arden brand and our prestige fragrance portfolio, as well as our ability to acquire or license additional brands or secure additional distribution arrangements and obtain the required financing for these agreements and arrangements.

Our business strategy contemplates the continued growth of our portfolio of owned, licensed and distributed brands, including expanding our geographic presence to take advantage of opportunities in developed and emerging markets. Efforts to increase sales of the Elizabeth Arden brand and our prestige fragrance portfolio and expand our geographic market presence, such as our global repositioning of the Elizabeth Arden brand, depend upon a number of factors, including our ability to:

 

   

develop our brand portfolio through branding, innovation and execution;

 

   

identify and develop new and existing brands with the potential to become successful global brands;

 

   

innovate and develop new products that are appealing to the consumer;

 

   

acquire or license additional brands or secure additional distribution arrangements and obtain the required financing for these agreements and arrangements;

 

   

expand our geographic presence to take advantage of opportunities in developed and emerging markets;

 

   

continue to expand our distribution channels within existing geographies to increase market presence, brand recognition and sales;

 

   

expand our market presence through alternative distribution channels;

 

   

expand margins through sales growth, the development of higher margin products, and overhead and supply chain integration and efficiency initiatives;

 

   

effectively manage capital investments and working capital to improve the generation of cash flow; and

 

   

execute any acquisitions quickly and efficiently and integrate businesses successfully.

There can be no assurance that we can successfully achieve any or all of the above objectives in the manner or time period that we expect. Further, achieving these objectives will require investments, which may result in material short-term costs without generating any current net revenues and, we may not ultimately achieve our net sales or earnings estimates associated with such efforts. Our future expansion through acquisitions, new product licenses or new product distribution arrangements, if any, will depend upon our ability to identify suitable brands to acquire, license or distribute and our ability to obtain the required financing for these acquisitions, licenses or distribution arrangements or to launch or support the brands associated with these agreements or arrangements, and thus depends on the capital resources and working capital available to us. We may not be able to identify, negotiate, finance or consummate such acquisitions, licenses or arrangements, or the associated working capital requirements, on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business. In addition, we may decide to divest or discontinue certain brands or streamline operations and incur other costs or special charges in doing so. We cannot give any assurance that we will realize, in full or in part, the anticipated benefits we expect our business strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The success of our business depends, in part, on the demand for heritage, celebrity and designer fragrance products.

We have rights to manufacture, market and distribute a number of heritage, celebrity and designer fragrance products, including those of Juicy Couture, John Varvatos, Elizabeth Taylor, Britney Spears, Taylor Swift, Mariah Carey, Nicki Minaj, Ed Hardy, Lucky, Halston, Geoffrey Beene and Wildfox Couture. In fiscal 2016, we derived approximately 46% of our net sales from heritage, celebrity and designer fragrance brands, and celebrity fragrances accounted for approximately 4% of our net sales. The demand for these products is, to some extent, dependent on the appeal to consumers of the particular celebrity or designer and the celebrity’s or designer’s reputation. To the extent that the celebrity/designer fragrance category or a particular celebrity or designer ceases to be appealing to consumers or a celebrity’s or designer’s reputation is adversely affected, sales of the related products and the value of the brands can decrease materially. In addition, under certain circumstances, lower net sales may shorten the duration of the applicable license agreement.

 

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Our success depends, in part, on our ability to successfully manage our inventory.

The competitive nature of the beauty industry and rapidly changing consumer preferences require constant product innovation and have led to the shortening of product life cycles. As a result, we monitor our inventories based on forecasted demand, the estimated market value and shelf life of our inventory and our historic experience. If we misjudge consumer preferences or demands or future sales do not reach forecasted levels, however, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. If we are not successful in managing our inventory, our business, results of operations, financial condition, or cash flows could be adversely affected.

We may not be able to successfully and cost-effectively integrate acquired businesses or new brands.

Acquisitions entail numerous integration risks and impose costs on us that could materially and adversely affect our business, prospects, results of operations, financial condition or cash flows, including:

 

   

difficulties in assimilating acquired operations, products or brands, including disruptions to our operations or the unavailability of key employees from acquired businesses;

 

   

diversion of management’s attention from the day-to-day management of our core business;

 

   

an inability to achieve net sales or earnings assumptions associated with such acquired businesses or brands;

 

   

adverse effects on existing business relationships with suppliers and customers;

 

   

risks of entering distribution channels, categories or markets in which we have limited or no prior experience;

 

   

incurrence or assumption of additional debt and liabilities, as well as the potential for increased claims and litigation; and

 

   

incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets

Our failure to achieve intended benefits from any future acquisitions could have a material adverse effect on our business, results of operations, financial condition, or cash flows.

Our business could be adversely affected if we are unable to successfully protect our intellectual property rights or if our licensors are unable to successfully protect their intellectual property rights.

The market for our products depends to a significant extent upon the value associated with the trademarks and patents that we own or license. We own, or have licenses or other rights to use, the material trademarks and patents used in connection with the ingredients, packaging, marketing and distribution of our major owned and licensed products both in the U.S. and in certain other countries where such products are principally sold.

Although most of our brand names are registered in the U.S. and in certain foreign countries in which we operate, we may not be successful in asserting trademark protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. The costs required to protect our trademarks and patents may be substantial. We also cannot assure that the owners of the trademarks that we license can or will successfully maintain their intellectual property rights.

If other parties infringe on our intellectual property rights or the intellectual property rights that we license, the value of our brands in the marketplace may be diluted. In addition, any infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and could materially adversely affect our business, prospects, results of operations, financial condition or cash flows.

 

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Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of other parties.

Our commercial success depends at least in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of others. We cannot be certain that the conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage. For these and other reasons, third parties may allege that our products, services or activities infringe, misappropriate or otherwise violate their trademark, patent, copyright or other proprietary rights. Defending against allegations and litigation could be expensive, take significant time, divert management’s attention from other business concerns, and delay getting our products to market. In addition, if we are found to be infringing, misappropriating or otherwise violating third party trademark, patent, copyright or other proprietary rights, we may need to obtain a license, which may not be available on commercially reasonable terms or at all, or redesign or rebrand our products, which may not be possible, and even if possible, may be costly. We may also be required to pay substantial damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could therefore have a material adverse effect on our business, financial condition and/or results of operations.

If our intangible assets, such as trademarks, patents, exclusive brand licenses and goodwill, become impaired, we may be required to record a significant non-cash charge to earnings which would negatively impact our results of operations.

Exclusive brand licenses, trademarks and intangibles comprise a material portion of our total consolidated assets. Acquisitions of brands typically result in an increase in other intangibles on our balance sheet. Under accounting principles generally accepted in the United States, we review our intangible assets, including our trademarks, patents, licenses and goodwill, for impairment annually, or more frequently if events or changes in circumstances indicate the carrying value of our intangible assets may not be fully recoverable. The carrying value of our intangible assets may not be recoverable due to factors such as a decline in our stock price and market capitalization, reduced estimates of future cash flows, including those associated with the specific brands to which intangibles relate, or slower growth rates in our industry.

Estimates of future cash flows are based on a long-term financial outlook of our operations and the specific brands to which the intangible assets relate. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates and the recorded value of the intangibles. For example, during the second quarter of fiscal 2015, net sales of Justin Bieber and Nicki Minaj fragrances fell significantly below expectations, and 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 and 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.

Accordingly, a significant sustained decline in our stock price and market capitalization, reduced estimates of future cash flows, or slower growth rates in our industry may result in impairment of certain of our intangible assets, including goodwill, and a significant charge to earnings in our financial statements during the period in which an impairment is determined to exist. We cannot accurately predict the amount and timing of any impairment charge, and any such impairment charge could materially reduce our results of operations.

We are subject to risks related to our international operations.

We operate on a global basis, with sales in approximately 120 countries. Approximately 43% of our fiscal 2016 net sales were generated outside of the United States. Our international operations could be adversely affected by:

 

   

import and export license requirements;

 

   

trade restrictions;

 

   

changes in tariffs and taxes;

 

   

restrictions on repatriating foreign profits back to the United States;

 

   

changes in, or our unfamiliarity with, foreign laws and regulations, including those related to product registration, ingredients, packaging and labeling, including changes in the interpretation or enforcement of such laws and regulations;

 

   

difficulties in staffing and managing international operations;

 

   

terrorist attacks or other civil unrest; and

 

   

changes in applicable social, political, legal, economic and other conditions.

 

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A downgrade in our credit ratings may adversely affect our access to financing and our ability to satisfy our working capital requirements.

Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt. Prior to the announcement of the pending Revlon Merger, our long-term credit ratings were Caa2 (Negative Outlook) with Moody’s and CCC (Negative Outlook) with S&P, each of which is below investment grade. Future rating agency reviews could result in a change in outlook or further downgrade. A negative change in outlook or downgrade of our credit ratings, and/or the circumstances giving rise to such actions, could limit our access to financing, reduce our flexibility with respect to working capital needs, increase the cost of new financing, result in less favorable covenants and financial terms for our financing and adversely affect the market price of some or all of our outstanding debt securities.

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets (such as net operating losses and tax credits) and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation or tax authority audit process. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income of the appropriate character in the relevant jurisdiction. Commencing in fiscal 2014, we have recorded valuation allowances against our U.S. deferred tax assets as non-cash charges to income tax expense. Additionally, commencing in fiscal 2015, for certain of our foreign operations, we recorded valuation allowances against our deferred tax assets as non-cash charges 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 these jurisdictions unless sufficient future taxable income is generated in such jurisdictions to support the realization of the deferred tax assets. Although we may be able to utilize some of these deferred tax assets in the future if we have income of the appropriate character prior to their expiration, there is no assurance that we will be able to do so.

From time to time, tax proposals are introduced or considered by the United States Congress or the legislative bodies in foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our other tax liabilities. Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions such as the current Internal Revenue Service examination of our U.S. federal tax returns for the years ended June 30, 2010, 2011 and 2012. In connection with these audits, tax authorities may disagree with certain tax positions taken on our tax returns, including without limitation cross-jurisdictional transfer pricing, and assess additional taxes. Although we regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision, such provisions may not be adequate. As a result, the ultimate resolution of these tax audits, changes in tax laws or tax rates, and the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.

Our quarterly results of operations fluctuate due to seasonality and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.

We generate a significant portion of our net income in the first half of our fiscal year as a result of higher sales in anticipation of the holiday season. Similarly, our working capital needs are greater during the first half of the fiscal year. We may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including new product innovations and launches, the size and timing of customer orders and additions or losses of brand distribution rights. If we were to experience a significant shortfall in sales or internally generated funds, we may not have sufficient liquidity to fund our business.

Our success depends, in part, on the quality, efficacy and safety of our products.

Our success depends, in part, on the quality, efficacy and safety of our products. If our products are found or alleged to be defective or unsafe, or if they fail to meet customer or consumer standards, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Our success depends upon the retention and availability of key personnel and the succession of senior management.

Our success largely depends on the performance of our management team and other key personnel. Our future operations could be harmed if we are unable to attract and retain talented, highly qualified senior executives and other key personnel. In addition, if we are unable to effectively provide for the succession of senior management, including our chief executive officer, our business, prospects, results of operations, financial condition or cash flows may be materially adversely affected. See also the risk factor above entitled, “We will be subject to business uncertainties during the pendency of the Revlon Merger that could materially and adversely affect our business.”

 

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Our global information systems are subject to outages, hacking and other risks and the failure to adequately maintain the security of our electronic and confidential information could materially adversely affect our financial condition and results of operations.

We have information systems that support our business processes, including supply chain, marketing, sales, order processing, distribution, finance and intracompany communications throughout the world. In addition, all of our global information systems are susceptible to outages due to fire, floods, tornadoes, hurricanes, severe weather, power loss, telecommunications failures, security breaches and similar events. Despite the implementation of network security measures, our systems may also be vulnerable to computer viruses, “hacking” and similar disruptions from unauthorized tampering. Our business, prospects, results of operations, financial condition or cash flows may be adversely affected by the occurrence of these or other events that could disrupt or damage our information systems or any failure to properly maintain or upgrade our information systems.

In addition, as part of our normal business activities, we collect and store certain confidential information, including personal information with respect to customers and employees, and the success of our e-commerce operations depends on the secure transmission of confidential and personal data over public networks, including the use of cashless payments. Any failure on the part of us or our vendors to properly maintain the security of our confidential data and our employees’ and customers’ personal information could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs and other competitive disadvantages, and could accordingly have a material adverse impact on our business, financial condition and results of operations.

We outsource certain functions, making us dependent on the entities and facilities performing those functions.

We are continually looking for opportunities to secure essential business services in a more cost-effective manner, without impacting the quality of the service rendered. In some cases, this requires the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. These include certain information systems functions such as information technology operations, certain human resource functions such as payroll processing and employee benefit plan administration, and our international logistics management. We believe that we conduct appropriate due diligence before entering into agreements with the outsourcing entity, and we use service level agreements and operating metrics to monitor and assess performance. The failure of one or more entities to properly provide the expected services without disruption, provide them on a timely basis or to provide them at the prices we expect may have a material adverse effect on our results of operations or financial condition. In addition, substantially all of our data center operations are located in a facility in Raleigh, North Carolina, and any loss of or damage to the facility could have a material adverse effect on our business, results of operations, prospects, financial condition or cash flows.

The trading price of our equity and debt securities periodically may rise or fall based on the accuracy of predictions of our earnings or other financial performance, as well as other factors.

Our business planning process is designed to maximize our long-term strength, growth and profitability, not to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in our best interests and those of our shareholders. At the same time, however, we recognize that it may be helpful to provide investors with guidance as to our forecast of net sales, earnings per share and other financial metrics or projections. Accordingly, from time to time we may provide guidance as to a number of assumptions, including our expectations with respect to net sales and earnings per share for future periods. We assume no responsibility to update any of our forward-looking statements.

In all of our public statements when we make, or update, a forward-looking statement about our net sales and/or earnings expectations or expectations regarding restructuring, cost-savings or other initiatives, we accompany such statements directly, or by reference to a public document, with a list of factors that could cause our actual results to differ materially from those we expect. Such a list is included, among other places, in our earnings press releases and in our periodic filings with the Securities and Exchange Commission (e.g., in our reports on Form 10-K and Form 10-Q). These and other factors may make it difficult for us and for outside observers, such as research analysts, to predict what our earnings will be in any given fiscal quarter or year.

 

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Outside analysts and investors have the right to make their own predictions of our financial results for any future period. Outside analysts, however, do not have access to any more material information about our results or plans than any other public investor, and we do not endorse their predictions as to our future performance. Nor do we assume any responsibility to correct the predictions of outside analysts or others when they differ from our own internal expectations. If and when we announce actual results that differ from those that outside analysts or others have been predicting, the market price of our securities could be affected. Investors who rely on the predictions of outside analysts or others when making investment decisions with respect to our securities do so at their own risk. The market price of our common stock could also fluctuate significantly in response to various other factors, many of which are beyond our control, including:

 

   

volatility in the financial markets;

 

   

announcements or significant developments with respect to beauty products or the beauty industry in general;

 

   

general economic and political conditions;

 

   

governmental policies and regulations;

 

   

financial analyst and rating agency actions; and

 

   

rumors, speculation or third party statements about us, including any potential strategic alternatives to enhance shareholder value or maximize the value of our brand portfolio.

Joint ventures or strategic alliances in geographic markets in which we have limited or no prior experience may expose us to additional risks.

We review, and from time to time may establish, joint ventures and strategic alliances that we believe would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. These business relationships may require us to rely on the local expertise of our partners with respect to market development, sales, local regulatory compliance and other matters. Further, there may be challenges with ensuring that such joint ventures and strategic alliances implement the appropriate internal controls to ensure compliance with the various laws and regulations applicable to us as a U.S. public company. Accordingly, in addition to commercial and operational risk, these joint ventures and strategic alliances may entail risks such as reputational risk and regulatory compliance risk. In addition, there can be no assurance that we will be able to identify suitable alliance or joint venture candidates, that we will be able to consummate any such alliances or joint ventures on favorable terms, or that we will realize the anticipated benefits of entering into any such alliances or joint ventures.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

United States. Our corporate headquarters are located in Pembroke Pines, Florida, where we lease approximately 19,000 square feet of general office space under a lease that expires in September 2022. Our U.S. fulfillment operations are conducted in our Roanoke, Virginia distribution facility that consists of approximately 400,000 square feet and is leased through September 2023. We also lease approximately 482,000 square feet in a warehouse facility in Salem, Virginia that is leased through March 2019 and is used primarily as a returns processing facility and to house promotional inventory. From time to time, we also lease additional temporary warehouse facilities to handle inventory overflow. We lease approximately 50,000 square feet of general office space, which will be reduced to approximately 40,000 square feet after December 2016, for our supply chain, information systems and finance operations in Stamford, Connecticut under a lease that expires October 2021. We lease approximately 50,000 square feet of general office space, which will be reduced to approximately 36,000 square feet after October 2017, primarily for our marketing operations in New York City under a lease that expires in December 2027, and we have an additional lease at that location for approximately 10,000 square feet that is used for an Elizabeth Arden Red Door Spa and retail store that expires in April 2023. We also lease small offices in Bentonville, Arkansas and Minneapolis, Minnesota, and retail outlet store locations of approximately 1,000 to 2,000 square feet that are located in Florida, New York, Texas, Virginia, Nevada, Pennsylvania and Massachusetts.

International. Our international operations are headquartered in offices in Geneva, Switzerland that are leased through 2017. We also lease offices in Australia, Canada, China, Denmark, France, Germany, New Zealand, Russia, Singapore, South Africa, South Korea, Spain, Taiwan, and the United Kingdom.

We believe that additional or alternative office, warehouse and retail space suitable for our needs is reasonably available in the markets in which we operate.

 

ITEM 3. LEGAL PROCEEDINGS

Litigation Related to the Revlon Merger

In connection with the Revlon Merger, five putative shareholder class action lawsuits have been filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida:

 

  (1) Parker v. Elizabeth Arden, Inc. et al., Case No. CACE-16-011781, filed on June 24, 2016, and amended on July 26, 2016 (the “Parker Complaint”);

 

  (2) Christiansen v. Rhône Capital L.L.C. et al., Case No. CACE-16-011746, filed on June 29, 2016 and amended on July 14, 2016 (the “Christiansen Complaint”);

 

  (3) Ross v. Elizabeth Arden, Inc., et al, Case No, CACE-16-013220, filed on July 19, 2016 (the “Ross Complaint”);

 

  (4) Hutson v. Elizabeth Arden, Inc., et al., Case No. CACE-16-013566, filed on July 25, 2016 (the “Hutson Complaint”); and

 

  (5) Stein v. Rhône Capital L.L.C. et al, Case No. CACE-16-013580, filed on July 25, 2016 (the “Stein Complaint”), referred to collectively as the “Complaints.”

The Christiansen claim is also a derivative lawsuit.

All of the Complaints name the members of our board of directors, Revlon, Inc., Revlon Consumer Products Corporation and RR Transaction Corp. as defendants. The Parker, Ross and Hutson Complaints name Elizabeth Arden, Inc. as a defendant. The Christiansen, Stein and Parker Complaints also name Rhône Capital L.L.C., Nightingale Onshore Holdings, L.P. and Nightingale Offshore Holdings, L.P., as defendants.

The Complaints allege that (i) the members of our board of directors breached their fiduciary duties to our shareholders with respect to the Revlon Merger, by, among other things, approving the Revlon Merger pursuant to an unfair process and at an inadequate and unfair price, and (ii) Revlon, RCPC, and Revlon Sub aided and abetted the breaches of fiduciary duty by the members of the board. The Christiansen and Stein Complaints also allege that Rhône Capital L.L.C., Nightingale Onshore Holdings, L.P. and Nightingale Offshore Holdings, L.P. breached alleged fiduciary duties owed by such entities to the holders of our common stock and to us. The plaintiffs in these lawsuits generally seek, among other things, injunctive relief prohibiting consummation of the Revlon Merger, compensatory damages and rescissory damages in the event the Revlon Merger is consummated, an order to disclose all material information to the shareholders in advance of a shareholder vote and an award of attorneys’ fees and expenses.

 

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We intend to vigorously defend these claims. Litigation costs associated with these matters may be significant and additional lawsuits arising out of or relating to the Revlon Merger may be filed in the future.

 

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IRS Audit for Fiscal 2010 through Fiscal 2012

The Internal Revenue Service (“IRS”) began an examination of our U.S. federal tax returns for the years ended June 30, 2010 (“Fiscal 2010”), June 30, 2011 (“Fiscal 2011”), and June 30, 2012 (“Fiscal 2012”) during fiscal year 2014 and, in March 2016, issued an IRS letter 950-Z, known as a 30-day Letter, for Fiscal 2010, Fiscal 2011 and Fiscal 2012 relating to transfer pricing matters. In the 30-day Letter, the IRS proposed increases to our U.S. taxable income for Fiscal 2010, Fiscal 2011 and Fiscal 2012 in an amount totaling approximately $99 million. Although we have recorded valuation allowances of approximately $156 million against our U.S. deferred tax assets through June 30, 2016, the resolution of the 30-day Letter could be material to our deferred tax assets and potentially to our consolidated statements of operations in the period in which it is resolved, unless resolved favorably to us. We disagree with the proposed adjustments and intend to vigorously contest them and pursue our available remedies. While any IRS examination contains an element of uncertainty, based on current facts and circumstances, we believe the ultimate outcome of any protest, appeals or judicial process will not have a material adverse effect on our financial condition, business or prospects. In addition, if the examination is not resolved favorably, we have approximately $315 million of U.S. federal operating loss carryforwards through June 30, 2016, which would be available to offset any cash flow impact. See Note 14 to the Notes to Consolidated Financial Statements.

General

We are also a party to a number of legal actions, proceedings, claims and disputes, arising in the ordinary course of business, including those with current and former customers over amounts owed. While any other action, proceeding or claim contains an element of uncertainty and it is possible that our cash flows and results of operations in a particular quarter or year could be materially affected by the impact of such actions, proceedings, claims and disputes, based on current facts and circumstances, our management believes that the outcome of such other actions, proceedings, claims and disputes will not have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Our common stock, $.01 par value per share, has been traded on the NASDAQ Global Select Market under the symbol “RDEN” since January 25, 2001. The following table sets forth the high and low sales prices for our common stock, as reported by NASDAQ for each of our fiscal quarters from July 1, 2014 through June 30, 2016.

 

Quarter Ended

   High      Low  

6/30/16

   $ 13.97       $ 7.30   

3/31/16

   $ 9.91       $ 5.02   

12/31/15

   $ 13.49       $ 9.17   

9/30/15

   $ 14.31       $ 9.10   

6/30/15

   $ 16.19       $ 13.20   

3/31/15

   $ 21.55       $ 14.48   

12/31/14

   $ 21.67       $ 14.50   

9/30/14

   $ 21.82       $ 14.65   

Holders. As of August 11, 2016, there were 295 record holders of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividends. We have not declared any cash dividends on our common stock since we became a beauty products company in 1995, and we currently have no plans to declare dividends on our common stock in the foreseeable future. Any future determination by our board of directors to pay dividends on our common stock will be made only after considering our financial condition, results of operations, capital requirements and other relevant factors. Our revolving credit facility, our second lien credit agreement and the indenture relating to our 7 3/8% senior notes due 2021 restrict our ability to pay cash dividends based upon our ability to satisfy certain financial covenants, including having a certain amount of borrowing capacity and satisfying a fixed charge coverage ratio after the payment of the dividends. In addition, no cash dividend may be declared or paid on our common stock or other classes of stock over which our preferred stock has preference unless full cumulative dividends have been or contemporaneously are declared and paid in cash on the preferred stock, and the preferred stock is entitled to participate in dividends declared or paid on the common stock for which warrants issued to the Purchasers are exercisable. See Notes 9, 10 and 13 to the Notes to Consolidated Financial Statements.

Performance Graph. The following performance graph data and table compare the cumulative total shareholder returns, including the reinvestment of dividends, on our common stock with the Russell 2000 Index and a market-weighted index of publicly traded peer companies for the five fiscal years from July 1, 2011 through June 30, 2016.

The publicly-traded companies in our peer group are Coty, Inc., The Estee Lauder Companies Inc., Inter Parfums, Inc., Revlon, Inc., and Shiseido Company Limited. We believe that our peer group is an appropriate representation of beauty companies with similar channels of distribution and/or products as our company. The graph and table assume that $100 was invested on June 30, 2011 in each of the Russell 2000 Index, the peer group, and our common stock, and that all dividends were reinvested.

 

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     For the Fiscal Year Ended June 30,  
     2012      2013      2014      2015      2016  

Elizabeth Arden, Inc.

   $ 133.69       $ 155.15       $ 73.79       $ 49.12       $ 47.40   

Russell 2000

   $ 97.92       $ 121.63       $ 150.38       $ 160.13       $ 149.35   

Peer Group

   $ 96.26       $ 113.69       $ 132.64       $ 164.11       $ 171.83   

 

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ITEM 6. SELECTED FINANCIAL DATA

We derived the following selected financial data from our audited consolidated financial statements. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this annual report.

 

     Year Ended June 30,  
(Amounts in thousands, except per share data)    2016     2015     2014     2013     2012  

Selected Statement of Operations Data

          

Net sales

   $ 966,733      $ 971,098 (4)    $ 1,164,304 (8)    $ 1,344,523      $ 1,238,273   

Gross profit

     429,665 (1)      348,652 (4)(5)      469,656 (8)(9)      628,793 (12)      609,031   

(Loss) income from operations

     (40,931 )(1)      (189,125 )(4)(5)      (64,539 )(8)(9)      71,960 (12)      95,271 (14) 

Debt extinguishment charges

     —          239        —          —          —     

Net (loss) income attributable to Elizabeth Arden shareholders

     (71,785 )(2)      (223,993 )(6)      (145,728 )(10)      40,711        57,419   

Less: Accretion and dividends on preferred stock

     2,586        22,333        —          —          —     

Net (loss) income attributable to Elizabeth Arden common shareholders

     (74,371     (246,326     (145,728     40,711        57,419   

Selected Per Share Data

          

(Loss) earnings per common share

          

Basic

   $ (2.49 )(3)    $ (8.26 )(7)    $ (4.90 )(11)    $ 1.37 (13)    $ 1.97 (15) 

Diluted

   $ (2.49 )(3)    $ (8.26 )(7)    $ (4.90 )(11)    $ 1.33 (13)    $ 1.91 (15) 

Weighted average number of common shares

          

Basic

     29,884        29,804        29,720        29,672        29,115   

Diluted

     29,884        29,804        29,720        30,539        30,111   

Other Data

          

EBITDA(16)

   $ 1,767      $ (140,881   $ (12,405   $ 117,929      $ 129,325   

Net cash (used in) provided by operating activities

     (33,750     54,027        (38,045     62,091        58,524   

Net cash used in investing activities

     (22,398     (30,079     (51,082     (48,591     (153,224

Net cash provided by (used in) financing activities

     56,431        (30,975     83,637        (9,214     96,760   
     Year Ended June 30,  
     2016     2015     2014     2013     2012  

Selected Balance Sheet Data

          

Cash

   $ 45,049      $ 46,085      $ 56,308      $ 61,674      $ 59,080   

Inventories

     241,409        240,740        338,826        310,934        291,987   

Working capital

     158,737        207,923        333,727        364,320        345,818   

Total assets

     799,539        813,224        1,061,653        1,103,732        1,066,754   

Short-term debt

     67,000        8,300        80,418        88,000        89,200   

Long-term debt, including current period

     354,785        355,634        356,432        250,000        250,000   

Redeemable noncontrolling interest

     2,345        4,222        5,553        —          —     

Total shareholders’ equity

     59,876        132,490        370,989        515,282        481,727   

 

(1) For the year ended June 30, 2016, gross profit includes $6.5 million of inventory costs under our 2016 Business Transformation Program, primarily related to the closing of our Brazilian affiliate, as well changes in certain distribution and customer arrangements.

In addition to the items above, loss from operations for the year ended June 30, 2016, includes:

 

   

$14.9 million in expenses under the 2016 Business Transformation Program, primarily comprised of severance and other employee-related expenses and related transition costs;

 

   

$0.5 million for the acceleration of depreciation expense for leasehold improvements related to leased space vacated under the 2016 Business Transformation Program; and

 

   

$2.0 million for costs incurred related to the pending Revlon Merger. See Notes 3 and 4 to the Notes to Consolidated Financial Statements.

 

(2) For the year ended June 30, 2016, net loss includes items discussed above in Note 1, as well as valuation allowances recorded as non-cash charges to income tax expense, comprised of $14.6 million recorded against our U.S. deferred tax assets and $3.9 million against deferred taxes in certain foreign operations. See Note 14 to the Notes to Consolidated Financial Statements.
(3) For the year ended June 30, 2016, costs and expenses related to the 2016 Business Transformation Program and pending Revlon Merger, and the valuation allowance against our U.S. and foreign deferred tax assets increased both basic and fully diluted loss per share by $1.24.

 

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(4) For the year ended June 30, 2015, net sales includes $28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily due to changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements.
(5) In addition to the returns and markdowns described above in Note 4, gross profit and loss from operations for the year ended June 30, 2015, includes $53.2 million of inventory write-downs under our 2014 Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products, and the discontinuation of certain products.

In addition to the items above, loss from operations for the year ended June 30, 2015, includes:

 

   

$13.2 million in expenses under the 2014 Performance Improvement Plan primarily comprised of $8.5 million of customer and vendor contract termination costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 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;

 

   

$2.4 million in expenses under the 2016 Business Transformation Program, primarily comprised of $1.6 million of severance and other employee-related costs and approximately $0.8 million in lease termination costs; and

 

   

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

 

(6) For the year ended June 30, 2015, net loss includes items discussed above in Notes 4 and 5, as well as valuation allowances recorded as non-cash charges to income tax expense, comprised of $51.9 million recorded against our U.S. deferred tax assets and $6.9 million against deferred taxes in certain foreign operations. See Note 14 to the Notes to Consolidated Financial Statements.
(7) For the year ended June 30, 2015, costs and expenses related to the 2014 Performance Improvement Plan, asset impairments and other costs, debt extinguishment costs, the valuation allowances against our U.S, and foreign deferred tax assets, and the accretion for the change in redemption value related to the issuance of preferred stock, increased both basic and fully diluted loss per share by $5.68.
(8) For the year ended June 30, 2014, net sales includes $9.5 million of returns and markdowns under our 2014 Performance Improvement Plan related to the closing of our Puerto Rico affiliate, exiting of certain unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements.
(9) In addition to the returns and markdowns described above in Note 8, gross profit and loss from operations include the following:

 

   

$14.0 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand;

 

   

$30.2 million of inventory write-downs under our 2014 Performance Improvement Plan due to the expiration, non-renewal and wind-down of certain fragrance license agreements and discontinuation of certain products; and

 

   

$1.8 million of transition costs incurred with respect to the elimination of certain sales positions and other staff positions announced in the fall of 2013 (the “Fall 2013 Staff Reduction”).

In addition to the items above, loss from operations for the year ended June 30, 2014, includes:

 

   

$16.2 million in expenses under our 2014 Performance Improvement Plan, comprised of $9.7 million in asset impairments and related charges, primarily due to the non-renewal and expiration of certain fragrance license agreements, $6.0 million of severance and other employee-related expenses associated with the reduction in global headcount positions and $0.5 million of vendor contract termination costs;

 

   

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 for fiscal years 2014 and 2015 would be met;

 

   

$2.8 million of severance and other employee-related expenses and $1.4 million of related transition expenses incurred with respect to the Fall 2013 Staff Reduction; and

 

   

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

 

(10) For the year ended June 30, 2014, net loss includes the items discussed above in Notes 8 and 9, as well as a valuation allowance of $89.5 million against our U.S. deferred tax assets recorded as a non-cash charge to income tax expense. See Note 14 to the Notes to Consolidated Financial Statements.
(11) For the year ended June 30, 2014, costs and expenses related to the 2014 Performance Improvement Plan, product changeover costs and expenses, other non-recurring expenses and the valuation allowance against our U.S. deferred tax assets increased both basic and fully diluted loss per share by $4.35.
(12) For the year ended June 30, 2013, gross profit and income from operations includes the following:

 

   

$13.8 million of inventory–related costs primarily for inventory we purchased from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisition of licenses and certain other assets from those companies (the “2012 acquisitions”) and other transition costs; and

 

   

$22.6 million of non-recurring product changeover costs and product discontinuation charges related to the repositioning of the Elizabeth Arden brand.

In addition to the above items, income from operations for the year ended June 30, 2013, also includes:

 

   

$0.4 million in transition costs associated with the 2012 acquisitions;

 

   

$0.5 million of non-recurring product changeover expenses related to the repositioning of the Elizabeth Arden brand; and

 

   

$1.5 million of expenses related to a third party provider of freight audit and payment services that entered into bankruptcy after receiving funds from us to pay our freight invoices and breaching its obligation to remit those funds to the freight companies.

 

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(13) For the year ended June 30, 2013, acquisition-related costs and expenses, product changeover costs and expenses, product discontinuation charges and other non-recurring expenses reduced basic and fully diluted earnings per share by $0.83 and $0.81, respectively.
(14) For the year ended June 30, 2012, gross profit and income from operations includes:

 

   

$4.5 million of inventory–related costs primarily for inventory we purchased from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions; and

 

   

$0.4 million for product discontinuation charges.

In addition to the above items, income from operations for the year ended June 30, 2012, also includes:

 

   

$1.4 million in license termination costs; and

 

   

$0.8 million in transaction costs associated with the 2012 acquisitions.

 

(15) For the year ended June 30, 2012, inventory-related costs, product discontinuation charges, license termination costs and transaction costs for the 2012 acquisitions reduced both basic and fully diluted earnings per share by $0.17 and $0.16, respectively.
(16) EBITDA is defined as net income attributable to Elizabeth Arden common shareholders plus the provision for income taxes (or net loss attributable to Elizabeth Arden common shareholders less the benefit from or plus the provision for 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. 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 U.S. 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 U.S. 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 and other companies may define EBITDA differently.

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 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 common shareholders, as determined in accordance with U.S. generally accepted accounting principles, to EBITDA:

 

     Year Ended June 30,  
(Amounts in thousands)    2016     2015     2014     2013     2012  

Net (loss) income attributable to Elizabeth Arden common shareholders

   $ (74,371   $ (246,326   $ (145,728   $ 40,711      $ 57,419   

Plus:

          

Provision for income taxes

     2,670        6,297        56,832        6,940        16,093   

Interest expense, net

     29,905        29,626        25,825        24,309        21,759   

Depreciation related to cost of goods sold

     5,796        7,710        7,742        6,386        5,257   

Depreciation and amortization

     36,902        40,773        44,392        39,583        28,797   

Net loss applicable to noncontrolling interest (See Note 12 to the Notes to Consolidated Financial Statements)

     (1,721     (1,294     (1,468     —          —     

Accretion and dividends on preferred stock (See Note 13 to the Notes to Consolidated Financial Statements)

     2,586        22,333        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 1,767 (a)    $ (140,881 )(b)    $ (12,405 )(c)    $ 117,929 (d)    $ 129,325 (e) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For the year ended June 30, 2016, EBITDA includes:

 

   

$6.5 million of inventory costs under our 2016 Business Transformation Program primarily related to the closing of our Brazilian affiliate, as well as changes in certain distribution and customer arrangements, and

 

   

$14.9 million of severance and other employee-related expenses and related transition costs under our 2016 Business Transformation Program.

 

   

$2.0 million of costs incurred related to the Revlon Merger. See Notes 3 and 4 to the Notes to Consolidated Financial Statements.

 

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(b) For the year ended June 30, 2015, EBITDA includes:

 

   

$28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily as a result of changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements;

 

   

$66.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $53.2 million of inventory write-downs under our 2014 Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products and the discontinuation of certain products, $8.5 million of customer and vendor contract termination costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 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;

 

   

$2.4 million in expenses with respect to our 2016 Business Transformation Program, primarily comprised of $1.6 million of severance and other employee-related costs and approximately $0.8 million in lease termination costs; and

 

   

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

 

(c) For the year ended June 30, 2014, EBITDA includes:

 

   

$15.1 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand;

 

   

$9.5 million of returns and markdowns under our 2014 Performance Improvement Plan related to the closing of our Puerto Rico affiliate, exiting of unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements;

 

   

$46.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $30.2 million of inventory write-downs under our 2014 Performance Improvement Plan due to the expiration, non-renewal and wind-down of fragrance license agreements and discontinuation of certain products, $9.7 million in asset impairments and related charges, primarily due to the non-renewal and expiration of fragrance license agreements, $6.0 million of severance and other employee-related expenses associated with the reduction in global headcount positions and $0.5 million of vendor contract termination costs;

 

   

$2.8 million of severance and other employee-related expenses and $3.2 million of related transition costs and expenses incurred with respect to the Fall 2013 Staff Reduction; and

 

   

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.

 

(d) For the year ended June 30, 2013, EBITDA includes:

 

   

$13.8 million of inventory–related costs recorded in cost of sales primarily for inventory we purchased from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions of licenses and certain other assets from those companies and other transition costs;

 

   

$0.4 million in transition expenses associated with the 2012 acquisitions:

 

   

$23.1 million of non-recurring product changeover costs, product discontinuation charges, and expenses related to the Elizabeth Arden brand repositioning; and

 

   

$1.5 million of expenses related to a third party provider of freight audit and payment services that entered into bankruptcy after receiving funds from us to pay our freight invoices and breaching its obligation to remit those funds to the freight companies.

 

(e) For the year ended June 30, 2012, EBITDA includes:

 

   

$4.5 million of inventory–related costs primarily for inventory we purchased from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions;

 

   

$0.8 million in transaction costs associated with the 2012 acquisitions;

 

   

$0.4 million for product discontinuation charges; and

 

   

$1.4 million in license termination costs.

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

 

     Year Ended June 30,  
(Amounts in thousands)    2016     2015     2014     2013     2012  

Net cash (used in) provided by operating activities

   $ (33,750   $ 54,027      $ (38,045   $ 62,091      $ 58,524   

Changes in assets and liabilities, net of acquisitions

     10,387        (176,751     10,542        30,508        48,016   

Interest expense, net

     29,905        29,626        25,825        24,309        21,759   

Amortization of senior note offering and credit facility costs

     (1,709     (1,558     (1,499     (1,367     (1,247

Amortization of senior note premium

     849        798        318        —          —     

Provision for income taxes

     2,670        6,297        56,832        6,940        16,093   

Deferred income taxes

     (1,095     (4,958     (54,105     1,055        (8,763

Amortization of share-based awards

     (5,490     (5,165     (5,783     (5,607     (5,057

Asset impairments

     —          (42,958     (6,490     —          —     

Debt extinguishment charges

     —          (239     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 1,767      $ (140,881   $ (12,405   $ 117,929      $ 129,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes which appear elsewhere in this document.

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, Superstart 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, Christina Aguilera, 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 Nicki Minaj, Mariah Carey and Taylor Swift

In addition to our owned and licensed fragrance brands, we distribute approximately 260 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

Our business strategy remains focused on two important initiatives — driving the growth of the Elizabeth Arden brand, particularly in North America and in our key international markets, and growing our fragrance portfolio with a focus on key global and regional brands. The success of these two initiatives is predicated on our ability to (i) improve our go-to-market capability and execution by enhancing our distribution quality, (ii) grow margins by simplifying and streamlining our organization to optimize costs and reduce complexity, and (iii) attract, retain and develop strong employee talent. For fiscal 2017, we will continue to focus on these initiatives and target our resources and efforts on those markets, channels and brands that we believe afford us the best opportunity for profitable growth.

In fiscal 2017, we expect to launch a high level of new product innovation for the Elizabeth Arden brand with the launch of several new products across the Elizabeth Arden skin care, color and fragrance categories and also we plan to launch several new fragrances for certain brands under our existing licenses.

As discussed further below, we also continue to focus on simplifying our organization, processes and overhead structure to reduce complexity and identify cost savings opportunities that can improve the performance of our business.

Pending Revlon Merger

On June 16, 2016, we announced that we entered into an agreement and plan of merger (which we refer to as the “Merger Agreement”) with Revlon, Inc., Revlon Consumer Products Corporation, a wholly-owned subsidiary of Revlon (which we refer to as “RCPC”, and together with Revlon, Inc., “Revlon”) and RR Transaction Corp., a Florida corporation and a wholly owned direct subsidiary of RCPC (which we refer to as the “Revlon Sub”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions as described below, the Revlon Sub will merge with and into us. As a result of the Revlon Merger, the Revlon Sub will cease to exist and we will survive as a wholly-owned subsidiary of RCPC. We refer to this pending transaction as the “Revlon Merger.”

Under the terms of the Merger Agreement, Revlon will acquire all of the outstanding shares of our common stock for $14.00 per share in cash (which we refer to as the “Merger Consideration”). At the closing of the Revlon Merger and pursuant to a Preferred Stock Repurchase and Warrant Cancellation Agreement among us, Revlon, the Revlon Sub, Nightingale Onshore Holdings, L.P. and Nightingale Offshore Holdings, L.P., Revlon will also provide funding for the redemption of our Series A Serial Preferred Stock (our “preferred stock”) for $55 million plus accrued and unpaid dividends, and all outstanding warrants for the purchase of our common stock will be canceled. In addition, Revlon has indicated that it intends to repay and retire substantially all of our outstanding debt on or after the closing of the Revlon Merger. See Notes 9, 10 and 13 to the Notes to Consolidated Financial Statements.

 

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The consummation of the Revlon Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the adoption and approval of the Merger Agreement by the holders of a majority of our outstanding common stock and preferred stock entitled to vote thereon (voting together and voting as separate classes), (ii) the receipt of certain foreign antitrust approvals and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of a material adverse effect with respect to us, (iv) the absence of a court or regulatory authority order prohibiting the closing of the Revlon Merger, and (v) other customary closing conditions, including (x) the accuracy of the representations and warranties of the other party (subject to certain specified standards) and (y) the performance in all material respects by the other party of its obligations under the Merger Agreement. We currently expect the Revlon Merger to be completed by the end of 2016. During the fourth quarter of fiscal 2016, we recorded approximately $2.0 million in selling, general and administrative expenses for costs incurred related to the pending Revlon Merger. See Note 3 to the Notes to Consolidated Financial Statements.

2014 Performance Improvement Plan and 2016 Business Transformation Program

During fiscal 2014, we began a comprehensive review of our entire business model and cost structure to identify initiatives to reduce the size and complexity of our overhead structure and to exit low-return businesses, customers and brands, in order to improve gross margins and profitability in the long term. As a result of this review, we implemented several restructuring and cost savings initiatives at the end of fiscal 2014 and during fiscal 2015 that we refer to as the “2014 Performance Improvement Plan.”

During fiscal 2014 and 2015, we incurred a total of approximately $150.5 million of pre-tax charges under the 2014 Performance Improvement Plan. All charges associated with the 2014 Performance Improvement Plan had been recorded as of June 30, 2015.

As we continued to look for ways of improving our business and financial performance, and achieving our targeted goal of $40 to $50 million in annualized savings, during the fourth quarter of fiscal 2015, we identified certain additional restructuring and cost savings initiatives that we implemented during fiscal 2016, with some remaining pre-tax charges to be incurred in fiscal 2017. We collectively refer to these initiatives as our “2016 Business Transformation Program.” The 2016 Business Transformation Program was intended to further align our organizational structure and distribution arrangements with the current needs and demands of our business in order to improve our go-to-market capability and execution and to streamline our organization. We expect to incur approximately $25 million to $26 million in pre-tax charges under the 2016 Business Transformation Program, of which an estimated $20 million to $22 million is expected to be comprised of cash expenditures. During the fiscal year ended June 30, 2016, we incurred approximately $21.9 million, of pre-tax charges under the 2016 Business Transformation Program, and since inception we have incurred approximately $24.3 million of pre-tax charges. For further discussion see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4 to the Notes to Consolidated Financial Statements.

We currently expect that the actions and initiatives identified and executed under the 2014 Performance Improvement Plan and the 2016 Business Transformation Program will result in approximately $51 million of annualized savings, exceeding the top end of our originally targeted range of annualized savings. If the Revlon Merger is not completed, we may pursue additional cost savings initiatives to further improve our business and financial performance. These efforts may result in additional decisions that may 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.

Investment by Rhône Capital L.L.C. Affiliates

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 “Pending Revlon Merger.”

Investments and Acquisitions

During fiscal 2013, 2014 and 2015, we have invested an aggregate of $13.7 million for a minority investment in Elizabeth Arden Salon-Holdings, Inc., an unrelated party whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons. The investment in Elizabeth Arden Salon-Holdings, Inc., which is in the form of a collateralized convertible note bearing interest at 2%, has been accounted for using the cost method and at June 30, 2016, is included in other assets on the consolidated balance sheet. See Note 12 to the Notes to Consolidated Financial Statements.

 

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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 12 to the Notes to Consolidated Financial Statements.

During fiscal 2015, through a subsidiary, we entered into a joint venture in the United Arab Emirates (the “UAE joint venture”) with an unrelated third party for the sale, promotion and distribution of our fragrance, skincare and cosmetics products primarily in Middle Eastern countries. Effective September 1, 2015, we entered into a similar joint venture for the Southeast Asia region and, effective January 1, 2016 in Hong Kong (the “Southeast Asia joint venture”) with an unrelated third party for the sale, promotion and distribution of certain of our fragrance, skincare and cosmetics products in Southeast Asia. See Note 12 to the Notes to Consolidated Financial Statements.

Based on our equity interests and controlling rights in the joint ventures, we have determined that the UAE joint venture and the Southeast Asia joint venture are each VIEs, requiring consolidation of such joint ventures’ financial statements in accordance with Topic 810, Consolidation. The respective unrelated third party’s interest in each joint venture is classified as a “noncontrolling interest” in the shareholders’ equity section of our consolidated balance sheet.

During fiscal 2016, we acquired the U.S. and international trademarks for the Giorgio of Beverly Hills fragrance brands from The Procter & Gamble Company and certain of its affiliates for $10.5 million. Prior to the acquisition of the trademarks, we manufactured and sold the Giorgio Beverly Hills fragrances under a license agreement with The Procter & Gamble Company and certain of its affiliates.

In July 2016, we acquired the global license and certain assets related to the Christina Aguilera fragrance business from Procter & Gamble International Operations SA for approximately $16 million.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated 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. Actual results could differ from those estimates. If these changes result in a material impact to the consolidated financial statements, their impact is disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and/or in the “Notes to the Consolidated Financial Statements.” The disclosures below also note situations in which it is reasonably likely that future financial results could be affected by changes in these estimates and assumptions. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of management.

Our most critical accounting policies and estimates are described in detail below. See Note 1 to the Notes to Consolidated Financial Statements – “General Information and Summary of Significant Accounting Policies,” for a discussion of these and other accounting policies.

Accounting for Acquisitions and Intangible Assets. Under the accounting for business combinations, consideration paid in an acquisition is allocated to the underlying assets and liabilities, based on their respective estimated fair values. The excess of the consideration paid at the acquisition date over the fair values of the identifiable assets acquired or liabilities assumed is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ, and the useful life of property, plant, and equipment acquired will differ substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, net income in a given period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. One area that requires more judgment is determining the fair value and useful lives of intangible assets. Because the fair value and the estimated useful life of an intangible asset is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. For example, if we discontinue or experience a decline in the profitability of one or more of our brands, the value of the intangible assets associated with those brands or their useful lives may decline, or, certain intangible assets such as the Elizabeth Arden brand trademarks, may no longer be classified as an indefinite-lived asset, which could result in additional charges to net income.

 

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We follow the guidance in Topic 350, Intangibles-Goodwill and Other, which simplifies how an entity assesses goodwill for impairment and allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment assessment. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Should a goodwill impairment assessment be necessary, there is a two step process for assessing impairment of goodwill. The first step used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment by comparing the estimated fair value of the goodwill and intangible assets to their respective carrying values. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value. See Note 1 to the Notes to Consolidated Financial Statements.

We also follow the guidance in Topic 350 for testing impairment of indefinite-lived intangible assets other than goodwill. Examples of intangible assets subject to the guidance include indefinite-lived trademarks, licenses, and distribution rights. Companies are given the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. A company electing to perform a qualitative assessment is not required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on such qualitative assessment, that it is “more likely than not” that the asset is impaired.

Our intangible assets consist of exclusive brand licenses, trademarks, patents and other intellectual property, customer relationships and lists, non-compete agreements and goodwill. The value of these assets is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We have determined that the Elizabeth Arden trademarks have indefinite useful lives as cash flows from the use of the trademarks are expected to be generated indefinitely. Goodwill and intangible assets with indefinite lives such as our Elizabeth Arden trademarks, are not amortized, but rather assessed for impairment at least annually. We typically perform our annual impairment assessment during the fourth quarter of our fiscal year or more frequently if events or changes in circumstances indicate the carrying value of goodwill may not fully be recoverable.

During the quarter ended June 30, 2016, we completed our annual impairment assessment of the Elizabeth Arden trademarks, with the assistance of a third party valuation firm. In assessing the fair value of these trademarks, we considered the income approach. Under the income approach, the fair value is based on the present value of estimated future cash flows. The analysis and assessments of these assets and goodwill indicated that no impairment adjustment was required as the estimated fair value exceeded the recorded carrying value. A hypothetical 10% decrease to the fair value of our Elizabeth Arden trademarks or a hypothetical 1% increase in the discount rate used to estimate fair value would not result in an impairment of our Elizabeth Arden trademarks. During the quarter ended June 30, 2016, we also completed our annual impairment assessment of goodwill using the guidance in Topic 350. The analysis indicated that no impairment adjustment was required. A hypothetical 10% decrease in the fair value of our North America reporting unit would not result in an impairment of our goodwill.

During the second quarter of fiscal 2015, as net sales of Justin Bieber and Nicki Minaj fragrances continued to fall significantly below expectations, we reviewed these license agreements for potential impairment. Given the significant decline in net sales under these brands during the first half of fiscal 2015, and the expectation for a continued decline of sales under these brands 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 in the second quarter of fiscal 2015 to write off the carrying values of both the Justin Bieber and Nicki Minaj licenses. See Note 8 to the Notes to Consolidated Financial Statements.

During the fourth quarter of fiscal 2014, we decided (i) not to renew the True Religion license agreement which expired on June 30, 2014, and (ii) not to renew the BCBGMAXAZRIA license agreement once it expires in January 2017. At the time of the acquisition of the licenses from New Wave Fragrances, LLC in May 2012, we assumed we would exercise the renewal options for both licenses and estimated the useful lives to be approximately six years for the True Religion license and 9.5 years for the BCBGMAXAZRIA license. The decision not to exercise the renewal options for both licenses triggered an impairment analysis for each license. As a result, we recorded an impairment charge of $5.8 million during the fourth quarter of fiscal 2014, to reduce the carrying values for both the True Religion and BCBGMAXAZRIA licenses. See Note 8 to the Notes to Consolidated Financial Statements.

Determining future undiscounted cash flows is judgmental in nature and requires the use of significant estimates and assumptions, including net sales projections, operating margins, and future market conditions, among others. We believe our assumptions are reasonable; however, there can be no assurance that our estimates and assumptions will prove to be accurate predictions of the future. We will continue to monitor and evaluate the expected future cash flows of our reporting units and the long-term trends of our market capitalization for the purposes of assessing the carrying value of our goodwill and indefinite-lived Elizabeth Arden trademarks, other trademarks and intangible assets. If market and economic conditions deteriorate, this could increase the likelihood of future material non-cash impairment charges to our results of operations related to our goodwill, indefinite-lived Elizabeth Arden trademarks, or other trademarks and intangible assets.

 

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Depreciation and Amortization. Depreciation and amortization is provided over the estimated useful lives of the assets using the straight line method. Periodically, we review the lives assigned to our long-lived assets and adjust the lives, as circumstances dictate. Because estimated useful life is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. For example, if we experience significant declines in net sales in certain channels of distribution, it could affect the estimated useful life of certain of our long-lived assets, such as counters or trade fixtures, which could result in additional charges to net income.

Long-Lived Assets. We review for the impairment of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Measurement of an impairment loss is based on the fair value of the asset group compared to its carrying value. An impairment loss is recognized to the extent the carrying amount of the asset group exceeds its estimated fair value. Because the fair value is a subjective estimate, it is reasonably likely that circumstances may cause the estimate to change. The same circumstances that could affect the estimated useful life of a long-lived asset, as discussed above, could cause us to change our estimate of the fair value of that asset, which could result in additional charges to net income. We did not record any adjustments to our long-lived assets in fiscal 2016, 2015 or 2014. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Revenue Recognition. Sales are recognized when title and risk of loss transfers to the customer, the sales price is fixed or determinable and collectability of the resulting receivable is probable. Sales are recorded net of estimated returns, markdowns and other allowances. The provision for sales returns and markdowns represents management’s estimate of future returns and markdowns based on historical experience and considering current external factors and market conditions.

Allowances for Sales Returns and Markdowns. As is customary in the prestige beauty business, we grant certain of our customers (primarily North American prestige retailers and specialty beauty stores), subject to our authorization and approval, the right to either return product for credit against amounts previously billed or to receive a markdown allowance. Upon sale to such customers, we record a provision for product returns and markdowns estimated based on our level of sales, historical and projected experience with product returns and markdowns in each of our business segments and with respect to each of our product types, current economic trends and changes in customer demand and customer mix. We make detailed estimates at the segment, product and customer level, which are then aggregated to arrive at a consolidated provision for product returns and markdowns and are reviewed periodically as facts and circumstances warrant. Such provisions and markdown allowances are recorded as a reduction of net sales.

Because there is considerable judgment used in evaluating the allowance for returns and markdowns, it is reasonably likely that actual experience will differ from our estimates. If, for example, customer demand for our products is lower than estimated or a proportionately greater amount of sales is made to prestige retailers and/or specialty beauty stores, additional provisions for returns or markdowns may be required resulting in a charge to income in the period in which the determination was made. Similarly, if customer demand for our products is higher than estimated, a reduction of our provision for returns or markdowns may be required resulting in an increase to income in the period in which the determination was made. As a percentage of gross sales, our returns and markdowns were 8.6%, 9.9% and 11.1% for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. A hypothetical 5% change in the value of our allowance for sales returns and markdowns as of June 30, 2016, would result in a $1.0 million change to net income.

Allowances for Doubtful Accounts Receivable. We maintain allowances for doubtful accounts to cover uncollectible accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a customer-by-customer review for large accounts. It is reasonably likely that actual experience will differ from our estimates, which may result in an increase or decrease in the allowance for doubtful accounts. If, for example, the financial condition of our customers deteriorates resulting in an impairment of their ability to pay, additional allowances may be required, resulting in a charge to income in the period in which the determination was made. A hypothetical 5% change in the value of our allowance for doubtful accounts receivable as of June 30, 2016, would result in a $0.1 million change to net income.

Provisions for Inventory Obsolescence. We record a provision for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, forecasted demand, the estimated market value, the shelf life of the inventory and our historical experience. Because of the subjective nature of this estimate, it is reasonably likely that circumstances may cause the estimate to change. If, for example, demand for our products declines, or if we decide to discontinue certain products, we may need to increase our provision for inventory obsolescence which would result in additional charges to net income. A hypothetical 5% change in the value of our provision for inventory obsolescence as of June 30, 2016, would result in a $0.9 million change to net income.

 

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Hedge Contracts. We have designated each qualifying foreign currency contract we have entered into as a cash flow hedge. Unrealized gains or losses, net of taxes, associated with these contracts are included in accumulated other comprehensive income on the balance sheet. Gains and losses 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. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately.

Share-Based Compensation. All share-based payments to employees, including the grants of employee stock options, are recognized in the consolidated financial statements based on their fair values, but only to the extent that vesting is considered probable. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The fair value of stock options is determined using the Black-Scholes option-pricing model. The fair value of restricted stock unit awards is based on the closing price of our common stock on the date of grant. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions are based on or determined from external data and other assumptions may be derived from our historical experience with share-based arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.

We rely on our historical experience and post-vested termination activity to provide data for estimating our expected term for use in determining the fair value of our stock options. We currently estimate our stock volatility by considering our historical stock volatility experience and other key factors. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. We estimate forfeitures using our historical experience. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change. If, for example, actual forfeitures are lower than our estimate, additional charges to net income may be required.

Income Taxes and Valuation Reserves. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider the weight of the available positive and negative evidence, which includes, but is not limited to, prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. Significant weight is given to positive and negative evidence that is objectively verifiable. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset would likely be charged or credited to net income in the period in which such determination was made.

Commencing with the fourth quarter of fiscal 2014 we have recorded non-cash charges of $156.0 million as valuation allowances with respect to our U.S. deferred tax assets, including $14.6 million recorded in fiscal 2016. Additionally, commencing in fiscal 2015, for certain of our foreign operations, we have recorded valuation allowances of $10.8 million against our deferred tax assets in such foreign operations as non-cash charges to income tax expense, including $3.9 million recorded in fiscal 2016. 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. and affected foreign operations unless sufficient future taxable income is generated in such operations to support the realization of the deferred tax assets. See Note 14 to the Notes to Consolidated Financial Statements.

We recognize in our consolidated financial statements the impact of a tax position if it is more likely than not that such position will be sustained on audit based on its technical merits. While we believe that our assessments of whether our tax positions are more likely than not to be sustained are reasonable, each assessment is subjective and requires the use of significant judgments. As a result, one or more of such assessments may be challenged by the relevant tax authorities, which could result in a change to net income if such position is not sustained. See Note 14 to the Notes to Consolidated Financial Statements.

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.

 

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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 for the years ended June 30, 2016, 2015 and 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 table below 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 years ended June 30, 2016, 2015 and 2014.

 

     Year Ended June 30,  
(Amounts in thousands)    2016      2015      2014  

Net sales

   $ 137       $ 2,938       $ (1,446

Cost of sales

     1,165         1,035         116   

Selling, general and administrative expenses

     1,094         2,455         (1,304
  

 

 

    

 

 

    

 

 

 

Total pre-tax gain (loss)

   $ 2,396       $ 6,428       $ (2,634
  

 

 

    

 

 

    

 

 

 

RESULTS OF OPERATIONS

The following table compares our historical results of operations, including as a percentage of net sales, on a consolidated basis, for the years ended June 30, 2016, 2015 and 2014 (Amounts in thousands, other than percentages. Percentages may not add due to rounding):

 

     Year Ended June 30,  
     2016     2015     2014  

Net sales

   $ 966,733        100.0   $ 971,098        100.0   $ 1,164,304        100.0

Cost of sales

     531,272        55.0        614,736        63.3        686,906        59.0   

Depreciation related to cost of goods sold

     5,796        0.6        7,710        0.8        7,742        0.7   

Gross profit

     429,665        44.4        348,652        35.9        469,656        40.3   

Selling, general and administrative expenses

     433,694        44.8        497,004        51.2        489,803        42.0   

Depreciation and amortization

     36,902        3.8        40,773        4.2        44,392        3.8   

Loss from operations

     (40,931     (4.2     (189,125     (19.5     (64,539     (5.5

Interest expense

     29,905        3.1        29,626        3.1        25,825        2.2   

Debt extinguishment charges

     —          —          239        —          —          —     

Loss before income taxes

     (70,836     (7.3     (218,990     (22.6     (90,364     (7.7

Provision for income taxes

     2,670        0.3        6,297        0.6        56,832        4.9   

Net loss

     (73,506     (7.6     (225,287     (23.2     (147,196     (12.6

Net loss attributable to noncontrolling interests (1)

     (1,721     (0.2     (1,294     (0.1     (1,468     (0.1

Net loss attributable to Elizabeth Arden shareholders

     (71,785     (7.4     (223,993     (23.1     (145,728     (12.5

Less: Accretion and dividends on preferred stock (2)

     2,586        0.3        22,333        2.3        —          —     

Net loss attributable to Elizabeth Arden common shareholders

     (74,371     (7.7     (246,326     (25.4     (145,728     (12.5

 

(1) See Note 12 to the Notes to Consolidated Financial Statements.
(2) See Note 13 to the Notes to Consolidated Financial Statements.

 

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     Year Ended June 30,  
     2016     2015     2014  

Other data:

             

EBITDA and EBITDA margin (1)

   $ 1,767         0.2   $ (140,881     (14.5 )%    $ (12,405     (1.1 )% 

 

(1) For a definition of EBITDA and a reconciliation of net (loss) income to EBITDA, see Note 16 under Item 6 “Selected Financial Data.” EBITDA margin represents EBITDA divided by net sales.

At June 30, 2016, 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 in North America. 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 profit (loss) for the years ended June 30, 2015 and 2014, exclude returns and markdowns related to the 2014 Performance Improvement Plan. In addition, segment profit (loss) 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 profit (loss) to consolidated loss 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, (iii) costs and expenses related to the 2014 Performance Improvement Plan and the 2016 Business Transformation Program, including returns and markdowns, and (iv) costs related to the pending Revlon Merger. 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.

The following table is a comparative summary of our net sales and segment profit (loss) by operating segment for the fiscal years ended June 30, 2016, 2015 and 2014, and reflects the basis of presentation described in Note 1 – “General Information & Summary of Significant Accounting Policies” and Note 21 – “Segment Data and Related Information” to the Notes to Consolidated Financial Statements for all periods presented.

 

(Amounts in thousands)    Year Ended June 30,  
     2016     2015     2014  

Segment Net Sales:

      

North America

   $ 584,921      $ 606,599      $ 731,164   

International

     381,812        392,726        442,604   
  

 

 

   

 

 

   

 

 

 

Total

   $ 966,733      $ 999,325      $ 1,173,768   
  

 

 

   

 

 

   

 

 

 

Reconciliation:

      

Segment Net Sales

   $ 966,733      $ 999,325      $ 1,173,768   

Less:

      

Unallocated sales returns and markdowns

     —          28,227 (2)      9,464 (4) 
  

 

 

   

 

 

   

 

 

 

Net Sales

   $ 966,733      $ 971,098      $ 1,164,304   
  

 

 

   

 

 

   

 

 

 

Segment Profit (Loss):

      

North America

   $ 69,892      $ 40,633      $ 66,126   

International

     (43,690     (40,553     (34,972

Less:

      

Depreciation and Amortization

     42,698        48,483        52,134   

Interest expense, net

     29,905        29,626        25,825   

Consolidation and Elimination Adjustments

     965        (64     (1,127

Unallocated Corporate Costs and Expenses

     23,470 (1)      141,025 (3)      44,686 (5) 
  

 

 

   

 

 

   

 

 

 

(Loss) income Before Income Taxes

   $ (70,836   $ (218,990   $ (90,364
  

 

 

   

 

 

   

 

 

 

 

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(1) Amounts include $21.4 million in costs and expenses with respect to our 2016 Business Transformation Program, primarily comprised of $6.5 million of inventory costs related to the closing of our Brazilian affiliate, as well as changes in certain distribution and customer arrangements, and $14.9 million of severance and other employee-related expenses and related transition costs. In addition, fiscal 2016 amounts include approximately $2.0 million for costs incurred related to the pending Revlon Merger.
(2) Amounts represent $28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily due to changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements.
(3) In addition to the returns and markdowns described above in Note 2, amounts for the year ended June 30, 2015, include:

 

   

$66.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $53.2 million of inventory write-downs under our 2014 Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products and the discontinuation of certain products, $8.5 million of customer and vendor contract termination costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 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;

 

   

$2.4 million in expenses with respect to our 2016 Business Transformation Program primarily comprised of $1.6 million of severance and other employee-related costs and approximately $0.8 million in lease termination costs; and

 

   

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

 

(4) Amounts represent $9.5 million of returns and markdowns under our 2014 Performance Improvement Plan related to the closing of our Puerto Rico affiliate, exiting of certain unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements.
(5) In addition to the returns and markdowns described above in Note 4, amounts for the year ended June 30, 2014, include:

 

   

$46.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $30.2 million of inventory write-downs under our 2014 Performance Improvement Plan due to the expiration, non-renewal and wind-down of fragrance license agreements and discontinuation of certain products, $9.7 million in asset impairments and related charges, primarily due to the non-renewal and expiration of fragrance license agreements, $6.0 million of severance and other employee-related expenses associated with the reduction in global headcount positions and $0.5 million of vendor contract termination costs;

 

   

$6.0 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 (the Fall 2013 Staff Reduction); and

 

   

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.

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)    Year Ended June 30,  
     2016      2015      2014  

Net Sales:

        

Elizabeth Arden Brand

   $ 394,909       $ 376,925       $ 428,565   

Designer, Heritage, Celebrity and Other Fragrances

     571,824         594,173         735,739   
  

 

 

    

 

 

    

 

 

 

Total

   $ 966,733       $ 971,098       $ 1,164,304   
  

 

 

    

 

 

    

 

 

 

Year Ended June 30, 2016 Compared to Year Ended June 30, 2015

Net Sales. Net sales decreased by 0.4%, or $4.4 million, for the year ended June 30, 2016, compared to the year ended June 30, 2015. Excluding the unfavorable impact of foreign currency, net sales increased by 3.2%, or $30.9 million. Net sales for the year ended June 30, 2015, reflect $28.2 million of returns and markdowns recorded under our 2014 Performance Improvement Plan primarily due to changes to our distribution strategy in China and to other customer and distribution arrangements. These returns and markdowns were not allocated to our segments. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

 

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Segment Net Sales:

North America

Net sales decreased by 3.6%, or $21.7 million, for the year ended June 30, 2016, compared to the year ended June 30, 2015. Excluding the unfavorable impact of foreign currency, net sales decreased by 2.7%, or $16.4 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased by $10.7 million primarily due to (i) the lack of sales of Usher and True Religion fragrances due to the expiration of those licenses in the prior year, and (ii) lower sales of Ed Hardy, Britney Spears, Justin Bieber and Nicki Minaj fragrance, partially offset by higher net sales of Curve, Juicy Couture and Elizabeth Taylor fragrances. Net sales of Elizabeth Arden branded products decreased by $1.5 million due to lower sales of fragrances products, partially offset by higher sales of color cosmetic products. Net sales of distributed brands were $9.5 million lower than the prior year period, primarily due to lower sales of One Direction fragrances.

International

Net sales for the year ended June 30, 2016, decreased by 2.8%, or $10.9 million, compared to the year ended June 30, 2015. Excluding the unfavorable impact of foreign currency, net sales increased by 4.9%, or $19.1 million. Net sales of licensed and non-Elizabeth Arden-branded, owned products decreased by $13.0 million from the prior year period, primarily due to lower sales of Britney Spears, Justin Bieber, Nicki Minaj and Mariah Carey fragrances, partially offset by higher net sales of John Varvatos, Juicy Couture and Elizabeth Taylor fragrances. Net sales of Elizabeth Arden branded products increased by $2.6 million as higher sales of fragrance products were partially offset by lower sales of skin care and color cosmetic products. Net sales in the Latin America, Asia Pacific, Europe and South Africa regions decreased by an aggregate of $18.4 million, and were partially offset by higher sales in the Middle East and Greater China.

Product Category Net Sales:

Elizabeth Arden Brand

Net sales of Elizabeth Arden branded products for the year ended June 30, 2016, increased by 4.8%, or $18.0 million, compared to the prior year period. Excluding the unfavorable impact of foreign currency, net sales increased by 10.7%, or $40.2 million. Net sales for the year ended June 30, 2015, reflect $16.8 million of unallocated returns and markdowns for Elizabeth Arden branded products recorded as a result of our 2014 Performance Improvement Plan. Net sales of fragrance products increased by 7.4%, or $10.6 million, and net sales of skin care products increased 4.5%, or $8.2 million higher in part due to the launch of SUPERSTART Skin Renewal and higher sales of Ceramides, partially offset by lower sales of Prevage. Net sales of color cosmetic products decreased by 1.4%, or $0.7 million.

Designer, Heritage, Celebrity and Other Fragrances

Net sales for the year ended June 30, 2016, decreased by 3.8%, or $22.3 million, compared to the prior year period. Excluding the unfavorable impact of foreign currency, net sales decreased by 1.6% or $9.3 million. Net sales for the year ended June 30, 2015, reflect $11.4 million of unallocated returns and markdowns for licensed and distributed brands recorded as a result of our 2014 Performance Improvement Plan. The decrease in net sales was primarily due to (i) lower sales of Britney Spears, Ed Hardy, Nicki Minaj and Justin Bieber fragrances, and (ii) the lack of sales of Usher and True Religion fragrances due to the expiration of those licenses in the prior year, partially offset by higher net sales of John Varvatos, Curve, Juicy Couture, Taylor Swift and Elizabeth Taylor fragrances. Net sales of distributed brands were $7.9 million lower than the prior year period, primarily due to lower sales of One Direction fragrances.

Gross Margin. For the years ended June 30, 2016 and 2015, gross margins were 44.4% and 35.9%, respectively. Gross margin in the current year period was negatively impacted by $6.5 million, or 70 basis points, of inventory costs related to the closing of our Brazilian affiliate, as well as changes in certain distribution and customer arrangements. Gross margin in the prior year period was negatively impacted by $79.4 million, or 710 basis points, of returns, markdowns and inventory write-downs under our 2014 Performance Improvement Plan. The improvement in gross margin was also due to a higher proportion of sales of higher margin products in the current year as compared to our strategic decision in the prior year period to reduce levels of certain inventories at reduced margins.

SG&A. Selling, general and administrative expenses decreased by 12.7%, or $63.3 million, for the year ended June 30, 2016, compared to the year ended June 30, 2015. The decrease was primarily due to lower general and administrative expenses totaling $54.2 million, as the prior year period included the asset impairment charges discussed below. In addition, marketing and sales expenses for the year ended June 30, 2016, decreased by $9.1 million, compared to the year ended June 30, 2015.

During the year ended June 30, 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 year ended June 30, 2015, general and administrative expenses included (i) $13.2 million in expenses under the 2014 Performance Improvement Plan, and (ii) $2.4 million in expenses with respect to our 2016 Business Transformation Program. General and administrative expenses for the year ended June 30, 2016, included $14.9 million in expenses under our 2016 Business Transformation Program for severance and other employee-related expenses and related transition costs and $2.0 million for costs incurred related to the pending Revlon Merger.

 

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In addition to the items discussed above, the decrease in general and administrative expenses for the year ended June 30, 2016, was also due to lower payroll and employee related expenses of $4.8 million and the impact of foreign currency translation of our affiliates’ balance sheets as the current year included losses of $3.9 million, compared to losses of $6.7 million in the prior year period.

The decrease of $9.1 million in marketing and sales expenses for the year ended June 30, 2016, was primarily due to $6.9 million of lower marketing and sales overhead expenses in part due to the overall simplification of our sales and marketing organizations under the 2014 Performance Improvement Plan, and $4.0 million of lower royalty expense primarily due to lower net sales of certain licensed products in the current year period, partially offset by $1.7 million in higher marketing and direct selling expenses (excluding royalties).

Segment Profit

North America

Segment profit increased by 72.0% or $29.3 million, as compared to the prior year. The increase in segment profit was due to the higher gross profit and lower segment selling, general and administrative expenses.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased by 9.5%, or $3.9 million, for the year ended June 30, 2016, compared to the year ended June 30, 2015. The decrease in depreciation and amortization expense for the current year period was primarily due to lower amortization expense for brand licenses, trademarks and intangibles as a result of the asset impairments recorded during the second quarter of fiscal 2015 for certain fragrance licenses. See Note 8 to the Notes to Consolidated Financial Statements.

Interest Expense. Interest expense, net of interest income, increased 0.9%, or $0.3 million, for the year ended June 30, 2016, compared to the year ended June 30, 2015 as borrowings under our second lien credit agreement and higher interest rates were mostly offset by lower average borrowings under our revolving credit facility.

Provision for Income Taxes. The pre-tax (loss) from our domestic and international operations consisted of the following for the years ended June 30, 2016 and 2015:

 

(Amounts in thousands)    Year Ended  
     June 30,
2016
    June 30,
2015
 

Domestic pre-tax loss

   $ (56,362   $ (183,351

Foreign pre-tax loss

     (14,474     (35,639
  

 

 

   

 

 

 

Total loss before income taxes

   $ (70,836   $ (218,990
  

 

 

   

 

 

 

Effective tax rate

     (3.8 )%      (2.9 )% 
  

 

 

   

 

 

 

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 could not recognize a tax benefit on our U.S. pre-tax loss for either of the years ended June 30, 2016 or 2015, and have instead recorded valuation allowances of $14.6 million and $51.9 million, respectively, for these periods. Additionally, commencing in the second quarter of fiscal 2015, we began recording valuation allowances against our deferred tax assets in certain of our foreign operations as non-cash charges to income tax expense. For the years ended June 30, 2016 and 2015, we recorded valuation allowances of $3.9 million and $6.9 million, respectively, against our deferred tax assets in such foreign operations. See Note 14 to the Notes to Consolidated Financial Statements.

The valuation allowances for our net deferred tax assets will not impact our cash flow for a number of years; however, they did have a direct negative impact on net income and shareholders’ equity for the years ended June 30, 2016 and 2015. In addition, they will result in our inability to record tax benefits on future losses in these jurisdictions unless sufficient future taxable income is generated in such jurisdictions to support the realization of the deferred tax assets. Recording the valuation allowances does not restrict our ability to utilize net operating losses associated with the deferred tax assets assuming taxable income of the appropriate character is recognized in the applicable jurisdictions in periods prior to the expiration of such net operating losses. A return to sustained profitability in these jurisdictions is an example of objective positive evidence that could result in a potential reversal of all or a portion of the valuation allowances in future periods. However, there is no assurance that we will be able to reverse all or a portion of the valuation allowances in the future. See Note 14 to the Notes to Consolidated Financial Statements.

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 (i) a shift in the ratio of earnings contributions between jurisdictions, (ii) the impact of the valuation allowances in the U.S. and certain foreign jurisdictions, and (iii) a $0.8 million tax benefit related to tax adjustments for changes in estimates and other tax related items.

 

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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 year ended June 30, 2016, was $74.4 million, compared to $246.3 million for the year ended June 30, 2015. The improvement in results compared to the prior year was primarily due to the higher gross profit, as well as the lower selling, general and administrative expenses in the current year period, primarily as a result of the asset impairment charges recorded in the prior year period. The prior year amount also includes accretion of $20.1 million for the change in redemption value of preferred stock that we issued in August 2014. We decided to recognize the accretion immediately and recorded the full accretion in the first quarter of fiscal 2015. See Note 13 to the Notes to Consolidated Financial Statements.

EBITDA. EBITDA (net income attributable to Elizabeth Arden common shareholders plus the provision for income taxes (or net loss attributable to Elizabeth Arden common shareholders less the benefit from or plus the provision for 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) of $1.8 million for the year ended June 30, 2016, represents an improvement of $142.7 million, compared to the prior year amount of $(140.9) million primarily due to lower selling, general and administrative expenses. EBITDA for the year ended June 30, 2016 includes:

 

   

$6.5 million of inventory costs under our 2016 Business Transformation Program primarily related to the closing of our Brazilian affiliate, as well as changes in certain distribution and customer arrangements;

 

   

$14.9 million primarily consisting of severance and other employee-related expenses and related transition costs under our 2016 Business Transformation Program; and

 

   

$2.0 million for costs incurred related to the pending Revlon Merger.

EBITDA for the year ended June 30, 2015 included:

 

   

$28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily as a result of changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements;

 

   

$53.2 million of inventory write-downs under our 2014 Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products, and the discontinuation of certain products;

 

   

$13.2 million in expenses under our 2014 Performance Improvement Plan primarily comprised of $8.5 million of customer and vendor contract termination costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 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;

 

   

$2.4 million in expenses with respect to our 2016 Business Transformation Program primarily comprised of $1.6 million of severance and other employee-related costs and approximately $0.8 million in lease termination costs; and

 

   

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

Year Ended June 30, 2015 Compared to Year Ended June 30, 2014

Net Sales. Net sales decreased by 16.6%, or $193.2 million, for the year ended June 30, 2015, compared to the year ended June 30, 2014, primarily due to our efforts to tighten product distribution and a lower level of product innovation as compared to the prior year period that impacted both Elizabeth Arden brand and non-Elizabeth Arden branded products, as well as an overall decline in sales of celebrity and certain heritage fragrances. Excluding the unfavorable impact of foreign currency, net sales decreased by 14.7%, or $171.3 million. Net sales reflect $28.2 million of returns and markdowns recorded as a result of our 2014 Performance Improvement Plan primarily due to changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance brands, and (iii) other 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.

 

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Segment Net Sales:

North America

Net sales decreased by 17.0%, or $124.6 million primarily due to an overall decline in sales of celebrity and certain heritage fragrances, our efforts to tighten product distribution, and a lower level of product innovation as compared to the prior year period that impacted both Elizabeth Arden brand and non-Elizabeth Arden branded products. Excluding the unfavorable impact of foreign currency, net sales decreased by 16.6%, or $121.2 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $89.2 million due to lower net sales for almost all fragrance brands, including Justin Bieber, Britney Spears, Ed Hardy, Juicy Couture, Taylor Swift and Nicki Minaj fragrances. Net sales of Elizabeth Arden branded products decreased by $16.1 million, due to lower sales in all product categories. Net sales of distributed brands were $19.2 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 11.3%, or $49.9 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 7.0%, or $30.8 million. Net sales of Elizabeth Arden branded products decreased by $24.7 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 as compared to the prior year period were $39.7 million lower in Europe. Additionally, net sales in Latin America, primarily in Brazil, and the Greater China region were $13.3 million and $11.0 million lower, respectively, as compared to the prior year period. These decreases were partially offset by higher sales in other Asia Pacific markets.

Product Category Net Sales:

Elizabeth Arden Brand

Net sales decreased by 12.0%, or $51.6 million, due to lower sales in all product categories. Excluding the unfavorable impact of foreign currency, net sales decreased by 9.2%, or $39.4 million. Net sales of fragrances decreased 14.0%, or $23.2 million, primarily due to the prior year launch of UNTOLD and lower sales of Elizabeth Arden 5th Avenue and Elizabeth Arden Green Tea fragrances. Net sales of skin care products decreased by 10.1%, or $20.7 million, primarily due to lower overall skincare sales in China as a result of the transition of our distribution strategy in China, as well as lower sales of Visible Difference, and net sales of color cosmetic products decreased by 13.2%, or $7.7 million.

Designer, Heritage, Celebrity and Other Fragrances

Net sales decreased by 19.2% or $141.6 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 17.9% or $131.9 million. The decrease includes lower net sales for most fragrance brands including Justin Bieber, Britney Spears, Taylor Swift, Ed Hardy, Nicki Minaj and Juicy Couture fragrances. Partially offsetting these decreases were higher sales of John Varvatos fragrances. Sales of distributed brands were $20.7 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 years ended June 30, 2015 and 2014, gross margins were 35.9% and 40.3%, respectively. Gross margin in the current year period was negatively impacted by $79.4 million, or 710 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. We made a strategic decision for fiscal 2015 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 $55.5 million, or 440 basis points, of returns, markdowns and inventory write-downs under our 2014 Performance Improvement Plan, product changeover costs associated with the Elizabeth Arden brand repositioning and transition costs related to the Fall 2013 Staff Reduction.

SG&A. Selling, general and administrative expenses increased by 1.5%, or $7.2 million, for the year ended June 30, 2015, compared to the year ended June 30, 2014. The increase was due to the asset impairment charges discussed below and higher general and administrative expenses totaling $61.2 million, partially offset by lower marketing and sales expenses of $54.0 million.

 

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During the year ended June 30, 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 year ended June 30, 2015, general and administrative expenses included (i) $13.2 million in expenses under the 2014 Performance Improvement Plan, and (ii) $2.4 million in expenses with respect to our 2016 Business Transformation Program. General and administrative expenses for the year ended June 30, 2015, were also impacted by higher incentive compensation expense of $5.9 million, and the impact of foreign currency translation on our affiliates’ balance sheets as the current period included losses of $6.7 million, compared to losses of $0.8 million in the prior year period. Partially offsetting these increases were lower payroll and related costs of $4.7 million in the current year.

General and administrative expenses for the year ended June 30, 2014, included (i) $16.2 million in expenses under our 2014 Performance Improvement Plan, (ii) $4.2 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, partially offset by (iv) 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.

The decrease in marketing and sales expenses during the year ended June 30, 2015 was primarily due to (i) $33.4 million in lower media, advertising and sales promotion spend reflecting a spend rate as a percentage of sales consistent with the spend rate in the prior year period, (ii) $13.1 million of lower marketing and sales overhead expenses in part due to the elimination of certain sales and marketing positions, and (iii) $7.5 million of lower royalty expense primarily due to lower net sales of licensed products in the current year.

Segment Profit

North America

Segment profit decreased by 38.6% or $25.5 million, as compared to the prior year. The decrease in segment profit was due to the lower sales and gross profit, partially offset by lower segment selling, general and administrative expenses.

International

Segment loss increased by 15.9% or $5.6 million, as compared to the prior year. The increase in segment loss was due to the 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 8.2% or $3.6 million, for the year ended June 30, 2015, compared to the year ended June 30, 2014, due to lower amortization expense for brand licenses, trademarks and intangibles as a result of the asset impairments recorded during the fourth quarter of fiscal 2014 and second quarter of fiscal 2015 for certain fragrance licenses. See Note 8 to the Notes to Consolidated Financial Statements.

Interest Expense. Interest expense, net of interest income, increased 14.7%, or $3.8 million, for the year ended June 30, 2015, compared to the year ended June 30, 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.

Provision for Income Taxes. The pre-tax (loss) from our domestic and international operations consisted of the following for the years ended June 30, 2015 and 2014:

 

(Amounts in thousands)    Year Ended  
     June 30,
2015
    June 30,
2014
 

Domestic pre-tax loss

   $ (183,351   $ (86,014

Foreign pre-tax loss

     (35,639     (4,350
  

 

 

   

 

 

 

Total loss before income taxes

   $ (218,990   $ (90,364
  

 

 

   

 

 

 

Effective tax rate

     (2.9 )%      (62.9 )% 
  

 

 

   

 

 

 

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 year ended June 30, 2015, and have instead recorded a valuation allowance of $51.9 million for the period. For the year ended June 30, 2014, we recorded a valuation allowance of $89.5 million against our U.S. deferred tax assets as a non-cash charge to income tax expense. Additionally, commencing in fiscal 2015, for certain of our foreign operations, we recorded valuation allowances of $6.9 million against our deferred tax assets in such foreign operations as non-cash charges to income tax expense. See Note 14 to the Notes to Consolidated Financial Statements.

 

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The valuation allowance for our net deferred tax assets will not impact our cash flow for a number of years; however, it did have a direct negative impact on net income and shareholders’ equity for the fiscal years ending June 30, 2015 and 2014. In addition, it will result in our inability to record tax benefits on future losses in these jurisdictions unless sufficient future taxable income is generated in such jurisdictions to support the realization of the deferred tax assets. Recording the valuation allowances does not restrict our ability to utilize net operating losses associated with the deferred tax assets assuming taxable income of the appropriate character is recognized in the applicable jurisdictions in periods prior to the expiration of such net operating losses. A return to sustained profitability in these jurisdictions is an example of objective positive evidence, which 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 allowances in the future. See Note 14 to the Notes to Consolidated Financial Statements.

In addition to the impact of the valuation allowances discussed above, the effective tax rate in the current year period was higher as compared to the prior year period, primarily due to a shift in the ratio of earnings contributions between jurisdictions, as well as a net tax provision of approximately $2.1 million recorded on a discrete basis primarily related to (i) an $0.8 million offsetting benefit in a foreign jurisdiction related to the Internal Revenue Service (“IRS”) examination of our fiscal 2008 and 2009 U.S. tax returns, (ii) a net tax provision of $0.3 million on repatriated earnings from two foreign subsidiaries, (iii) a tax provision of $2.1 million for estimated deferred taxes on a portion of unremitted foreign earnings that may be considered for repatriation in the future, and (iv) a $0.5 million net tax provision related to smaller tax adjustments for changes in estimates and other tax related items.

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 year ended June 30, 2015, was $246.3 million compared to $145.8 million for the year ended June 30, 2014. The decrease in results compared to the prior year was due to the lower net sales and gross profit and higher selling, general and administrative expenses, due primarily to the write off of the Justin Bieber and Nicki Minaj licenses and inventory impairment and other charges under our 2014 Performance Plan, partially offset by lower valuation allowances recorded in the current year as part of our tax provision as compared to the prior year. The current year amount also includes accretion of $20.1 million for the change in redemption value and dividends of $2.2 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 13 to the Notes to Consolidated Financial Statements.

EBITDA. EBITDA (net income attributable to Elizabeth Arden common shareholders plus the provision for income taxes (or net loss attributable to Elizabeth Arden common shareholders less the benefit from income taxes or plus the provision for 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) of $(140.9) million for the year ended June 30, 2015, represents a decrease of $128.5 million compared to the prior year amount of $(12.4) million due to lower gross profit and higher selling, general and administrative expenses in the current period. EBITDA for the year ended June 30, 2015 includes:

 

   

$28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily as a result of changes to (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements;

 

   

$53.2 million of inventory write-downs under our 2014 Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products, and the discontinuation of certain products;

 

   

$13.2 million in expenses under our 2014 Performance Improvement Plan primarily comprised of $8.5 million of customer and vendor contract termination costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 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;

 

   

$2.4 million in expenses with respect to our 2016 Business Transformation Program primarily comprised of $1.6 million of severance and other employee-related costs and approximately $0.8 million in lease termination costs; and

 

   

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

 

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EBITDA for the year ended June 30, 2014 included:

 

   

$15.1 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand;

 

   

$9.5 million of returns and markdowns under our 2014 Performance Improvement Plan related to the closing of our Puerto Rico affiliate, exiting of certain unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements;

 

   

$30.2 million of inventory write-downs under our 2014 Performance Improvement Plan due to the expiration, non-renewal and wind-down of certain fragrance license agreements and discontinuation of certain products;

 

   

$16.2 million in expenses under our 2014 Performance Improvement Plan, comprised of $9.7 million in asset impairments and related charges, primarily due to the non-renewal and expiration of certain fragrance license agreements, $6.0 million of severance and other employee-related expenses associated with the reduction in global headcount positions and $0.5 million of vendor contract termination costs;

 

   

$2.8 million of severance and other employee-related expenses and $3.2 million of related transition expenses incurred with respect to Fall 2013 Staff Reduction; and

 

   

a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential earnout 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 for fiscal years 2014 and 2015 would be met.

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, 2016, approximately 60% of our net sales were made during the first half of our fiscal year. Due to product innovation and new product launches, the size and timing of certain orders from our customers, additions or losses of brand distribution rights, and additions or expirations of license agreements, 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.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital 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.

Liquidity and Capital Resources

 

     Year Ended June 30,  
(Amounts in thousands)    2016      2015      2014  

Net cash (used in) provided by operating activities

   $ (33,750    $ 54,027       $ (38,045

Net cash used in investing activities

     (22,398      (30,079      (51,082

Net cash provided by (used in) financing activities

     56,431         (30,975      83,637   

Net decrease in cash and cash equivalents

     (1,036      (10,223      (5,366

Operating Activities

Cash (used in) provided by our operating activities is driven by net loss adjusted for non-cash expenses and debt extinguishment charges, and changes in working capital. The following chart illustrates our net cash (used in) provided by operating activities during the years ended June 30, 2016, 2015 and 2014:

 

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     Year Ended June 30,  
(Amounts in thousands)    2016      2015      2014  

Net loss

   $ (73,506    $ (225,287    $ (147,196

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

     50,143         102,563         119,693   

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

     (10,387      176,751         (10,542
  

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by operations

   $ (33,750    $ 54,027       $ (38,045
  

 

 

    

 

 

    

 

 

 

For the year ended June 30, 2016, net cash used in operating activities was $33.8 million, as compared to net cash provided by operating activities of $54.0 million for the year ended June 30, 2015. Net loss decreased by $151.8 million and net adjustments to reconcile net loss to cash used in operating activities decreased by $52.4 million, as compared to the prior year. Working capital changes utilized cash of $10.4 million in the current year as compared to cash provided of $176.8 million in the prior year. Working capital changes in the current period as compared to the prior year period were primarily driven by (i) a slight increase in inventory balances during the current year as compared to significant declines in inventory in the prior year period, (ii) an increase in account receivable balances compared to a decrease in the prior year period, (iii) a higher decrease in prepaid expenses and other assets in the prior year period, and (iv) higher increases in payables and accruals in the aggregate in the prior year period.

For the year ended June 30, 2015, net cash provided by operating activities was $54.0 million, as compared to net cash used in operating activities of $38.0 million for the year ended June 30, 2014. Net loss increased by $78.1 million and net adjustments to reconcile net (loss) income to cash used in operating activities decreased by $17.1 million, as compared to the prior year. Working capital changes provided cash of $176.8 million in the current year as compared to $10.5 million of cash utilized in the prior year. Cash provided by working capital changes in the current year was primarily driven by lower inventory purchases as compared to the prior year, primarily due to our lower sales in the current year.

Investing Activities

The following chart illustrates our net cash used in investing activities during the years ended June 30, 2016, 2015 and 2014:

 

     Year Ended June 30,  
(Amounts in thousands)    2016      2015      2014  

Additions to property and equipment

   $ (11,961    $ (23,870    $ (46,556

Acquisition of businesses, intangible and other assets

     (10,500      (6,264      (5,100

Cash received from consolidation of variable interest entity

     63         55         574   
  

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

   $ (22,398    $ (30,079    $ (51,082
  

 

 

    

 

 

    

 

 

 

For the year ended June 30, 2016, net cash used in investing activities of $22.4 million was composed of $12.0 million of capital expenditures and $10.5 million paid to acquire the U.S. and international trademarks for the Giorgio Beverly Hills fragrances from The Procter & Gamble Company. In addition, net cash used in investing activities includes $63,000 of cash received in connection with the formation of our joint venture in Southeast Asia and the requirement to consolidate its financial statements.

For the year ended June 30, 2015, net cash used in investing activities of $30.1 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 its interest in Elizabeth Arden Salon-Holdings, Inc., an unrelated entity whose subsidiaries operate the Red Door beauty salons and spas, to us, and (iii) $23.9 million of capital expenditures principally for computer hardware and software related to the 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 our joint venture in the United Arab Emirates and the requirement to consolidate its financial statements.

For the year ended June 30, 2014, net cash used in investing activities of $51.1 million was composed of (i) $46.6 million of capital expenditures, (ii) $3.0 million associated with the purchase of an equity interest in a company that was developing a beauty device and $2.1 million associated with a minority investment in Elizabeth Arden Salon-Holdings, Inc., 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 increase in capital expenditures for the year ended June 30, 2014 is primarily due to (i) expenditures incurred for in-store counters and displays related to the Elizabeth Arden brand repositioning, (ii) computer hardware and software related to the last phase our Oracle global enterprise system, (iii) leasehold improvements associated with an opening of the Elizabeth Arden Red Door spa and retail store at our New York office location, and (iv) tools and dies for fragrance launches.

 

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We currently expect to incur approximately $17 million to $22 million in capital expenditures in the year ending June 30, 2017, primarily for in-store counters and displays, and computer hardware and software.

Financing Activities

The following chart illustrates our net cash provided by (used in) financing activities during the years ended June 30, 2016, 2015 and 2014:

 

      Year Ended June 30,  
(Amounts in thousands)    2016      2015      2014  

Proceeds from (payments on) short-term debt

   $ 58,700       $ (72,118    $ (9,782

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

     —           43,993         —     

Proceeds from long-term debt

     —           —           106,750   

Repurchase of common stock

     —           —           (5,393

Financing fees paid

     (867      (1,959      (2,173

Preferred stock dividend

     (1,285      (774      —     

Proceeds from the exercise of stock options

     —           —           2,085   

Payments to noncontrolling interests

     —           —           (4,979

Payments of contingent consideration related to acquisition

     —           —           (4,914

All other financing activities

     (117      (117      2,043   
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

   $ 56,431       $ (30,975    $ 83,637   
  

 

 

    

 

 

    

 

 

 

For the year ended June 30, 2016, net cash provided by financing activities was $56.4 million, as compared to net cash used in financing activities of $31.0 million for the year ended June 30, 2015. Net cash used in financing activities for the year ended June 30, 2015, included $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.

For the year ended June 30, 2016, borrowings under our credit facility and second lien credit agreement increased by $58.7 million from a balance of $8.3 million at June 30, 2015. For the year ended June 30, 2016, net cash provided by financing activities includes financing fees paid of approximately $0.9 million related to fiscal 2016 amendments of our second lien credit agreement, as well as preferred dividends paid of $1.3 million.

For the year ended June 30, 2015, borrowings under our credit facility decreased by $69.7 million from a balance of $78.0 million at June 30, 2014. During the year ended June 30, 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 year ended June 30, 2015, net cash provided by financing activities also includes financing fees paid of approximately $1.9 million related to the December 2014 amendment of our credit facility and $0.8 million in preferred stock dividends paid.

On January 30, 2014, we issued an additional $100 million aggregate principal amount of our 7 3/8% senior notes due March 2021. 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, have the same terms and are treated as a single series under the same 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. We incurred approximately $2.2 million in financing costs in connection with the offering of the additional 7 3/8% senior notes.

For the year ended June 30, 2014, borrowings under our credit facility decreased by $10.0 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, at June 30, 2014, short-term debt included $2.4 million in outstanding borrowings under a credit facility agreement between a foreign subsidiary and HSBC Bank plc. In addition, for the year ended June 30, 2014, (i) repurchases of common stock totaled $5.4 million, (ii) payments of contingent consideration related to the 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, (iv) financing fees related to the January 2014 issuance of an additional $100 million in aggregate principal amounts of our 7 3/8% senior notes totaled $2.2 million, and (v) proceeds from the exercise of stock options were $2.1 million.

Interest paid during the year ended June 30, 2016, included $25.8 million of interest payments on the 7 3/8% senior notes and $3.8 million of interest paid on the borrowings under our credit facility and second lien credit agreement. Interest paid during the year ended June 30, 2015, included $25.8 million of interest payments on the 7 3/8% senior notes and $3.7 million of interest paid on the borrowings under our credit facility. Interest paid during the year ended June 30, 2014, included $19.4 million of interest payments on the 7 3/8% senior notes and $3.7 million of interest paid on the borrowings under our credit facility and our second lien credit agreement.

 

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At June 30, 2016, we had approximately $45.0 million of cash, of which $41.8 million was held outside of the United States, primarily in Switzerland, China, Spain, Singapore, South Africa, and the U.K. During the fourth quarter of fiscal 2015, we finalized an intercompany loan agreement between a foreign subsidiary, incorporated in Switzerland, and a U.S. subsidiary. Under the terms of the intercompany loan agreement, our foreign subsidiary loaned $42 million to our U.S. subsidiary. The intercompany loan is payable on or before June 30, 2020.

In addition to the intercompany loan, during the fourth quarter of fiscal 2015, the Company assessed its forecasted cash needs and overall financial position of its international subsidiaries and determined that a portion of previously permanently reinvested earnings would no longer be reinvested overseas in New Zealand and South Africa. As a result, in fiscal 2015 the Company returned $10.3 million in cash to the U.S. through a one-time dividend repatriation as the funds were no longer considered needed in those locations. These funds were utilized to pay down our outstanding borrowings under our credit facility. The remaining cash held outside the U.S. is needed to meet local working capital requirements and to fund the expansion of our international operations, and is therefore considered permanently reinvested outside the U.S.

Debt and Contractual Financial Obligations and Commitments. At June 30, 2016, our long-term debt and financial obligations and commitments by due dates were as follows:

 

            Payments Due by Period  
(Amounts in thousands)    Total      Less Than
1 Year
     1 - 3 Years      3 - 5 Years      More
Than 5
Years
 

Long-term debt, including current portion

   $ 350,000       $ —         $ —         $ 350,000       $ —     

Interest payments on long-term debt (1)

     122,611         25,813         51,626         45,172         —     

Operating lease obligations

     85,990         16,159         24,906         18,483         26,442   

Capital lease obligations

     216         117         99         —           —     

Purchase obligations (2)

     290,193         267,077         19,906         2,760         450   

Other long-term obligations (3)

     8,222         —           8,222         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 857,232       $ 309,166       $ 104,759       $ 416,415       $ 26,892   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of interest at the rate of 7 3/8% per annum on the $350 million aggregate principal amount of 7 3/8% senior notes. See Note 10 to the Notes to Consolidated Financial Statements.
(2) Consists of obligations incurred in the ordinary course of business related to purchase commitments for finished goods, raw materials, components, advertising, promotional items, minimum royalty guarantees, insurance, services pursuant to legally binding obligations, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions.
(3) Excludes $24.0 million of gross unrecognized tax benefits recorded net of certain tax attributes in non-current deferred tax assets that, if not realized, would ultimately result in cash payments. We cannot currently estimate when, or if, any of the gross unrecognized tax benefits, will be due. See Note 14 to the Notes to Consolidated Financial Statements.

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. See Note 8 to the Notes to Consolidated Financial Statements.

On July 26, 2016, we entered into an amendment and restatement of our credit facility in order to permit certain of our foreign subsidiaries to make borrowings under the amended credit facility and to secure such borrowings with certain assets of such subsidiaries. The amended credit facility now provides for:

 

   

a Canadian senior secured revolving credit sub-facility in an aggregate amount of up to US$15 million, secured by a first perfected security interest in the accounts receivable and certain other assets of our Canadian subsidiary, Elizabeth Arden (Canada) Limited (which we call “EA Canada”) and the outstanding equity interests of EA Canada;

 

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a European senior secured revolving credit sub-facility in an aggregate amount of up to US$100 million, secured by (a) a first perfected security interest in the accounts receivable and certain other assets of our Swiss operating and United Kingdom subsidiaries, Elizabeth Arden International Sarl (which we call “EAISA”) and Elizabeth Arden (UK) Ltd. (which we call “EA UK”), respectively, (b) a floating charge over all assets of EA UK, (c) the inventory of EAISA located in the Netherlands and the U.S., and (d) the outstanding equity interests of EAISA, EA UK, Elizabeth Arden (Netherlands) Holding B.V. (which we call “EA Netherlands Holding”) and Elizabeth Arden (Switzerland) Holding Sarl (which we call “EA Swiss Holding”) (subject to certain limitations as described in the amended credit facility);

 

   

the ability to add our German subsidiary, Elizabeth Arden GmbH (which we call “EA Germany”), as a borrower under the amended credit facility and to include EA Germany’s accounts receivable in the applicable borrowing base for the European sub-facility referred to above, subject to a first perfected security interest in EA Germany’s accounts receivable;

 

   

guarantees of the borrowings of EA Canada by us, all of our material U.S. subsidiaries, and subject to local law restrictions, EA Swiss Holding, EA Netherlands Holding, EA UK, and EAISA; and

 

   

guarantees of the borrowings of EA UK and EAISA, by us, all of our material U.S. subsidiaries, and subject to local law restrictions, EA Swiss Holding, EA Netherlands Holding, and EA Canada.

U.S. borrowings under the amended credit facility continue to be guaranteed by our material U.S. subsidiaries and are collateralized by a first priority lien on all of our U.S. accounts receivable and inventory. No assets of any of our foreign subsidiaries secure any U.S. borrowings under the amended credit facility.

Borrowings under the amended credit facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of applicable inventory, as determined pursuant to the terms of the amended credit facility; provided, however, that from August 15 to October 31 of each year, our U.S. borrowing base may be temporarily increased by up to $25 million. The borrowing bases under the amended credit facility are subject to certain reserves, including, after March 31, 2017, an aggregate reserve against the borrowing bases of EAISA, EA UK, and, if added as borrower under the amended credit facility, EA Germany, in an amount of US$15 million; provided that in the event that we have a debt service pricing ratio under the amended credit facility as of the end of any fiscal quarter ending on or after June 30, 2017 equal to or greater than 1.00 to 1.00, such reserve shall fall to $0.

The amended credit facility continues to have only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1.0 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 amended credit facility, or (b) our borrowing availability under the amended 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 June 30, 2016, did not fall below the applicable thresholds in the credit facility. Accordingly, the debt service coverage ratio did not apply during the year ended June 30, 2016. We were in compliance with all applicable covenants under the credit facility for the quarter and year ended June 30, 2016.

Under the terms of the amended credit facility, we continue to be permitted to 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 amended credit facility continues to restrict us from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

Borrowings under the credit portion of the amended 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 (i) the London InterBank Offered Rate (LIBOR) or the Canadian Deposit Offered Rate (CDOR), or (ii) the base rate or the Canadian prime rate. The Applicable Margin charged on LIBOR and CDOR loans ranges from 1.50% to 2.50%, and ranges from 0% to 1.0% for base rate loans and Canadian prime rate, 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 amended credit facility and second lien credit agreement are not impacted by credit rating agency actions.

At June 30, 2016, the Applicable Margin was 2.50% for LIBOR loans and 1.00% for prime rate loans. For the years ended June 30, 2016 and 2015, the weighted average annual interest rate on borrowings under our credit facility was 2.9% and 2.7%, respectively.

 

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We also have a $25 million second lien credit agreement with JPMorgan Chase Bank, N.A. The second lien credit agreement matures on October 16, 2017. The second lien credit agreement is collateralized by a second priority lien on all our U.S. accounts receivable and inventories. In connection with the October 2015 amendment to the second lien credit agreement, we were effectively required to draw a single advance under the second lien credit agreement, and we also entered into security agreements in favor of JP Morgan Chase Bank, N.A. and the lenders under our amended credit facility, granting a lien against our U.S. trademarks relating to our Curve fragrance brand and certain related assets to secure our obligations under both the second lien credit agreement and the amended credit facility. With respect to the amended credit facility, the security interest in these trademarks and related assets will be released upon payment in full of our obligations under the second lien credit agreement, provided that our minimum debt service coverage ratio (as calculated pursuant to the amended credit facility) as of the end of the most recently ended fiscal quarter for the preceding twelve months is greater than 1.0 to 1.0 and no default or event of default exists immediately prior to or after giving effect to the release of such security interest.

The second lien credit agreement provides that borrowings will 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 LIBOR or the base rate. The Applicable Margin charged on LIBOR loans ranges from 3.00% to 5.00% and for base rate loans ranges from 1.5% to 3.5%. At June 30, 2016, the Applicable Margin under our second lien credit agreement was 5% for LIBOR loans and 3.5% for base rate loans.

At June 30, 2016, we had $42 million in borrowings and $3.2 million in letters of credit outstanding under the credit facility and $25 million in borrowings under our second lien credit agreement. At June 30, 2016, based on eligible accounts receivable and inventory available as collateral, our aggregate borrowing availability under our credit facility and second lien credit agreement was $65.2 million. 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 June 30, 2016, 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 amended 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 amended credit facility and the second lien credit agreement to the extent of the collateral securing the credit facility and second lien credit agreement. 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 are not 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.

At June 30, 2016, we have outstanding 50,000 shares of our 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. The preferred stock and detachable warrants were issued for aggregate cash consideration of $50 million under a securities purchase agreement we entered into with Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings L.P., investment funds affiliated with Rhône Capital L.L.C.

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 June 30, 2016, were $2,708,122. Dividend arrearage as of June 30, 2016, was $2,059,165. In July 2016, we paid 50%, or $324,478 of the dividend declared in April 2016. After giving effect to the July 2016 dividend payment, dividend arrearage was $2,383,643. See Note 13 to the Notes to Consolidated Financial Statements.

 

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Based upon our internal projections, we believe that existing cash and cash equivalents, internally generated funds and borrowings under our amended credit facility and second lien credit agreement 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 brands or licensing or distribution arrangements.

As noted above, our amended 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. Deterioration in the economic and retail environment or continued challenges in our operating performance, however, could cause us to default under our amended credit facility if we do not have the requisite average borrowing 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 amended credit facility or second lien credit agreement and may not have access to the capital necessary for our business. In addition, a default under our amended credit facility or second lien credit agreement 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 our amended credit facility or second lien credit agreement, 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 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 StockWe 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 expires on November 30, 2016. There have been no share repurchases since December 2013. Since inception in November 2005, we have repurchased 4,517,309 shares of common stock on the open market under the stock repurchase program at an aggregate cost of $85.3 million, leaving approximately $34.7 million available for additional repurchases under the program. The acquisition of these shares was accounted for under the treasury method.

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 Annual Report on Form 10-K 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. These forward-looking statements are provided pursuant to the Private Securities Litigation Reform Act of 1995. 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 operating or financial 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 from our forward-looking statements is set forth below, and most of these factors are discussed in greater detail under Item 1A – “Risk Factors” of this Annual Report on Form 10-K:

 

   

uncertainty about the completion of the Revlon Merger and the impact of such uncertainty on our business and stock price;

 

   

potential disruptions of current plans and operations and expenses incurred due to the announcement and pendency of the Revlon Merger;

 

   

the response of customers, distributor, suppliers and business partners to the announcement and pendency of the Revlon Merger;

 

   

potential difficulties in employee retention due to the announcement and pendency of the Revlon Merger;

 

   

litigation costs, judgments or settlements, including those incurred with respect to actions initiated with respect to the proposed Revlon Merger;

 

   

our ability to implement our 2014 Performance Improvement Plan and our 2016 Business Transformation Program or other restructuring or cost saving initiatives, our ability to realize the anticipated benefits of our 2014 Performance Improvement Plan, our 2016 Business Transformation Program and any other restructuring or cost saving initiatives and/or changes in the timing of such benefits;

 

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whether we will incur higher than anticipated costs, expenses or charges related to the implementation of our 2016 Business Transformation Program 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 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, restrictions on our ability to repatriate cash, economic and political consequences of the U.K.’s announced withdrawal from the European Union, terrorist attacks or civil unrest, 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 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;

 

   

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, economic uncertainty or terrorist attacks or civil unrest;

 

   

our ability to protect our intellectual property rights and to operate our business without infringing the intellectual property rights of others;

 

   

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 brands or secure 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 and working capital requirements, and restrictive covenants in our amended credit facility, second lien credit agreement, and the indenture for our 7 3/8% senior notes;

 

   

our ability to realize sufficient cash flows from operations to meet our dividend and redemption obligations under the terms of our preferred stock, and our ability to comply with our other obligations relating to our preferred stock, including those set forth in the shareholders agreement relating thereto;

 

   

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, advertising 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;

 

   

our reliance on 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.

 

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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of June 30, 2016, we had $42 million in borrowings and $3.2 million in letters of credit outstanding under our revolving credit facility and $25 million in borrowings outstanding under our second lien credit agreement. 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 credit agreement 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 credit agreement during the year ended June 30, 2016, and assuming there had been a two percentage point (200 basis points) change in the average interest rate for these borrowings, it is estimated that our interest expense for the year ended June 30, 2016, would have increased or decreased by approximately $1.1 million. See Note 9 to the Notes to Consolidated Financial Statements.

Foreign Currency Risk

We sell our products in approximately 120 countries around the world. During the fiscal year ended June 30, 2016, 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 June 30, 2016, our subsidiaries outside the United States held 32% of our total assets. The cumulative effect of translating balance sheet accounts from the functional currency of our subsidiaries into the U.S. dollar at current exchange rates is included in accumulated other comprehensive (loss) income in our consolidated balance sheets.

As of June 30, 2016, we had open foreign currency contracts that expire between July 31, 2016 and May 31, 2017, with notional amounts of (i) 16.1 million Euros and 3.2 million British pounds used to hedge forecasted foreign subsidiary revenues, (ii) 24.8 million Canadian dollars and 21.6 million Australian dollars used to hedge forecasted cost of sales, and (iii) 13.2 million Swiss francs used to hedge forecasted operating costs.

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 year ended June 30, 2016 from settled contracts was approximately $0.8 million. At June 30, 2016, the unrealized loss, net of taxes, associated with these open contracts of approximately $0.7 million is included in accumulated other comprehensive (loss) income in our consolidated balance sheet. See Note 18 to the Notes to 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 June 30, 2016, there were no such foreign currency contracts outstanding. The realized gain, net of taxes, recognized during the year ended June 30, 2016, from these settled contracts was $1.2 million.

 

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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.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Management

     59   

Report of Independent Registered Public Accounting Firm

     60   

Consolidated Balance Sheets as of June 30, 2016 and June 30, 2015

     61   

Consolidated Statements of Operations for the Years Ended June 30, 2016, 2015 and 2014

     62   

Consolidated Statements of Comprehensive Loss for the Years Ended June 30, 2016, 2015 and 2014

     63   

Consolidated Statements of Shareholders’ Equity for the Years Ended June 30, 2016, 2015 and 2014

     64   

Consolidated Statements of Cash Flows for the Years Ended June 30, 2016, 2015 and 2014

     67   

Notes to Consolidated Financial Statements

     68   

 

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Report of Management

Elizabeth Arden, Inc. and Subsidiaries

Report on Consolidated Financial Statements

We prepared and are responsible for the consolidated financial statements that appear in the Annual Report on Form 10-K for the year ended June 30, 2016 of Elizabeth Arden, Inc. (the “Company”). These consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America, and therefore, include amounts based on informed judgments and estimates. We also accept responsibility for the preparation of the other financial information that is included in the Company’s Annual Report on Form 10-K.

Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2016. In making this assessment, management used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment using those criteria, management concluded that the Company maintained effective internal control over financial reporting as of June 30, 2016.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting for the year ended June 30, 2016, and has expressed an unqualified opinion in their report, which is included herein.

 

/s/ E. Scott Beattie

   

/s/ Rod R. Little

E. Scott Beattie

Chairman, President and Chief Executive Officer

   

Rod R. Little

Executive Vice President and Chief Financial Officer

August 15, 2016

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Elizabeth Arden, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Elizabeth Arden, Inc. and its subsidiaries at June 30, 2016 and June 30, 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

New York, New York

August 15, 2016

 

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ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except shares and par value)

 

     As of  
     June 30,
2016
    June 30,
2015
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 45,049      $ 46,085   

Accounts receivable, net

     115,994        105,414   

Inventories

     241,409        240,740   

Deferred income taxes

     2,102        2,206   

Prepaid expenses and other assets

     24,670        29,455   
  

 

 

   

 

 

 

Total current assets

     429,224        423,900   

Property and equipment, net

     88,321        105,821   

Exclusive brand licenses, trademarks and intangibles, net

     225,046        224,895   

Goodwill

     31,607        31,607   

Debt financing costs, net

     6,557        7,396   

Deferred income taxes

     3,254        2,739   

Other

     15,530        16,866   
  

 

 

   

 

 

 

Total assets

   $ 799,539      $ 813,224   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Short-term debt

   $ 67,000      $ 8,300   

Accounts payable – trade

     98,967        92,699   

Other payables and accrued expenses

     104,520        114,978   
  

 

 

   

 

 

 

Total current liabilities

     270,487        215,977   
  

 

 

   

 

 

 

Long-term Liabilities

    

Long-term debt

     354,785        355,634   

Deferred income taxes and other liabilities

     62,046        54,901   
  

 

 

   

 

 

 

Total long-term liabilities

     416,831        410,535   
  

 

 

   

 

 

 

Total liabilities

     687,318        626,512   
  

 

 

   

 

 

 

Redeemable noncontrolling interest (see Note 12)

     2,345        4,222   

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        50,000   

Shareholders’ Equity

    

Common stock, $.01 par value, 50,000,000 shares authorized; 34,790,625 and 34,652,963 shares issued, respectively

     348        347   

Additional paid-in capital

     381,536        375,796   

Accumulated deficit

     (208,360     (133,989

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

     (93,169     (93,169

Accumulated other comprehensive loss

     (20,788     (16,586
  

 

 

   

 

 

 

Total Elizabeth Arden shareholders’ equity

     59,567        132,399   

Noncontrolling interest (See Note 12)

     309        91   
  

 

 

   

 

 

 

Total shareholders’ equity

     59,876        132,490   
  

 

 

   

 

 

 

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

   $ 799,539      $ 813,224   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

 

     Year Ended June 30,  
     2016     2015     2014  

Net sales

   $ 966,733      $ 971,098      $ 1,164,304   

Cost of goods sold:

      

Cost of sales

     531,272        614,736        686,906   

Depreciation related to cost of goods sold

     5,796        7,710        7,742   
  

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     537,068        622,446        694,648   
  

 

 

   

 

 

   

 

 

 

Gross profit

     429,665        348,652        469,656   

Operating expenses

      

Selling, general and administrative

     433,694        497,004        489,803   

Depreciation and amortization

     36,902        40,773        44,392   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     470,596        537,777        534,195   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (40,931     (189,125     (64,539
  

 

 

   

 

 

   

 

 

 

Other expense

      

Interest expense, net

     29,905        29,626        25,825   

Debt extinguishment charges

     —          239        —     
  

 

 

   

 

 

   

 

 

 

Other expense, net

     29,905        29,865        25,825   
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (70,836     (218,990     (90,364

Provision for income taxes

     2,670        6,297        56,832   
  

 

 

   

 

 

   

 

 

 

Net loss

     (73,506     (225,287     (147,196

Net loss attributable to noncontrolling interests (See Note 12)

     (1,721     (1,294     (1,468
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Elizabeth Arden shareholders

     (71,785     (223,993     (145,728

Less: Accretion and dividends on preferred stock (See Note 13)

     2,586        22,333        —     
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Elizabeth Arden common shareholders

   $ (74,371   $ (246,326   $ (145,728
  

 

 

   

 

 

   

 

 

 

Net loss per common share attributable to Elizabeth Arden common shareholders:

      

Basic

   $ (2.49   $ (8.26   $ (4.90
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (2.49   $ (8.26   $ (4.90
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares:

      

Basic

     29,884        29,804        29,720   
  

 

 

   

 

 

   

 

 

 

Diluted

     29,884        29,804        29,720   
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

 

     Year Ended June 30,  
     2016     2015     2014  

Net loss

   $ (73,506   $ (225,287   $ (147,196

Other comprehensive loss, net of tax:

      

Foreign currency translation adjustments (1)

     (3,498     (13,918     2,385   

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

     (704     2,117        (2,760
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (4,202     (11,801     (375
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (77,708     (237,088     (147,571

Net loss attributable to noncontrolling interests

     (1,721     (1,294     (1,468
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Elizabeth Arden shareholders

   $ (75,987   $ (235,794   $ (146,103
  

 

 

   

 

 

   

 

 

 

 

(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 benefit of $6 and $420 for the years ended June 30, 2016 and 2014, respectively, and net of tax expense of $415 for the years ended June 30, 2015.

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

    Common Stock     Additional
Paid-in
    Retained     Treasury Stock     Accumulated
Other
Comprehensive
    Total
Shareholders’
 
    Shares     Amount     Capital     Earnings     Shares     Amount     Income (Loss)     Equity  

Balance as of July 1, 2013

    34,338      $ 343      $ 349,060      $ 258,065        (4,686   $ (87,776   $ (4,410   $ 515,282   

Issuance of common stock upon exercise of options, net of tax withholdings of $1,428

    159        2        655        —          —          —          —          657   

Issuance of restricted stock, net of forfeitures and tax withholdings

    24        —          (1,197     —          —          —          —          (1,197

Issuance of common stock for employee stock purchase plan

    78        1        2,135        —          —          —          —          2,136   

Amortization of share-based awards

    —          —          5,783        —          —          —          —          5,783   

Repurchase of common stock

    —          —          —          —          (155     (5,393     —          (5,393

Excess tax benefit from share-based awards

    —          —          (192     —          —          —          —          (192

Other

    —          —          16        —          —          —          —          16   

Net loss attributable to Elizabeth Arden shareholders

    —          —          —          (145,728     —          —          —          (145,728

Foreign currency translation adjustments

    —          —          —          —          —          —          2,385        2,385   

Net unrealized cash flow hedging loss

    —          —          —          —          —          —          (2,760     (2,760
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

    34,599      $ 346      $ 356,260      $ 112,337        (4,841   $ (93,169   $ (4,785   $ 370,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements

 

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Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

    Common Stock     Additional
Paid-In
   

Retained

Earnings
(Accumulated

    Treasury Stock     Accumulated
Other
Comprehensive
    Total
Elizabeth
Arden
Shareholders’
    Noncontrolling     Total
Shareholders
 
    Shares     Amount     Capital     Deficit)     Shares     Amount     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

    —          —          5,165        —          —          —          —          5,165        —          5,165   

Issuance of warrants to purchase common stock

    —          —          14,144        —          —          —          —          14,144        —          14,144   

Excess tax benefit from share-based awards

    —          —          611        —          —          —          —          611        —          611   

Net (loss) income (1)

    —          —          —          (223,993     —          —          —          (223,993     36        (223,957

Noncontrolling interest contribution at startup

    —          —          —          —          —          —          —          —          55        55   

Preferred stock accretion to redemption value

    —          —          —          (20,151     —          —          —          (20,151     —          (20,151

Preferred stock dividends

    —          —          —          (2,182     —          —          —          (2,182     —          (2,182

Foreign currency translation adjustments

    —          —          —          —          —          —          (13,918     (13,918     —          (13,918

Net unrealized cash flow hedging gain

    —          —          —          —          —          —          2,117        2,117        —          2,117