HELEN OF TROY LTD - Quarter Report: 2010 May (Form 10-Q)

Table of Contents

 

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

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended May 31, 2010
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ..... to …..

 

Commission file number: 001-14669

 

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

 

 

(915) 225-8000

(Registrant’s telephone number, including area code)

 

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

 

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 o    No o

 

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

 

Large accelerated filer o		Accelerated filer  x
Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company  o

 

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

Yes o     No x

 

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

 

Class		Outstanding at July 6, 2010
Common Shares, $0.10 par value, per share		30,675,286 shares

 

Table of Contents

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

 

INDEX – FORM 10-Q

 

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Condensed Balance Sheets (unaudited) as of May 31, 2010 and February 28, 2010	3
		Consolidated Condensed Statements of Income (unaudited) for the Three Months Ended May 31, 2010 and May 31, 2009	4
		Consolidated Condensed Statements of Cash Flows (unaudited) for the Three Months Ended May 31, 2010 and May 31, 2009	5
		Notes to Consolidated Condensed Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
	Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 6.	Exhibits	39
	Signatures		40

 

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PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (unaudited)

(in thousands, except shares and par value)

		May 31,			February 28,
		2010			2010
Assets
Asset, current:
Cash and cash equivalents		$	47,604		$	110,208
Derivative assets, current		1,997			795
Receivables - principally trade, less allowances of $3,524 and $3,346		115,369			109,722
Inventory, net		135,018			124,021
Prepaid expenses		4,721			2,485
Income taxes receivable		-			597
Deferred tax assets, net		10,516			11,526
Total assets, current		315,225			359,354
Property and equipment, net of accumulated depreciation of $59,960 and $58,464		81,243			82,113
Goodwill		201,557			185,937
Other intangible assets, net of accumulated amortization of $34,665 and $33,449		222,356			177,124
Other assets, net of accumulated amortization of $3,882 and $3,825		30,944			30,205
Total assets		$	851,325		$	834,733
Liabilities and Stockholders’ Equity
Liabilities, current:
Accounts payable, principally trade		$	38,663		$	35,005
Accrued expenses and other current liabilities		58,993			67,289
Income taxes payable		161			-
Long-term debt, current maturities		3,000			3,000
Total liabilities, current		100,817			105,294
Deferred compensation liability		2,916			3,833
Deferred tax liabilities, net		1,548			1,202
Long-term debt, excluding current maturities		131,000			131,000
Liability for uncertain tax positions		1,791			2,562
Derivative liabilities, noncurrent		6,928			7,070
Total liabilities		245,000			250,961
Commitments and contingencies
Stockholders’ equity:
Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued		-			-
Common stock, $0.10 par. Authorized 50,000,000 shares; 30,671,286 and 30,571,813 shares
issued and outstanding		3,067			3,057
Additional paid in capital		123,490			120,761
Accumulated other comprehensive loss		(7,147		)	(8,574		)
Retained earnings		486,915			468,528
Total stockholders’ equity		606,325			583,772
Total liabilities and stockholders’ equity		$	851,325		$	834,733

 

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (unaudited)

(in thousands, except per share data)

		Three Months Ended May 31,
		2010			2009
Sales revenue, net		$	160,153		$	143,873
Cost of goods sold		87,726			85,364
Gross profit		72,427			58,509
Selling, general, and administrative expense		49,194			39,322
Operating income before impairment		23,233			19,187
Asset impairment charges		501			-
Operating income		22,732			19,187
Nonoperating income (expense), net		170			442
Interest expense		(2,160		)	(3,460		)
Income before income taxes		20,742			16,169
Income tax expense (benefit):
Current		1,689			(560		)
Deferred		666			2,220
Net income		$	18,387		$	14,509
Earnings per share:
Basic		$	0.60		$	0.49
Diluted		$	0.59		$	0.47
Weighted average shares of common stock used in computing net earnings per share:
Basic		30,632			29,879
Diluted		31,353			30,578

 

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (unaudited)

(in thousands)

		Three Months Ended May 31,
		2010			2009
Net cash provided by operating activities:
Net income		$	18,387		$	14,509
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		4,083			3,878
Provision for doubtful receivables		(83		)	187
Share-based compensation		407			117
Intangible asset impairment charges		501			-
(Gains) loss on the sale of property and equipment		36			(14		)
Realized and unrealized gain on investments		-			(214		)
Deferred income taxes and tax credits		640			2,212
Changes in operating assets and liabilities, net of effects of acquisition of businesses:
Receivables		3,025			(1,859		)
Inventories		(6,110		)	1,475
Prepaid expenses		(1,844		)	(1,069		)
Other assets		(660		)	(220		)
Accounts payable		(1,622		)	(4,019		)
Accrued expenses and other current liabilities		(12,055		)	(3,525		)
Accrued income taxes		149			(1,098		)
Net cash provided by operating activities		4,854			10,360
Net cash used in investing activities:
Capital, license, trademark, and other intangible expenditures		(786		)	(651		)
Proceeds from the sale of property and equipment		32			30
Proceeds from sale of investments		100			-
Payments to acquire businesses		(69,000		)	(60,000		)
Net cash used in investing activities		(69,654		)	(60,621		)
Net cash provided by (used in) financing activities:
Proceeds from exercise of stock options and excess tax benefits		2,196			21
Payment of tax obligations resulting from cashless option exercise		-			(2,712		)
Payments for repurchases of common stock		-			(419		)
Net cash provided by (used in) financing activities		2,196			(3,110		)
Net decrease in cash and cash equivalents		(62,604		)	(53,371		)
Cash and cash equivalents, beginning balance		110,208			102,675
Cash and cash equivalents, ending balance		$	47,604		$	49,304
Supplemental cash flow information:
Interest paid		$	2,057		$	3,235
Income taxes paid, net of refunds		$	1,486		$	643
Value of common stock received as exercise price of options		$	-		$	11,992

 

 

See accompanying notes to consolidated condensed financial statements.

 

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HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

May 31, 2010

 

Note 1 - Basis of Presentation

 

In our opinion, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of May 31, 2010 and February 28, 2010, and the results of our consolidated operations for the three month periods ended May 31, 2010 and 2009. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K, and our other reports on file with the Securities and Exchange Commission (“SEC”).  In some cases, we have provided additional information for prior periods in the accompanying notes to consolidated condensed financial statements to conform to the current period’s presentation.  In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us” or “our” refer to Helen of Troy Limited and its subsidiaries.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.”

 

Product and service names mentioned in this Form 10-Q are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions.  The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right.  All trademarks, trade names, service marks and logos referenced herein belong to their respective companies.

 

Note 2 – New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies that are adopted by the Company as of the specified effective date.  Unless otherwise discussed, the Company’s management believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.

 

Note 3 – Litigation

 

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

 

Note 4 – Earnings per Share

 

Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period plus the effect of dilutive securities.   Our dilutive securities consist entirely of outstanding options for common stock that were “in-the-money,” meaning that the exercise price of the options was less than the average market price of our common stock during the period reported.  “Out-of-the-money” options are outstanding options to purchase common stock that were excluded from the computation of earnings per share because the exercise price of the options was greater than the average market price of our common stock during the period reported.  Thus, their effect would be antidilutive.

 

The effect of dilutive securities was approximately 721,000 and 699,000 shares of common stock for the three month periods ended May 31, 2010 and 2009, respectively.   Options for common stock that were antidilutive totaled approximately 481,000 and 1,752,000 at May 31, 2010 and 2009, respectively.

 

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Note 5 – Comprehensive Income

 

The components of comprehensive income, net of tax, for each of the periods covered by this report are as follows:

 

COMPONENTS OF COMPREHENSIVE INCOME

(in thousands)

		Three Months Ended May 31,
		2010			2009
Net income		$	18,387		$	14,509
Other comprehensive income (loss), net of tax:
Cash flow hedges - interest rate swaps, net of tax (1)		399			790
Cash flow hedges - foreign currency, net of tax (2)		872			(714		)
Unrealized gain (loss) - auction rate securities, net of tax (3)		156			(454		)
Comprehensive income, net of tax		$	19,814		$	14,131

 

The components of accumulated other comprehensive loss, net of tax, for the periods covered by our consolidated condensed balance sheets are as follows:

 

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

(in thousands)

		May 31,			February 28,
		2010			2010
Unrealized holding losses on cash flow hedges - interest rate swaps, net of tax (1)		$	(7,535	)	$	(7,934	)
Unrealized holding gains on cash flow hedges - foreign currency, net of tax (2)		1,464			592
Temporary impairment loss on auction rate securities, net of tax (3)		(1,076		)	(1,232		)
Total accumulated other comprehensive loss		$	(7,147	)	$	(8,574	)

 

(1)	The change in unrealized loss on interest rate swap cash flow hedges is recorded net of tax expense of $0.21 and $0.41 million for the three month periods ended May 31, 2010 and 2009, respectively. The unrealized holding loss on interest rate swap cash flow hedges included in accumulated other comprehensive loss includes net deferred tax benefits of $3.88 and $4.09 million at May 31, 2010 and February 28, 2010, respectively.
(2)	The change in unrealized gain (loss) on foreign currency cash flow and ordinary hedges is recorded net of tax benefits (expense) of $0.41 and $(0.31) million for the three month periods ended May 31, 2010 and 2009, respectively. The unrealized holding gain on foreign currency cash flow hedges included in accumulated other comprehensive loss, includes net deferred tax expense of $0.65 and $0.24 million at May 31, 2010 and February 28, 2010, respectively.
(3)	The change in temporary impairment loss on auction rate securities is recorded net of tax benefits (expense) of ($0.08) and $0.23 million for the three month periods ended May 31, 2010 and 2009, respectively. The temporary impairment loss on auction rate securities included in accumulated other comprehensive loss, includes net deferred tax benefits of $0.55 and $0.63 million at May 31, 2010 and February 28, 2010, respectively.

 

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Note 6 – Segment Information

 

In the tables that follow, we present two segments: Personal Care and Housewares.  Our Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, shavers, mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid and aerosol hair styling products, men’s fragrances, men’s and women’s antiperspirants and deodorants, liquid and bar soaps, shampoos, hair treatments, foot powder, body powder and skin care products.  Our Housewares segment reports the operations of the OXO family of brands whose products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, food storage containers, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools and rechargeable lighting products.   We use third-party manufacturers to produce our goods.  Both our Personal Care and Housewares segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores and specialty stores.  In addition, the Personal Care segment sells through beauty supply retailers and wholesalers.

 

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

 

THREE MONTHS ENDED MAY 31, 2010 AND 2009

(in thousands)

		Personal
May 31, 2010		Care			Housewares			Total
Net sales		$	112,228		$	47,925		$	160,153
Operating income before impairment		13,583			9,650			23,233
Asset impairment charges		501			-			501
Operating income		13,082			9,650			22,732
Capital, license, trademark and other intangible expenditures		296			490			786
Depreciation and amortization		2,589			1,494			4,083
		Personal
May 31, 2009		Care			Housewares			Total
Sales revenue, net		$	101,185		$	42,688		$	143,873
Operating income before impairment		10,593			8,594			19,187
Asset impairment charges		-			-			-
Operating income		10,593			8,594			19,187
Capital, license, trademark and other intangible expenditures		119			532			651
Depreciation and amortization		2,503			1,375			3,878

 

We compute operating income for each segment based on net sales revenue, less cost of goods sold, selling, general, and administrative expense (“SG&A”), and any impairment charges associated with the segment. The SG&A used to compute each segment’s operating income includes SG&A directly associated with the segment, plus overhead expenses that are allocable to the segment.  We do not allocate nonoperating income (expense), interest expense, or income taxes to operating segments.  The following tables contain identifiable assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:

 

IDENTIFIABLE ASSETS AT  MAY 31, 2010 AND FEBRUARY 28, 2010

(in thousands)

		Personal
		Care			Housewares			Total
May 31, 2010		$	496,864		$	354,461		$	851,325
February 28, 2010		483,106			351,627			834,733

 

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Note 7 – Property and Equipment

 

A summary of property and equipment is as follows:

 

PROPERTY AND EQUIPMENT

(in thousands)

		Estimated
		Useful Lives			May 31,			February 28,
		(Years)			2010			2010
Land		-			$	9,073		$	9,073
Building and improvements		10 - 40			65,136			65,117
Computer and other equipment		3 - 10			45,804			46,088
Tools, dies and molds		1 - 3			10,683			9,573
Transportation equipment		3 - 5			153			240
Furniture and fixtures		5 - 15			8,541			8,532
Construction in process		-			1,813			1,954
Property and equipment, gross					141,203			140,577
Less accumulated depreciation					(59,960		)	(58,464		)
Property and equipment, net					$	81,243		$	82,113

 

Depreciation expense was $2.06 and $2.46 million for the three month periods ended May 31, 2010 and 2009, respectively.

 

We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2019.  Certain leases contain escalation clauses and renewal or purchase options.  Rent expense related to our operating leases was $0.57 million for each of the three month periods ended May 31, 2010 and 2009.

 

Note 8 – Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal 2011 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2011.  As a result of its testing, the Company recorded a non-cash impairment charge of $0.50 million ($0.49 million after tax).  The charge was related to an indefinite lived trademark in our Personal Care segment that was written down to its fair value, determined on the basis of future discounted cash flows using the relief from royalty method.

 

Annual Impairment Testing in the First Quarter of Fiscal 2010 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2010.  As a result of its testing, the Company concluded no further impairments had occurred since the fourth quarter of fiscal 2009, when interim testing was performed and a total non-cash impairment charge of $99.51 million ($99.06 million after tax) was recorded.

 

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

 

GOODWILL AND INTANGIBLE ASSETS

(in thousands)

		May 31, 2010												February 28, 2010
		Gross			Cumulative									Gross			Cumulative
		Carrying			Goodwill			Accumulated			Net Book			Carrying			Goodwill			Accumulated			Net Book
Description / Life		Amount			Impairments			Amortization			Value			Amount			Impairments			Amortization			Value
Personal Care:
Goodwill		$	81,916		$	(46,490	)	$	-		$	35,426		$	66,296		$	(46,490	)	$	-		$	19,806
Trademarks - indefinite		76,203			-			-			76,203			53,054			-			-			53,054
Trademarks - finite		338			-			(247		)	91			338			-			(245		)	93
Licenses - indefinite		10,300			-			-			10,300			10,300			-			-			10,300
Licenses - finite		24,196			-			(19,645		)	4,551			24,196			-			(19,495		)	4,701
Other intangibles - finite		50,161			-			(5,336		)	44,825			26,286			-			(4,049		)	22,237
Total Personal Care		243,114			(46,490		)	(25,228		)	171,396			180,470			(46,490		)	(23,789		)	110,191
Housewares:
Goodwill		166,131			-			-			166,131			166,131			-			-			166,131
Trademarks - indefinite		75,554			-			-			75,554			75,554			-			-			75,554
Other intangibles - finite		20,269			-			(9,437		)	10,832			20,845			-			(9,660		)	11,185
Total Housewares		261,954			-			(9,437		)	252,517			262,530			-			(9,660		)	252,870
Total		$	505,068		$	(46,490	)	$	(34,665	)	$	423,913		$	443,000		$	(46,490	)	$	(33,449	)	$	363,061

 

Intangible asset activity for the three month period ended May 31, 2010 was as follows:

 

·     In the Personal Care segment, the Company recorded $63.15 million of intangible assets, net of certain acquisition adjustments, in connection with its acquisition of the Pert Plus and Sure products business (as discussed further in Note 9), and a non-cash impairment charge of $0.50 million against the carrying value of an indefinite lived trademark.

 

·     In the Housewares segment, the Company recorded $0.18 million to account for new patents and other adjustments of $0.76 to remove certain fully amortized patents.

 

The following table summarizes the amortization expense attributable to intangible assets for the three month periods ended May 31, 2010 and 2009, respectively, as well as our estimated amortization expense for the fiscal years ending the last day of each February 2011 through 2016.

 

AMORTIZATION OF INTANGIBLE ASSETS

(in thousands)

Aggregate Amortization Expense
For the three months ended
May 31, 2010		$	1,971
May 31, 2009		$	1,270
Estimated Amortization Expense
For the fiscal years ended
February 2011		$	7,977
February 2012		$	7,944
February 2013		$	7,911
February 2014		$	7,446
February 2015		$	7,375
February 2016		$	7,322

 

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NOTE 9 - Acquisitions

 

Pert Plus and Sure Acquisition - On March 31, 2010, we completed the acquisition of certain assets and liabilities of the Pert Plus hair care and Sure anti-perspirant and deodorant businesses from Innovative Brands, LLC for a net cash purchase price of $69.00 million, which we paid with cash on hand.  Net assets acquired consist principally of accounts receivable, finished goods inventories, prepaid expenses, goodwill, patents, trademarks, tradenames, product design specifications, production know-how, certain fixed assets, distribution rights and customer lists, less certain product related operating accruals and other current liabilities.  We will market Pert Plus and Sure products primarily into retail trade channels.

 

We have accounted for the acquisition as the purchase of a business, and have recorded the excess purchase price as goodwill. All of the goodwill is held in jurisdictions that do not allow deductions for tax purposes. We have completed our analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and will amortize the customer list and patent rights over expected average lives of approximately 8.2 and 7.5 years, respectively.  For the customer list, we used our historical attrition rates to assign an expected life.  For patent rights, we used the underlying non-renewable term of a royalty free license we acquired for the use of patented formulas in certain Pert Plus and Sure products. The trademarks acquired are considered to have indefinite lives that are not subject to amortization.  The goodwill arising from the Pert Plus and Sure acquisition consists largely of the distribution network, marketing synergies, and economies of scale expected to occur from the addition of the new product line. The following schedule presents the acquisition date fair value of the net assets of Pert Plus and Sure:

 

PERT AND SURE - NET ASSETS ACQUIRED ON MARCH 31, 2010

 

 

Receivables		$	8,589
Inventory		4,887
Prepaid expenses		392
Tools, dies and molds		730
Goodwill		15,845
Trademarks		23,650
Patent rights		2,600
Customer list		21,275
Total assets acquired		77,968
Less: Accounts payable and other current liabilities assumed or recorded at acquisition		(8,968		)
Net assets acquired		$	69,000

 

The fair values of the intangible assets acquired were estimated by applying income and market approaches. These fair value measurements are based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements as defined under U.S. generally accepted accounting principles (“GAAP”). Key assumptions included various discount rates based upon a 15.8 percent weighted average cost of capital, royalty rates used in the determination of trademark values of 5 percent,  and customer attrition rates used in the determination of customer list values of 11.5 percent per year.

 

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The impact of the Pert Plus and Sure acquisition on the Company’s consolidated condensed statement of income from the acquisition date through the fiscal quarter ended May 31, 2010 was as follows:

 

PERT PLUS AND SURE - IMPACT ON CONSOLIDATED CONDENSED STATEMENT OF INCOME

March 31, 2010 (Acquisition Date) through May 31, 2010

 

Sales revenue, net		$	10,871
Net income		2,099
Earning per share impact
Basic		$	0.07
Diluted		$	0.07

 

The following supplemental pro forma information presents the Company’s financial results as if the Pert Plus and Sure acquisition had occurred as of the beginning of each of the fiscal periods presented.  This supplemental pro forma information has been prepared for comparative purposes and would not necessarily indicate what may have occurred if the acquisition had been completed on March 1, 2010 or 2009, and this information is not intended to be indicative of future results.

 

As if the Acquisition Had Been Completed at the Beginning of Each Period

(in thousands, except per share data)

		Three Months Ended May 31,
		2010			2009
Sales revenue, net		$	165,784		$	162,729
Net income		19,464			18,213
Earning per share impact
Basic		$	0.64		$	0.61
Diluted		$	0.62		$	0.60

 

Infusium 23 Acquisition - On March 31, 2009, we completed the acquisition of certain assets, trademarks, customer lists, distribution rights, patents, goodwill and formulas for Infusium 23 (“Infusium”) hair care products from The Procter & Gamble Company for a cash purchase price of $60 million, which we paid with cash on hand.  We accounted for the acquisition as the purchase of a business, and recorded the excess purchase price as goodwill. All of this goodwill is held in jurisdictions that do not allow deductions for tax purposes. We completed our analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price. We assigned the acquired trademarks indefinite economic lives and will amortize the customer list and patent rights over expected lives of 9.0 and 7.5 years, respectively.  For the customer list, we used our historical attrition rates to assign an expected life.  For patent rights, we used the underlying non-renewable term of a royalty free license we acquired for the use of patented formulas in certain Infusium products. The trademarks acquired are considered to have indefinite lives that are not subject to amortization.  The goodwill arising from the Infusium acquisition consists largely of the distribution network, marketing synergies, and economies of scale expected to occur from the addition of the new product line. The following schedule presents the acquisition date fair value of the net assets of Infusium:

 

INFUSIUM 23 - ASSETS ACQUIRED ON MARCH 31, 2009

(in thousands)

Goodwill		$	19,700
Trademarks		18,700
Patent rights		600
Customer list		21,000
Total assets acquired		$	60,000

 

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Note 10 – Short Term Debt

 

We have a Revolving Line of Credit Agreement (the “RCA”) with Bank of America, N.A. that provides for a total revolving commitment of up to $50 million, subject to certain limitations as discussed below. The commitment under the RCA terminates on December 15, 2013.  Borrowings under the RCA accrue interest at a “Base Rate” plus a margin of 0.25 to 0.75 percent based on the “Leverage Ratio” at the time of borrowing.  The base rate is equal to the highest of the Federal Funds Rate plus 0.50 percent, Bank of America’s prime rate, or the one month LIBOR rate plus 1 percent.  Alternatively, upon our timely election, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 1.25 percent to 1.75 percent based upon the “Leverage Ratio” (as defined in the RCA) at the time of the borrowing. We incur loan commitment fees at a current rate of 0.20 percent per annum on the unused balance of the RCA and letter of credit fees at a current rate of 1.25 percent per annum on the face value of any letter of credit. Outstanding letters of credit reduce the borrowing availability dollar for dollar.  As of May 31, 2010, there were no revolving loans and $0.20 million of open letters of credit outstanding against this facility.

 

The RCA contains certain covenants and formulas that limit our outstanding indebtedness from all sources (less unrestricted cash on hand in excess of $15 million) to no more than 3.0 times the latest twelve months’ trailing EBITDA. As of May 31, 2010, our loan covenants effectively limited our ability to incur more than $286.15 million of additional debt from all sources, including draws on our RCA.  The RCA is guaranteed, on a joint and several basis, by our parent company, Helen of Troy Limited, and certain subsidiaries.  Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions, and limit our ability to repurchase shares of our common stock.  As of May 31, 2010, we were in compliance with the terms of the RCA and our other debt agreements.

 

Note 11 – Accrued Expenses and Current Liabilities

 

A summary of accrued expenses and other current liabilities is as follows:

 

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

		May 31,			February 28,
		2010			2010
Accrued defectives, discounts and allowances		$	17,837		$	20,758
Accrued compensation		6,717			17,888
Accrued advertising		12,182			6,862
Accrued interest		1,385			1,339
Accrued royalties		3,759			3,612
Accrued professional fees		657			730
Accrued benefits and payroll taxes		1,468			1,170
Accrued freight		2,081			1,398
Accrued property, sales and other taxes		2,236			879
Derivative liabilities, current		4,489			4,951
Other		6,182			7,702
Total accrued expenses and other current liabilities		$	58,993		$	67,289

 

Note 12 – Income Taxes

 

United States Income Taxes - In April 2010, the IRS concluded its audit of the Company’s 2007 and 2008 tax returns.  No adjustments were made to either year’s tax returns.

 

Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets

 

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and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes.  We must assess the likelihood that we will be able to recover our deferred tax assets.  If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

 

In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our income not being subject to taxation in the U.S.  If such income were subject to U.S. federal income taxes, our effective income tax rate would increase materially. Future actions by taxing authorities may result in tax liabilities that are significantly higher than the reserves established, which could have a material adverse effect on our consolidated results of operations or cash flows.  Additionally, the U.S. government is currently considering several alternative proposed changes in the tax law that, if enacted, could increase our effective overall tax rate.

 

Note 13 – Long-Term Debt

 

A summary of long-term debt is as follows:

 

LONG-TERM DEBT

(dollars in thousands)

		Original
		Date		Interest				May 31,			February 28,
		Borrowed		Rates		Matures		2010			2010
$15 million unsecured Senior Note payable at a fixed interest rate of 7.24%. Interest payable quarterly. Annual principal payments of $3 million began in July 2008.		07/97		7.24%		07/12		$	9,000		$	9,000
$50 million unsecured floating interest rate 7 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 85 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)		06/04		5.89%		06/11		50,000			50,000
$75 million unsecured floating interest rate 10 year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 90 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)		06/04		6.01%		06/14		75,000			75,000
Total long-term debt								134,000			134,000
Less current maturities of long-term debt								(3,000		)	(3,000		)
Long-term debt, excluding current maturities								$	131,000		$	131,000

 

(1)  Floating interest rates have been hedged with interest rate swaps to effectively fix interest rates.  Additional information regarding these swaps is provided in Note 15.

 

All of our long-term debt is unconditionally guaranteed by our parent company, Helen of Troy Limited, and/or certain subsidiaries on a joint and several basis.  Our debt agreements require the maintenance of certain debt/EBITDA and interest coverage ratios, specify minimum consolidated net worth levels and contain other customary covenants. As of May 31, 2010, our debt agreements effectively limited our ability to incur more than $286.15 million of additional debt from all sources, including draws on our RCA.  Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions, and limit our ability to repurchase our common stock.  As of May 31, 2010, we were in compliance with the terms of these agreements.

 

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