HELEN OF TROY LTD - Quarter Report: 2011 May (Form 10-Q)

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, 2011
	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 5, 2011
Common Shares, $0.10 par value, per share		30,900,494 shares

 

 

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, 2011 and February 28, 2011	3
		Consolidated Condensed Statements of Income (unaudited) for the Three Months Ended May 31, 2011 and May 31, 2010	4
		Consolidated Condensed Statements of Cash Flows (unaudited) for the Three Months Ended May 31, 2011 and May 31, 2010	5
		Notes to Consolidated Condensed Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
	Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	42
	Item 1A.	Risk Factors	42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
	Item 6.	Exhibits	43
	Signatures		44

 

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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,
		2011			2011
Assets
Asset, current:
Cash and cash equivalents		$	16,037		$	27,193
Investments, at market value		1,177			1,233
Receivables - principally trade, less allowances of $5,249 and $4,148		197,761			188,404
Inventory, net		228,234			217,230
Prepaid expenses		8,008			5,149
Income taxes receivable		1,508			2,399
Deferred tax assets, net		14,176			18,843
Total assets, current		466,901			460,451
Property and equipment, net of accumulated depreciation of $67,339 and $65,428		82,191			82,487
Goodwill		356,137			356,242
Other intangible assets, net of accumulated amortization of $40,511 and $36,083		300,207			304,705
Other assets, net of accumulated amortization of $3,187 and $4,096		33,859			36,639
Total assets		$	1,239,295		$	1,240,524
Liabilities and Stockholders’ Equity
Liabilities, current:
Revolving line of credit		$	53,200		$	71,000
Accounts payable, principally trade		77,545			73,321
Accrued expenses and other current liabilities		132,944			141,620
Long-term debt, current maturities		53,000			53,000
Total liabilities, current		316,689			338,941
Deferred compensation liability		3,115			4,712
Other liabilities, noncurrent		1,555			1,594
Deferred tax liabilities, net		19,374			23,216
Long-term debt, excluding current maturities		178,000			178,000
Liability for uncertain tax positions		2,928			2,481
Derivative liabilities, noncurrent		6,537			6,031
Total liabilities		528,198			554,975
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; 30,893,487 and 30,838,860 shares issued and outstanding		3,089			3,084
Additional paid in capital		131,907			130,015
Accumulated other comprehensive loss		(8,577		)	(7,850		)
Retained earnings		584,678			560,300
Total stockholders’ equity		711,097			685,549
Total liabilities and stockholders’ equity		$	1,239,295		$	1,240,524

 

 

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,
		2011			2010
Sales revenue, net		$	271,467		$	160,153
Cost of goods sold		161,554			87,726
Gross profit		109,913			72,427
Selling, general, and administrative expense		79,259			49,194
Operating income before impairments		30,654			23,233
Asset impairment charges		-			501
Operating income		30,654			22,732
Nonoperating income, net		143			170
Interest expense		(3,429		)	(2,160		)
Income before income taxes		27,368			20,742
Income tax expense:
Current		1,390			1,689
Deferred		1,373			666
Net income		$	24,605		$	18,387
Earnings per share:
Basic		$	0.80		$	0.60
Diluted		$	0.78		$	0.59
Weighted average shares of common stock used in computing net earnings per share:
Basic		30,857			30,632
Diluted		31,660			31,353

 

 

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,
		2011			2010
Net cash provided by operating activities:
Net income		$	24,605		$	18,387
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		7,094			4,083
Provision for doubtful receivables		227			(83		)
Share-based compensation		466			407
Intangible asset impairment charges		-			501
(Gain) loss on the sale of property and equipment		(24		)	36
Realized and unrealized loss on investments		56			-
Deferred income taxes and tax credits		1,373			640
Changes in operating assets and liabilities, net of effects of acquisition of businesses:
Receivables		(8,634		)	3,025
Inventories		(11,004		)	(6,110		)
Prepaid expenses		(2,862		)	(1,844		)
Other assets		(543		)	(660		)
Accounts payable		4,224			(1,622		)
Accrued expenses and other current liabilities		(11,002		)	(12,055		)
Accrued income taxes		447			149
Net cash provided by operating activities		4,423			4,854
Net cash used in investing activities:
Capital, license, trademark, and other intangible expenditures		(2,036		)	(786		)
Proceeds from the sale of property and equipment		24			32
Proceeds from sale of investments		3,050			100
Payments to acquire businesses		-			(69,000		)
Net cash provided by (used in) investing activities		1,038			(69,654		)
Net cash provided by (used in) financing activities:
Proceeds from line of credit		142,700			-
Repayment of line of credit		(160,500		)	-
Payments of financing costs		(24		)	-
Proceeds from exercise of stock options, net		1,207			2,196
Net cash provided by (used in) financing activities		(16,617		)	2,196
Net decrease in cash and cash equivalents		(11,156		)	(62,604		)
Cash and cash equivalents, beginning balance		27,193			110,208
Cash and cash equivalents, ending balance		$	16,037		$	47,604
Supplemental cash flow information:
Interest paid		$	2,285		$	2,057
Income taxes paid, net of refunds		$	(51	)	$	1,486
Value of common stock received as exercise price of options		$	837		$	-

 

 

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, 2011

 

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

 

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, 2011 and February 28, 2011, and the results of our consolidated operations for the three month periods ended May 31, 2011 and 2010. 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 for the fiscal year ended February 28, 2011, and our other reports on file with the Securities and Exchange Commission (“SEC”).

 

In this report and the accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us” or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars.  References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries, which we acquired in a merger on December 31, 2010. Kaz is its own segment within the Company referred to as “the Healthcare / Home Environment” segment. References to “OXO” refer to the operations of OXO International and certain affiliated subsidiaries that comprise the Housewares segment of the Company’s business. Product and service names mentioned in this report are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks and logos referenced herein belong to their respective owners.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.”  References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASC” refer to the codification of U.S. GAAP in the Accounting Standards Codification issued by the FASB.

 

Note 2 – New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by 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.

 

- 6 -

 

The effect of dilutive securities was approximately 803,500 and 721,000 shares of common stock for the three month periods ended May 31, 2011 and 2010, respectively.   Options for common stock that were antidilutive totaled approximately 407,300 and 481,500 at May 31, 2011 and 2010, respectively.

 

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,
		2011			2010
Net income		$	24,605		$	18,387
Other comprehensive income (loss), net of tax:
Cash flow hedges - interest rate swaps, net of tax (1)		(500		)	399
Cash flow hedges - foreign currency, net of tax (2)		(190		)	872
Unrealized gain (loss) - auction rate securities, net of tax (3)		(37		)	156
Comprehensive income, net of tax		$	23,878		$	19,814

 

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,
		2011			2011
Unrealized holding losses on cash flow hedges - interest rate swaps, net of tax (1)		$	(6,852	)	$	(6,352	)
Unrealized holding losses on cash flow hedges - foreign currency, net of tax (2)		(804		)	(614		)
Temporary impairment loss on auction rate securities, net of tax (3)		(921		)	(884		)
Total accumulated other comprehensive loss		$	(8,577	)	$	(7,850	)

 

(1)  The change in unrealized loss on interest rate swap cash flow hedges is recorded net of tax benefit (expense) of $0.42 and ($0.21) million for the three month periods ended May 31, 2011 and 2010, respectively.  The unrealized holding loss on interest rate swap cash flow hedges included in accumulated other comprehensive loss includes net deferred tax benefits of $3.69 and $3.27 million at May 31, 2011 and February 28, 2011, respectively.

 

(2)  The change in unrealized loss on foreign currency cash flow hedges is recorded net of tax benefits (expense) of $0.09 and ($0.41) million for the three month periods ended May 31, 2011 and 2010, respectively.  The unrealized holding loss on foreign currency cash flow hedges included in accumulated other comprehensive loss, includes net deferred tax benefits of $0.39 and $0.30 million at May 31, 2011 and February 28, 2011, respectively.

 

(3) The change in temporary impairment loss on auction rate securities is recorded net of tax benefit (expense) of $0.04 and ($0.08) million for the three month periods ended May 31, 2011 and 2010, respectively.  The temporary impairment loss on auction rate securities included in accumulated other comprehensive loss, includes net deferred tax benefits of $0.50 and $0.46 million at May 31, 2011 and February 28, 2011, respectively.

 

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Note 6 – Segment Information

 

In the tables that follow, we present three segments: Personal Care, Housewares and Healthcare / Home Environment. 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, conditioners, 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 baby and toddler care products.  The Healthcare / Home Environment segment reports the operations of Kaz, which we acquired on December 31, 2010, as further discussed in Note (9) to these consolidated condensed financial statements. Kaz is a provider of a broad range of consumer products in two primary product categories consisting of healthcare and home environment. Significant products of the segment include humidifiers, de-humidifiers, vaporizers, thermometers, air purifiers, fans, portable heaters, heating pads and electronic insect control traps and devices.

 

All three 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 extensively through beauty supply retailers and wholesalers and the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores.  We use third-party manufacturers to produce our goods.

 

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

 

THREE MONTHS ENDED MAY 31, 2011 AND 2010
(in thousands)
		Personal						Healthcare /
May 31, 2011		Care			Housewares			Home Environment			Total
Sales revenue, net		$	122,718		$	52,946		$	95,803		$	271,467
Operating income (loss)		19,852			10,865			(63		)	30,654
Capital, license, trademark and other intangible expenditures		897			580			559			2,036
Depreciation and amortization		2,661			1,441			2,992			7,094
		Personal						Healthcare /
May 31, 2010		Care			Housewares			Home Environment			Total
Sales revenue, net		$	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

 

We compute operating income for each segment based on net sales revenue, less cost of goods sold, SG&A and any impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is comprised of SG&A directly associated with the segment, plus overhead expenses that are allocable to the segment.  We make allocations of overhead between operating segments using a number of relevant allocation criteria, depending on the nature of the expense, the most significant of which are relative revenues, estimates of relative labor expenditures, headcount, and facilities square footage.  For the three month period ended May 31, 2011, we began making an allocation of corporate overhead to the Healthcare / Home Environment segment.  This allocation totaled $1.50 million for the first quarter of the fiscal year. As we continue to further integrate the operations of the Healthcare / Home Environment segment, we expect to allocate the costs of certain operating functions that will likely be shared between segments.  When we decide such operating cost allocations are appropriate, there may be some additional reduction in the operating results of the Healthcare / Home Environment segment offset by increases in operating income of the Personal Care and Housewares segments. The extent of this operating income impact between the segments has not yet been determined.   We do not allocate other items of income and expense, including income taxes to operating segments.

 

- 8 -

 

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, 2011 AND FEBRUARY 28, 2011
(in thousands)
		Personal						Healthcare /
		Care			Housewares			Home Environment			Total
May 31, 2011		$	475,474		$	361,959		$	401,862		$	1,239,295
February 28, 2011		474,344			363,128			403,052			1,240,524

 

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)			2011			2011
Land		-			$	9,073		$	9,073
Building and improvements		10 - 40			65,513			65,605
Computer and other equipment		3 - 10			47,368			47,171
Tools, dies and molds		1 - 3			15,730			13,080
Transportation equipment		3 - 5			118			118
Furniture and fixtures		5 - 15			8,726			8,668
Construction in progress		-			3,002			4,200
Property and equipment, gross					149,530			147,915
Less accumulated depreciation					(67,339		)	(65,428		)
Property and equipment, net					$	82,191		$	82,487

 

Depreciation expense was $2.32 and $2.06 million for the three month periods ended May 31, 2011 and 2010, 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 $1.39 and $0.57 million for the three month periods ended May 31, 2011 and 2010, respectively.

 

Note 8 – Intangible Assets

 

Annual Impairment Testing in the First Quarter of Fiscal 2012 - The Company performed its annual evaluation of goodwill and indefinite-lived intangible assets for impairment during the first quarter of fiscal 2012.  As a result of its testing, the Company concluded no impairment charges were required as the estimated fair value of the indefinite-lived trademarks and licenses, reporting unit net assets, and the Company’s estimated enterprise value exceeded their respective carrying values as of the date of the evaluation.

 

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.

 

- 9 -

 

 

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, 2011												February 28, 2011
		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		$	81,841		$	(46,490	)	$	-		$	35,351		$	81,901		$	(46,490	)	$	-		$	35,411
Trademarks - indefinite		75,303			-			-			75,303			75,303			-			-			75,303
Trademarks - finite		150			-			(63		)	87			150			-			(62		)	88
Licenses - indefinite		10,300			-			-			10,300			10,300			-			-			10,300
Licenses - finite		19,564			-			(15,580		)	3,984			19,564			-			(15,450		)	4,114
Other intangibles - finite		49,401			-			(10,539		)	38,862			49,401			-			(9,048		)	40,353
Total Personal Care		236,559			(46,490		)	(26,182		)	163,887			236,619			(46,490		)	(24,560		)	165,569
Housewares:
Goodwill		166,131			-			-			166,131			166,131			-			-			166,131
Trademarks - indefinite		75,200			-			-			75,200			75,200			-			-			75,200
Other intangibles - finite		19,250			-			(10,254		)	8,996			19,320			-			(9,893		)	9,427
Total Housewares		260,581			-			(10,254		)	250,327			260,651			-			(9,893		)	250,758
Healthcare / Home Environment:
Goodwill		154,655			-			-			154,655			154,700			-			-			154,700
Other intangibles - finite		91,550			-			(4,075		)	87,475			91,550			-			(1,630		)	89,920
Total Healthcare / Home Environment		246,205			-			(4,075		)	242,130			246,250			-			(1,630		)	244,620
Total		$	743,345		$	(46,490	)	$	(40,511	)	$	656,344		$	743,520		$	(46,490	)	$	(36,083	)	$	660,947

 

The following table summarizes the amortization expense attributable to intangible assets for the three month periods ended May 31, 2011 and 2010, respectively, as well as our estimated amortization expense for the fiscal years ending the last day of each February 2012 through 2017.

 

AMORTIZATION OF INTANGIBLE ASSETS
(in thousands)
Aggregate Amortization Expense
For the three months ended
May 31, 2011		$	4,557
May 31, 2010		$	1,971
Estimated Amortization Expense
For the fiscal years ended
February 2012		$	17,806
February 2013		$	17,776
February 2014		$	17,227
February 2015		$	16,742
February 2016		$	16,599
February 2017		$	16,526

 

- 10 -

 

NOTE 9 - Acquisitions

 

Kaz, Inc. Acquisition – On December 31, 2010, we completed the merger of Kaz under the terms of an Agreement and Plan of Merger dated December 8, 2010, among us, Helen of Troy Texas Corporation, our wholly-owned subsidiary, KI Acquisition Corp., our indirect wholly-owned subsidiary, Kaz, and certain shareholders of Kaz. Pursuant to the terms of the merger agreement, all of the shares of capital stock of Kaz were cancelled and converted into a total cash purchase price of $271.50 million, subject to certain future adjustments. The acquisition was funded with $77.50 million of cash and $194.00 million in short- and long-term debt. Based in Southborough, Massachusetts, Kaz is a world leader in providing a broad range of consumer products in two primary product categories consisting of healthcare and home environment. Kaz sources, markets and distributes a number of well-recognized brands including: Vicks, Braun, Kaz, Smart-Temp, SoftHeat, Honeywell, Duracraft, Protec, Stinger and Nosquito.  The acquisition will help broaden the Company’s geographic footprint, increase our mutual significance with common customers and vendors, and expand our customer base worldwide.

 

The following schedule presents the identifiable assets and liabilities acquired, assumed or recognized at the acquisition date at their fair values. These balances are provisional and may be subject to additional adjustment.

 

KAZ - NET ASSETS RECORDED UPON ACQUISITION AT DECEMBER 31, 2010
(in thousands)
Assets:
Cash		$	4,258
Receivables		70,792
Inventory		62,415
Prepaid expenses and other current assets		2,197
Property and equipment		4,083
Goodwill		154,700
Other intangible assets - finite		91,550
Deferred tax assets		12,376
Other assets		3,098
Subtotal - assets		405,469
Liabilities:
Accounts payable		41,371
Accrued expenses		64,118
Income taxes payable		1,496
Deferred tax liabilities		24,303
Liabilities for uncertain tax positions		1,453
Deferred compensation		1,230
Subtotal - liabilities		133,971
Net assets recorded		$	271,498

 

The fair values of the intangible assets acquired were estimated by applying income and market approaches. These fair value measurements were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. Key assumptions included various discount rates based upon a 10.25 percent weighted average cost of capital, royalty rates ranging from 2.00 to 3.50 percent used in the determination of patent estate values and customer attrition rates of 10.00 percent per year used in the determination of customer list values.

 

Gross receivables of $77.49 million have been recorded in the transaction. We estimate that $6.70 million of gross receivables will not be collected. The goodwill of $154.70 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Kaz. All of the goodwill was assigned to the Company’s Healthcare / Home Environment segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

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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 antiperspirant and deodorant businesses from Innovative Brands, LLC for a net 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 market Pert Plus and Sure products primarily into retail trade channels.

 

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. All of the 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 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 PLUS AND SURE - NET ASSETS ACQUIRED ON MARCH 31, 2010
(in thousands)
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 were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. Key assumptions included various discount rates based upon a 15.80 percent weighted average cost of capital, royalty rates of 5.00 percent used in the determination of trademark values and customer attrition rates of 11.50 percent per year used in the determination of customer list values.

 

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Note 10 – Short Term Debt

 

We have a Credit Agreement (the “2010 RCA”) with Bank of America, N.A. that provides for an unsecured total revolving commitment of up to $150.00 million, subject to certain terms and limitations as described below. The commitment under the 2010 RCA terminates on December 30, 2015.  Borrowings under the 2010 RCA accrue interest at a “Base Rate” plus a margin of 0.25 to 1.375 percent per annum based on the Leverage Ratio (as defined in the 2010 RCA) at the time of borrowing. The base rate is equal to the highest of the Federal Funds Rate (as defined in the 2010 RCA) plus 0.50 percent, Bank of America’s prime rate or the one month LIBOR rate plus 1.00 percent. Alternatively, if we elect, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 1.25 to 2.375 percent per annum based upon the Leverage Ratio at the time of the borrowing. We incur loan commitment fees at a rate ranging from 0.30 to 0.50 percent per annum on the unused balance of the 2010 RCA. We incur letter of credit fees under the 2010 RCA at a rate ranging from 1.25 to 2.375 percent per annum on the face value of any letter of credit. Outstanding letters of credit reduce the borrowing availability under the 2010 RCA on a dollar for dollar basis. The 2010 RCA and our other debt are unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. As of May 31, 2011, there were $53.20 million in revolving loans and $1.50 million of open letters of credit outstanding against the 2010 RCA.  For the three months ended May 31, 2011, borrowings under the 2010 RCA incurred interest charges at rates ranging from 1.95 to 4.00 percent.  As of May 31, 2011, the amount available for borrowings under the 2010 RCA was $95.30 million.

 

The 2010 RCA and our other debt agreements require the maintenance of maximum debt leverage and interest coverage ratios, specify minimum consolidated net worth levels and contain other customary covenants, which restrict us, among other things, from incurring liens on any of our properties, except under certain conditions, and limit our ability to pay dividends and repurchase shares of our common stock. As of May 31, 2011, all our debt agreements effectively limited our ability to incur more than an estimated $199.70 million of additional debt from all sources, including draws on the 2010 RCA. As of May 31, 2011, we were in compliance with the terms of the 2010 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,
		2011			2011
Accrued sales returns, discounts and allowances		$	34,639		$	32,136
Accrued warranty returns		24,369			24,021
Accrued compensation		13,962			24,379
Accrued advertising		7,814			10,159
Accrued interest		2,900			1,973
Accrued royalties		6,694			7,265
Accrued legal expenses and professional fees		5,958			6,851
Accrued benefits and payroll taxes		10,848			10,100
Accrued freight		1,727			1,950
Accrued property, sales and other taxes		5,716			4,668
Kaz acquisition liabilities		4,261			4,261
Derivative liabilities, current		5,317			4,564
Other		8,739			9,293
Total accrued expenses and other current liabilities		$	132,944		$	141,620

 

Kaz acquisition liabilities at May 31, 2011 and February 28, 2011 consist of $4.26 million of additional purchase price due to former Kaz owners as a working capital adjustment settlement.

 

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