Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
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For
the quarterly period ended November 30, 2006
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
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For
the transition period from _________ to
_________
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Commission
file number: 001-14669
HELEN
OF TROY LIMITED
(Exact
name of registrant as specified in its charter)
Bermuda
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74-2692550
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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Clarenden
House
Church
Street
Hamilton,
Bermuda
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(Address
of principal executive offices)
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1
Helen of Troy Plaza
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El
Paso, Texas
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79912
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(Registrant’s
United States Mailing Address )
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(Zip
Code)
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(915)
225-8000
(Registrant’s
telephone number, including area code)
[Not
Applicable]
(Former
name, former address and former fiscal year, if changed since last
report)
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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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
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Outstanding
at January 5, 2007
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Common
Shares, $0.10 par value per share
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30,258,943
shares
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HELEN
OF TROY LIMITED AND SUBSIDIARIES
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Page
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3
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4
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5
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6
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7
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25
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41
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44
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45
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47
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50
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51
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52
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HELEN
OF TROY LIMITED AND SUBSIDIARIES
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(in
thousands, except shares and par value)
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November
30,
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February
28,
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2006
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2006
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(unaudited)
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Assets
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Current
assets:
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Cash
and cash equivalents
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$
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59,017
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$
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18,320
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Trading
securities, at market value
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221
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97
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Foreign
currency forward contracts
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584
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Receivables
- principally trade, less allowance of $1,157 and $850
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168,445
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107,289
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Inventories
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146,155
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168,401
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Prepaid
expenses
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6,613
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5,793
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Deferred
income tax benefits
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13,360
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10,690
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Total
current assets
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393,811
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311,174
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Property
and equipment, at cost less accumulated depreciation of $32,827
and
$27,039
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98,369
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100,703
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Goodwill
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201,003
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201,003
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Trademarks,
net of accumulated amortization of $229 and $225
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158,061
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157,711
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License
agreements, net of accumulated amortization of $15,593 and
$14,514
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26,722
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27,801
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Other
intangible assets, net of accumulated amortization of $4,177 and
$3,044
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15,019
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15,757
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Tax
certificates
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25,144
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28,425
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Other
assets
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13,846
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15,170
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$
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931,975
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$
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857,744
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Current
portion of long-term debt
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$
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10,000
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$
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10,000
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Accounts
payable, principally trade
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42,607
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30,175
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Accrued
expenses
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76,304
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54,145
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Income
taxes payable
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27,848
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31,286
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Total
current liabilities
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156,759
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125,606
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Long-term
compensation liability
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1,735
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1,706
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Deferred
income tax liability
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164
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81
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Long-term
debt, less current portion
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257,660
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254,974
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Total
liabilities
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416,318
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382,367
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Commitments
and contingencies (See Notes 3, 11 and 13)
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Stockholders'
equity
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Cumulative
preferred shares, non-voting, $1.00 par. Authorized 2,000,000 shares;
none
issued
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—
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Common
shares, $.10 par. Authorized 50,000,000 shares; 30,255,243 and
30,013,172
shares issued and outstanding
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3,025
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3,001
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Additional
paid-in-capital
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94,417
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90,300
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Retained
earnings
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421,282
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380,916
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Accumulated
other comprehensive income (loss)
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(3,067
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)
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1,160
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Total
stockholders' equity
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515,657
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475,377
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$
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931,975
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$
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857,744
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See
accompanying notes to consolidated condensed financial
statements.
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HELEN
OF TROY LIMITED AND SUBSIDIARIES
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(in
thousands, except per share data)
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Three
Months Ended November 30,
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Nine
Months Ended November 30,
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2006
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2005
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2006
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2005
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Net
sales
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$
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213,437
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$
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197,458
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$
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491,050
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$
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455,239
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Cost
of sales
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121,960
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111,414
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274,964
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250,285
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Gross
profit
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91,477
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86,044
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216,086
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204,954
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Selling,
general, and administrative expense
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62,375
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57,396
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159,428
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146,878
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Operating
income
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29,102
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28,648
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56,658
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58,076
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Other
income (expense):
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Interest
expense
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(4,487
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)
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(4,259
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)
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(13,689
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)
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(11,317
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)
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Other
income (expense), net
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863
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(623
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)
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1,940
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(277
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)
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Total
other income (expense)
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(3,624
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)
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(4,882
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)
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(11,749
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)
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(11,594
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Earnings
before income taxes
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25,478
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23,766
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44,909
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46,482
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Income
tax expense (benefit):
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|
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Current
|
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3,938
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|
1,287
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5,710
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2,393
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Deferred
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(1,273
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)
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(187
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)
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(1,167
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)
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1,423
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Net
earnings
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$
|
22,813
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$
|
22,666
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$
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40,366
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$
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42,666
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Earnings
per share:
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Basic
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$
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0.76
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$
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0.76
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$
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1.34
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$
|
1.43
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Diluted
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$
|
0.72
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$
|
0.72
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$
|
1.28
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$
|
1.34
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Weighted
average common shares used in
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computing
net earnings per share
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Basic
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30,160
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29,935
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30,074
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29,895
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Diluted
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31,769
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31,272
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31,578
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31,767
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|
|
|
|
|
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|
See
accompanying notes to consolidated condensed financial
statements.
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HELEN
OF TROY LIMITED AND SUBSIDIARIES
|
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(in
thousands)
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Nine
Months Ended November 30,
|
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2006
|
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2005
|
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Cash
flows from operating activities:
|
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|
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Net
earnings
|
|
$
|
40,366
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$
|
42,666
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Adjustments
to reconcile net earnings to net cash provided / (used) by operating
activities
|
|
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Depreciation
and amortization
|
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|
10,756
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8,738
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|
Provision
for doubtful receivables
|
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|
(307
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)
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|
(1,086
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)
|
Stock-based
compensation expense
|
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|
499
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|
|
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Unrealized
(gain) / loss - trading securities
|
|
|
(34
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)
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|
30
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|
Deferred
taxes, net
|
|
|
(1,288
|
)
|
|
309
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|
Gain
on the sale of property, plant and equipment
|
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|
(419
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)
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Changes
in operating assets and liabilities:
|
|
|
|
|
|
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Accounts
receivable
|
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|
(60,849
|
)
|
|
(52,816
|
)
|
Forward
contracts
|
|
|
5,429
|
|
|
(3,312
|
)
|
Inventories
|
|
|
22,246
|
|
|
(47,266
|
)
|
Prepaid
expenses
|
|
|
198
|
|
|
3,105
|
|
Other
assets
|
|
|
2,582
|
|
|
(276
|
)
|
Accounts
payable
|
|
|
12,432
|
|
|
22,711
|
|
Accrued
expenses
|
|
|
11,687
|
|
|
7,226
|
|
Income
taxes payable
|
|
|
(3,478
|
)
|
|
307
|
|
Net
cash provided / (used) by operating activities
|
|
|
39,860
|
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|
(19,664
|
)
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|
|
|
|
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Cash
flows from investing activities:
|
|
|
|
|
|
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|
Capital,
license, trademark, and other intangible expenditures
|
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|
(6,287
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)
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|
(48,302
|
)
|
Proceeds
from the sale of property, plant and equipment
|
|
|
666
|
|
|
150
|
|
Net
cash used by investing activities
|
|
|
(5,621
|
)
|
|
(48,152
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
7,660
|
|
|
4,974
|
|
Repayment
of debt
|
|
|
(4,974
|
)
|
|
|
|
Net
borrowings on revolving line of credit
|
|
|
|
|
|
60,000
|
|
Payment
of financing costs
|
|
|
|
|
|
(91
|
)
|
Proceeds
from exercise of stock options and employee stock
purchases
|
|
|
3,642
|
|
|
1,135
|
|
Share-based
compensation tax benefit
|
|
|
130
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
6,458
|
|
|
66,018
|
|
Net
increase / (decrease) in cash and cash equivalents
|
|
|
40,697
|
|
|
(1,798
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
18,320
|
|
|
21,752
|
|
Cash
and cash equivalents, end of period
|
|
$
|
59,017
|
|
$
|
19,954
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
12,771
|
|
$
|
10,587
|
|
Income
taxes paid (net of refunds)
|
|
$
|
8,562
|
|
$
|
3,015
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated condensed financial
statements.
|
|
|
|
|
|
|
|
HELEN
OF TROY LIMITED AND SUBSIDIARIES
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Three
Months Ended November 30,
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings, as reported
|
|
$
|
22,813
|
|
$
|
22,666
|
|
$
|
40,366
|
|
$
|
42,666
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges - Interest Rate Swaps
|
|
|
(1,793
|
)
|
|
|
|
|
(1,793
|
)
|
|
|
|
Cash
flow hedges - Foreign Currency
|
|
|
(956
|
)
|
|
1,561
|
|
|
(2,434
|
)
|
|
4,252
|
|
Comprehensive
income
|
|
$
|
20,064
|
|
$
|
24,227
|
|
$
|
36,139
|
|
$
|
46,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated condensed financial
statements.
|
|
|
|
|
|
HELEN
OF TROY LIMITED AND SUBSIDIARIES
November
30, 2006
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 November 30, 2006
and
February 28, 2006, and the results of our consolidated operations for the
three-month and nine-month periods ended November 30, 2006 and 2005. The same
accounting policies are followed in preparing quarterly financial data as are
followed in preparing annual data.
Due
to
the seasonal nature of our business, quarterly revenues, expenses, earnings
and
cash flows are not necessarily indicative of the results that may be expected
for the full fiscal year. While we believe that the disclosures presented are
adequate and the consolidated condensed financial statements are not misleading,
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”).
We
have
reclassified certain prior-period amounts, and in some cases provided additional
information in our consolidated condensed financial statements and accompanying
footnotes to conform to the current period’s presentation. These
reclassifications have no impact on previously reported net
earnings.
In
these
consolidated condensed financial statements, accompanying footnotes, and
elsewhere in this report, amounts shown are in thousands of U.S. Dollars, except
as otherwise indicated.
Note
2 - Adoption
of New Accounting Standard for Share-Based Payments
The
Company has equity awards outstanding under four share-based compensation plans.
The plans consist of two employee stock option and restricted stock plans,
a
non-employee director stock option plan, and an employee stock purchase plan.
These plans are described below. The plans are generally administered by the
Compensation Committee of the Board of Directors, consisting of non-employee
directors.
Effective
March 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), utilizing the
modified prospective method whereby prior periods will not be restated for
comparability. SFAS 123R requires recognition of share-based compensation
expense in the statements of income over the vesting period based on the fair
value of the award at the grant date. Previously, the Company used the intrinsic
value method under Accounting Principles Board Opinion No. 25, ‘‘Accounting for
Stock Issued to Employees’’ (‘‘APB 25’’), as amended by related interpretations
of the Financial Accounting Standards Board (“FASB”). Under APB 25, no
compensation cost was recognized for stock options because the quoted market
price of the stock at the grant date was equal to the amount per share the
employee had to pay to acquire the stock after fulfilling the vesting period.
SFAS 123R supersedes APB 25 as well as Statement of Financial Accounting
Standard 123 "Accounting for Stock-Based Compensation", which permitted pro
forma footnote disclosures to report the difference between the fair value
method and the intrinsic value method.
Under
stock option and restricted stock plans adopted in 1994 and 1998, as amended
(the "1994 Plan" and the "1998 Plan," respectively), we have reserved a total
of
14,750,000 common shares for issuance to key officers and employees. Under
these
plans, we grant options to purchase our common shares at a price equal to or
greater than the fair market value on the grant date. Both plans contain
provisions for incentive stock options, non-qualified stock options and
restricted share grants. Generally, options granted under the 1994 Plan and
the
1998 Plan become exercisable immediately or over one, four, or five-year vesting
periods and expire on dates ranging from seven to ten years from the date of
grant. As of November 30, 2006, 569,086 shares remained available for issue
and
6,418,858 options were outstanding under these plans.
Under
a
stock option plan for non-employee directors (the "Directors’ Plan") adopted in
fiscal 1996, we reserved a total of 980,000 of our common shares for issuance
to
non-employee members of the Board of Directors. We granted options under the
Directors' Plan at a price equal to the fair market value of our common shares
at the date of grant. Options granted under the Directors' Plan vest one year
from the date of issuance and expire ten years after issuance. The Directors’
Plan expired by its terms on June 6, 2005. On that date, the remaining 284,000
shares available for issue expired. As of November 30, 2006, 260,000 options
were outstanding under this plan.
Under
an
employee stock purchase plan (the "Stock Purchase Plan"), we have reserved
a
total of 500,000 common shares for issuance to our employees, nearly all of
whom
are eligible to participate. Under the terms of the Stock Purchase Plan,
employees authorize the withholding of from 1 percent to 15 percent of their
wages or salaries to purchase our common shares. The purchase price for shares
acquired under the Stock Purchase Plan is equal to the lower of 85 percent
of
the share’s fair market value on either the first day of each option period or
the last day of each period. During the second quarter of fiscal 2007, plan
participants acquired 12,485 shares at a price of $15.21 per share under the
Stock Purchase Plan. During the third quarter of fiscal 2007, no shares were
issued under the Stock Purchase Plan. At November 30, 2006, 319,231 shares
remained available for future issue under this plan.
For
the
three-month and nine-month periods ending November 30, 2006, the Company
expensed $130 and $500 pre-tax, respectively, for stock options issued and
employee share purchases under the above plans. These amounts were classified
in
selling, general, and administrative expense in the consolidated condensed
statements of income for the fiscal periods then ended. The following table
highlights the impact of share based compensation expense:
SHARE
BASED PAYMENT EXPENSE
|
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended November 30,
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
|
|
2005
(1)
|
|
2006
|
|
2005
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
130
|
|
$
|
|
|
$
|
450
|
|
$
|
|
|
Employee
stock purchase plan
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
Share-based
payment expense
|
|
$
|
130
|
|
$
|
|
|
$
|
500
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
payment expense, net of income tax benefits of $36 and
$130 for the three and nine months ended November 30,
2006.
|
|
$
|
94
|
|
$
|
|
|
$
|
370
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share impact of share based payment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
$
|
|
|
$
|
0.01
|
|
$
|
|
|
Diluted
|
|
$
|
0.00
|
|
$
|
|
|
$
|
0.01
|
|
$
|
|
|
(1)
Prior
year amounts are before adoption of SFAS 123R under the modified prospective
method. Under this method, periods prior to adoption are not restated.
The
following table provides the pro forma effect on net earnings and earnings
per
share as if the fair-value-based measurement method had been applied to all
stock-based compensation for the three-month and nine-month periods ended
November 30, 2005:
PRO
FORMA NET INCOME AND PRO FORMA EARNINGS PER SHARE
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
November
30, 2005
|
|
|
|
(Three
Months)
|
|
(Nine
Months)
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
22,666
|
|
$
|
42,666
|
|
Share-based
payment expense, net of income tax benefit of $170 and $408,
respectively
|
|
|
299
|
|
|
1,049
|
|
Pro
forma
|
|
$
|
22,367
|
|
$
|
41,617
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.76
|
|
$
|
1.43
|
|
Pro
forma
|
|
|
0.75
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.72
|
|
$
|
1.34
|
|
Pro
forma
|
|
|
0.72
|
|
|
1.31
|
|
The
fair
value of all share-based payment awards are estimated using the Black-Scholes
option pricing model with the following assumptions and weighted-average fair
values for the three-month and nine-month periods ended November 30, 2006 and
2005:
FAIR
VALUE OF AWARDS AND ASSUMPTIONS USED
|
|
|
|
|
|
|
Three
Months Ended November 30,
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
[1]
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of grants (in
dollars)
|
|
|
N/A
|
|
$
|
6.78
|
|
$
|
7.26
|
|
$
|
7.25
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
4.33
|
%
|
|
4.95
|
%
|
|
4.20
|
%
|
Dividend
yield
|
|
|
N/A
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected
volatility
|
|
|
N/A
|
|
|
41.45
|
%
|
|
39.90
|
%
|
|
41.66
|
%
|
Expected
life (in
years)
|
|
|
N/A
|
|
|
3.86
|
|
|
4.11
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1]
No stock options were granted during the quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following describes how certain assumptions affecting the estimated fair value
of options or discounted employee share purchases (“share based payments”) are
determined. The risk-free interest rate is based on U.S. Treasury securities
with maturities equal to the expected life of the share based payments. The
dividend yield is computed as zero because the Company has not historically
paid
dividends nor does it expect to at this time. Expected volatility is based
on a
weighted average of the market implied volatility and historical volatility
over
the expected life of the underlying share based payments. The Company uses
its
historic experience to estimate the expected life of each stock-option grant
and
also to estimate the impact of exercise, forfeitures, termination and holding
period behavior for fair value expensing purposes.
Employee
share purchases vest immediately at the time of purchase. Accordingly, the
fair
value award associated with their discounted purchase price is expensed at
the
time of purchase.
A
summary
of option activity as of November 30, 2006, and changes during the nine-months
then ended is as follows:
SUMMARY
OF STOCK OPTION ACTIVITY
|
|
|
|
(in
thousands, except contractual term and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
Remaining
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Contractual
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Grant
Date
|
|
Term
|
|
Intrinsic
|
|
|
|
Options
|
|
Price
|
|
Fair
Value
|
|
(in
years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at February 28, 2006
|
|
|
6,923
|
|
$
|
14.83
|
|
$
|
5.52
|
|
|
4.83
|
|
$
|
39,317
|
|
Granted
|
|
|
21
|
|
|
18.82
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(228
|
)
|
|
(12.60
|
)
|
|
|
|
|
|
|
|
|
|
Forfeited
/ expired
|
|
|
(37
|
)
|
|
(19.80
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2006
|
|
|
6,679
|
|
$
|
14.89
|
|
$
|
5.52
|
|
|
4.04
|
|
$
|
59,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at November 30, 2006
|
|
|
6,427
|
|
$
|
14.79
|
|
$
|
5.48
|
|
|
3.92
|
|
$
|
57,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of options exercised during the nine-month period
ended November 30, 2006 was $2,060. A summary of non-vested option activity
as
of November 30, 2006, and changes during the nine-month period then ended is
as
follows:
NON-VESTED
STOCK OPTION ACTIVITY
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Non-Vested
|
|
Grant
Date
|
|
|
|
Options
|
|
Fair
Value
|
|
|
|
|
|
|
|
Outstanding
at February 28, 2006
|
|
|
410
|
|
$
|
6.27
|
|
Granted
|
|
|
21
|
|
|
7.16
|
|
Vested
or forfeited
|
|
|
(179
|
)
|
|
(5.96
|
)
|
Outstanding
at November 30, 2006
|
|
|
252
|
|
$
|
6.56
|
|
|
|
|
|
|
|
|
|
A
summary
of the Company’s total unrecognized share-based compensation cost as of November
30, 2006 is as follows:
UNRECOGNIZED
SHARE BASED COMPENSATION EXPENSE
|
|
|
|
(in
thousands, except weighted average expense period
data)
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Period
of Expense
|
|
|
|
Unearned
|
|
Recognition
|
|
|
|
Compensation
|
|
(in
months)
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
1,216
|
|
|
41.1
|
|
Note
3 - Litigation
Securities
Class Action Litigation - Class
action lawsuits have been filed and consolidated into one action against the
Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and
Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial
Officer, on behalf of purchasers of publicly traded securities of the Company.
The Company understands that the plaintiffs allege violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and Rule 10b-5 thereunder, on the grounds that the Company and the two
officers engaged in a scheme to defraud the Company’s shareholders through the
issuance of positive earnings guidance intended to artificially inflate the
Company’s share price so that Mr. Rubin could sell almost 400,000 of the
Company’s common shares at an inflated price. The plaintiffs are seeking
unspecified damages, interest, fees, costs, an accounting of the insider trading
proceeds, and injunctive relief, including an accounting of and the imposition
of a constructive trust and/or asset freeze on the defendants’ insider trading
proceeds. The class period stated in the complaint was October 12, 2004 through
October 10, 2005.
The
lawsuit was brought in the United States District Court for the Western District
of Texas. The Company intends to defend the foregoing lawsuit vigorously, but,
because the lawsuit is still in the preliminary stages, the Company cannot
predict the outcome and is not currently able to evaluate the likelihood of
success or the range of potential loss, if any, that might be incurred in
connection with the action. However, if the Company were to lose on any issues
connected with the lawsuit or if the lawsuit is not settled on favorable terms,
the judgement or settlement may have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows. There
is
a risk that such litigation could result in substantial costs and divert
management’s attention and resources from its business, which could adversely
affect the Company's business. The Company carries insurance that provides
an
aggregate coverage of $20 million after a self-insured retention of $500
thousand for the period during which the claims were filed, but cannot evaluate
at this time whether such coverage will be adequate to cover losses, if any,
arising out of the lawsuit.
On
May
15, 2006, the Company filed a motion to dismiss the aforementioned lawsuit
citing numerous deficiencies with the claims asserted in the lawsuit. On June
29, 2006, the plaintiffs filed with the court their opposition to the Company’s
motion to dismiss. On July 17, 2006, the Company filed a reply rebutting the
plaintiffs’ June 29th opposition. As of the date this report was filed, this
matter was before the court for its consideration.
Other
Matters -
We
are
involved in various other legal claims and proceedings in the normal course
of
operations. We believe the outcome of these matters will not have a material
adverse effect on our consolidated financial position, results of operations,
or
liquidity.
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 plus
the effects of dilutive securities. The number of dilutive securities was
1,609,412 and 1,504,504 for the three- and nine-month periods ended November
30,
2006, respectively, and 1,337,269 and 1,872,714 for the three- and nine-month
periods ended November 30, 2005. All dilutive securities during these periods
consisted of stock options issued under our stock option plans. There were
options to purchase common shares that were outstanding but not included in
the
computation of earnings per share because the exercise prices of such options
were greater than the average market prices of our common shares. These options
totaled 536,300 and 946,368 at November 30, 2006 and 2005, respectively.
Note
5 - Segment
Information
In
the
tables that follow, we present two segments: Personal Care and Housewares.
The
Personal Care segment’s products include hair dryers, straighteners, curling
irons, hairsetters, women’s shavers, mirrors, hot air brushes, home hair
clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes,
combs, hair accessories, liquid hair styling products, men’s fragrances, men’s
deodorants, body powder, and skin care products. The
Housewares segment’s products include kitchen tools, cutlery, bar and wine
accessories, household cleaning tools, tea kettles, trash cans, storage and
organization products, hand tools, gardening tools, kitchen mitts and trivets,
and barbeque tools. Both
segments sell their portfolio of products principally through mass merchants,
general retail and specialty retail outlets in the United States and other
countries.
The
accounting policies of our segments are the same as those described in the
summary of significant accounting policies in Note 1 to the consolidated
financial statements in our 2006 Annual Report in Form10-K,
except as discussed below.
Operating
profit for each operating segment is computed based on net sales, less cost
of
goods sold and any selling, general, and administrative expenses ("SG&A")
associated with the segment. The selling, general, and administrative expenses
used to compute each segment's operating profit are comprised of SG&A
directly associated with the segment, plus overhead expenses that are allocable
to the operating segment. In connection with the acquisition of our Housewares
segment, the seller agreed to perform certain operating functions for the
segment for a transitional period of time that ended February 28, 2006. The
costs of these functions were reflected in SG&A for the Housewares segment’s
operating income. During the transitional period, we did not make an allocation
of our corporate overhead to Housewares. For the three-month and nine-month
periods ended November 30, 2006, we began making an allocation of corporate
overhead and distribution center expenses to Housewares in lieu of transition
charges previously recorded. For the three-month and nine-month periods ended
November 30, 2006, we allocated expenses totaling $3,690 and $9,448,
respectively, to the Housewares segment, some of which were previously absorbed
by the Personal Care segment. For the three-month and nine-month periods ended
November 30, 2005, transition charges of $3,303 and $8,087, respectively, were
used to compute the Housewares segments operating income.
Major
expense categories presently allocated to the Housewares segment, in lieu of
the
transition charges the Housewares segment incurred prior to March 1, 2006,
include the following:
|
Customer
Service;
|
|
Credit,
Collection and Accounting;
|
|
Distribution
Facility and Equipment Costs;
|
|
Distribution
Labor Charges; and
|
|
General
and Administrative Overhead.
|
During
the first quarter of fiscal 2007, we completed the transition of our Housewares
segment’s operations to our internal operating systems and our new distribution
facility in Southaven, Mississippi. The process of consolidating our domestic
appliance inventories into the same new facility is still underway with major
activity planned during the last quarter of fiscal 2007. As a result of these
transitions, we have incurred, and will continue to incur, additional expenses
that we believe will decline as operations in the new facility stabilize at
some
point later in fiscal 2008.
We
are in
the process of re-evaluating our allocation methodology, and plan to change
our
methodology in fiscal 2008 to better reflect the evolving economics of our
operation. At that time, we expect the new methodology to result in some
reduction in operating income for the Housewares segment, offset by an increase
in the operating income for the Personal Care segment. Until we finalize our
approach, the extent of this operating income impact between the segments cannot
be determined.
Other
items of income and expense, including income taxes, are not allocated to
operating segments.
The
following tables contain segment information for the periods covered by our
consolidated condensed statements of income:
THREE
MONTHS ENDED NOVEMBER 30, 2006 AND 2005
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
November
30, 2006
|
|
Care
|
|
Housewares
|
|
Total
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
173,741
|
|
$
|
39,696
|
|
$
|
213,437
|
|
Operating
income
|
|
|
20,077
|
|
|
9,025
|
|
|
29,102
|
|
Capital,
license, trademark and other intangible expenditures
|
|
|
1,456
|
|
|
1,083
|
|
|
2,539
|
|
Depreciation
and amortization
|
|
|
2,182
|
|
|
1,227
|
|
|
3,409
|
|
|
|
|
Personal
|
|
|
|
|
|
November
30, 2005
|
|
Care
|
|
Housewares
|
|
Total
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
161,007
|
|
$
|
36,451
|
|
$
|
197,458
|
|
Operating
income
|
|
|
19,045
|
|
|
9,603
|
|
|
28,648
|
|
Capital,
license, trademark and other intangible expenditures
|
|
|
28,478
|
|
|
10,634
|
|
|
39,112
|
|
Depreciation
and amortization
|
|
|
2,378
|
|
|
742
|
|
|
3,120
|
|
NINE
MONTHS ENDED NOVEMBER 30, 2006 AND 2005
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
November
30, 2006
|
|
Care
|
|
Housewares
|
|
Total
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
390,041
|
|
$
|
101,009
|
|
$
|
491,050
|
|
Operating
income
|
|
|
35,970
|
|
|
20,688
|
|
|
56,658
|
|
Capital,
license, trademark and other intangible expenditures
|
|
|
4,436
|
|
|
1,851
|
|
|
6,287
|
|
Depreciation
and amortization
|
|
|
7,081
|
|
|
3,675
|
|
|
10,756
|
|
|
|
|
Personal
|
|
|
|
|
|
November
30, 2005
|
|
Care
|
|
Housewares
|
|
Total
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
362,384
|
|
$
|
92,855
|
|
$
|
455,239
|
|
Operating
income
|
|
|
33,396
|
|
|
24,680
|
|
|
58,076
|
|
Capital,
license, trademark and other intangible expenditures
|
|
|
36,795
|
|
|
11,507
|
|
|
48,302
|
|
Depreciation
and amortization
|
|
|
6,443
|
|
|
2,295
|
|
|
8,738
|
|
The
following tables contain net assets allocable to each segment for the periods
covered by our consolidated condensed balance sheets:
IDENTIFIABLE
NET ASSETS AT NOVEMBER 30, 2006 AND FEBRUARY 28,
2006
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
|
Care
|
|
Housewares
|
|
Total
|
|
|
|
|
|
|
|
|
|
November
30, 2006
|
|
$
|
582,426
|
|
$
|
349,549
|
|
$
|
931,975
|
|
February
28, 2006
|
|
|
512,594
|
|
|
345,150
|
|
|
857,744
|
|
Note
6 - Property
and Equipment
A
summary
of property and equipment is as follows:
|
|
|
Estimated
|
|
|
|
|
|
|
|
Useful
Lives
|
|
November
30,
|
|
February
28,
|
|
|
|
(Years)
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
$
|
9,537
|
|
$
|
9,623
|
|
Building
and improvements
|
|
|
10
- 40
|
|
|
62,577
|
|
|
62,374
|
|
Computer
and other equipment
|
|
|
3
- 10
|
|
|
39,529
|
|
|
37,601
|
|
Molds
and tooling
|
|
|
1
- 3
|
|
|
6,138
|
|
|
4,907
|
|
Transportation
equipment
|
|
|
3
- 5
|
|
|
3,902
|
|
|
3,875
|
|
Furniture
and fixtures
|
|
|
5
- 15
|
|
|
7,722
|
|
|
7,865
|
|
Construction
in process
|
|
|
|
|
|
1,791
|
|
|
457
|
|
Information
system under development
|
|
|
|
|
|
|
|
|
1,040
|
|
|
|
|
|
|
|
131,196
|
|
|
127,742
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(32,827
|
)
|
|
(27,039
|
)
|
Property
and equipment, net
|
|
|
|
|
$
|
98,369
|
|
$
|
100,703
|
|
|
|
|
|
|
|
|
|
|
|
|
On
May
31, 2006, we sold 3.9 acres of raw land adjacent to our El Paso, Texas office
and distribution center. The land was sold for $666 and we recorded a gain
on
the sale of $422.
On
July
7, 2006, we acquired a 3,600 square foot office facility in Mexico City for
approximately $830. To date we have paid approximately $179 to remodel and
furnish this and other facilities and expect to incur approximately $21 of
additional capital expenditures to complete the remodeling and furnishing of
facilities.
During
the fiscal quarter ended November 30, 2006, we paid approximately $1,029 against
a $1,500 commitment to acquire and install additional storage racking, and
associated handling equipment for our new Southaven, Mississippi distribution
facility.
We
recorded depreciation of $2,531 and $7,499 for the three-month and nine-month
periods ended November 30, 2006, respectively, and $1,962 and $5,227 for the
three-month and nine-month periods ended November 30, 2005, respectively.
Note
7 - Intangible
Assets
In
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), we do not record amortization expense
on goodwill or other intangible assets that have indefinite useful lives.
Amortization expense is recorded for intangible assets with definite useful
lives. SFAS 142 also requires at least an annual impairment review of goodwill
and other intangible assets. Any asset deemed to be impaired is to be written
down to its fair value. We completed our annual impairment test during the
first
quarter of fiscal 2007 as required by SFAS 142, and have determined that none
of
our goodwill or other intangible assets were impaired at that time.
The
following table discloses information regarding the carrying amounts and
associated accumulated amortization for all intangible assets and indicates
the
operating segments to which they belong:
INTANGIBLE
ASSETS
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
30, 2006
|
|
February
28, 2006
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Gross
|
|
Amortization
|
|
Net
|
|
|
|
Segment
|
|
|
|
|
|
(if
Applicable)
|
|
|
|
|
|
(if
Applicable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OXO
|
|
|
Housewares
|
|
|
Indefinite
|
|
$
|
165,934
|
|
$
|
|
|
$
|
165,934
|
|
$
|
165,934
|
|
$
|
|
|
$
|
165,934
|
|
All
other goodwill
|
|
|
Personal
Care
|
|
|
Indefinite
|
|
|
35,069
|
|
|
|
|
|
35,069
|
|
|
35,069
|
|
|
|
|
|
35,069
|
|
|
|
|
|
|
|
|
|
|
201,003
|
|
|
|
|
|
201,003
|
|
|
201,003
|
|
|
|
|
|
201,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OXO
|
|
|
Housewares
|
|
|
Indefinite
|
|
|
75,554
|
|
|
|
|
|
75,554
|
|
|
75,200
|
|
|
|
|
|
75,200
|
|
Brut
|
|
|
Personal
Care
|
|
|
Indefinite
|
|
|
51,317
|
|
|
|
|
|
51,317
|
|
|
51,317
|
|
|
|
|
|
51,317
|
|
All
other - definite lives
|
|
|
Personal
Care
|
|
|
[1]
|
|
|
338
|
|
|
(229
|
)
|
|
109
|
|
|
338
|
|
|
(225
|
)
|
|
113
|
|
All
other - indefinite lives
|
|
|
Personal
Care
|
|
|
Indefinite
|
|
|
31,081
|
|
|
|
|
|
31,081
|
|
|
31,081
|
|
|
|
|
|
31,081
|
|
|
|
|
|
|
|
|
|
|
158,290
|
|
|
(229
|
)
|
|
158,061
|
|
|
157,936
|
|
|
(225
|
)
|
|
157,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seabreeze
|
|
|
Personal
Care
|
|
|
Indefinite
|
|
|
18,000
|
|
|
|
|
|
18,000
|
|
|
18,000
|
|
|
|
|
|
18,000
|
|
All
other licenses
|
|
|
Personal
Care
|
|
|
8
- 25 Years
|
|
|
24,315
|
|
|
(15,593
|
)
|
|
8,722
|
|
|
24,315
|
|
|
(14,514
|
)
|
|
9,801
|
|
|
|
|
|
|
|
|
|
|
42,315
|
|
|
(15,593
|
)
|
|
26,722
|
|
|
42,315
|
|
|
(14,514
|
)
|
|
27,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents,
customer lists and non-compete
agreements
|
|
|
Housewares
|
|
|
2
- 13 Years
|
|
|
19,196
|
|
|
(4,177
|
)
|
|
15,019
|
|
|
18,801
|
|
|
(3,044
|
)
|
|
15,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
420,804
|
|
$
|
(19,999
|
)
|
$
|
400,805
|
|
$
|
420,055
|
|
$
|
(17,783
|
)
|
$
|
402,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1]
Includes one fully amortized trademark and one trademark with an
estimated
life of 30 years
|
|
|
|
The
following table summarizes the amortization expense attributable to intangible
assets for the three-month and nine-month periods ending November 30, 2006
and
2005, as well as our latest estimate of amortization expense for the fiscal
years ending the last day of February 2007 through 2012.
AMORTIZATION
OF INTANGIBLES
|
|
|
|
(in
thousands)
|
|
|
|
|
Aggregate
Amortization Expense
|
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
November
30, 2006
|
|
$
|
660
|
|
November
30, 2005
|
|
$
|
791
|
|
|
|
|
|
|
Aggregate
Amortization Expense
|
|
|
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
|
|
November
30, 2006
|
|
$
|
2,216
|
|
November
30, 2005
|
|
$
|
2,372
|
|
|
|
|
|
|
Estimated
Amortization Expense
|
|
|
|
|
For
the fiscal years ended
|
|
|
|
|
|
|
|
|
|
February
2007
|
|
$
|
2,951
|
|
February
2008
|
|
$
|
2,889
|
|
February
2009
|
|
$
|
2,639
|
|
February
2010
|
|
$
|
2,595
|
|
February
2011
|
|
$
|
2,122
|
|
February
2012
|
|
$
|
2,016
|
|
Note
8 - Short
Term Debt
On
June
1, 2004, we entered into a five year $75,000 Credit Agreement (“Revolving Line
of Credit Agreement”), with Bank of America, N.A. and other lenders. Borrowings
under the Revolving Line of Credit Agreement accrue interest equal to the higher
of the Federal Funds Rate plus 0.50 percent or Bank of America's prime rate.
Alternatively, upon election by the Company, borrowings accrue interest based
on
the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent
to
1.25 percent based upon the "Leverage Ratio" at the time of the borrowing.
The
"Leverage Ratio" is defined by the Revolving Line of Credit Agreement as the
ratio of total consolidated indebtedness, including the subject funding on
such
date, to consolidated EBITDA ("Earnings Before Interest, Taxes, Depreciation
and
Amortization") for the period of the four consecutive fiscal quarters most
recently ended.
The
credit line allows for the issuance of letters of credit up to $10,000.
Outstanding letters of credit reduce the $75,000 borrowing limit dollar for
dollar. There
were
no outstanding borrowings or associated interest expense during the fiscal
three-month and nine-month periods ended November 30, 2006. As of November
30,
2006, there were no open letters of credit outstanding against this
facility.
The
Revolving Line of Credit Agreement requires the maintenance of certain
Debt/EBITDA, fixed charge coverage ratios, and other customary covenants.
Certain covenants, as of the latest balance sheet date, limit our total
outstanding indebtedness from all sources to no more than 3.5 times the latest
twelve months trailing EBITDA. These covenants effectively limited our ability
to incur no more than $40,333 of additional debt from all sources, including
draws on our Revolving Line of Credit Agreement. The agreement is guaranteed,
on
a joint and several basis, by the parent company, Helen of Troy Limited, and
certain subsidiaries. Any amounts outstanding under the Revolving Line of Credit
Agreement will mature on June 1, 2009. As of November 30, 2006, we were in
compliance with the terms of this agreement.
Note
9 - Accrued
Expenses
A
summary
of
accrued expenses was as follows:
ACCRUED
EXPENSES
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
30,
|
|
February
28,
|
|
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
Accrued
sales returns, discounts and allowances
|
|
$
|
32,791
|
|
$
|
24,176
|
|
Accrued
compensation
|
|
|
7,231
|
|
|
7,603
|
|
Accrued
advertising
|
|
|
12,024
|
|
|
7,617
|
|
Accrued
interest
|
|
|
3,002
|
|
|
2,671
|
|
Accrued
royalties
|
|
|
3,747
|
|
|
2,577
|
|
Accrued
professional fees
|
|
|
1,247
|
|
|
1,502
|
|
Accrued
benefits and payroll taxes
|
|
|
2,011
|
|
|
1,495
|
|
Accrued
freight
|
|
|
1,250
|
|
|
858
|
|
Accrued
property, sales and other taxes
|
|
|
1,856
|
|
|
593
|
|
Foreign
currency forward contracts
|
|
|
2,129
|
|
|
|
|
Interest
rate swaps
|
|
|
2,716
|
|
|
|
|
Other
|
|
|
6,300
|
|
|
5,053
|
|
Total
Accrued Expenses
|
|
$
|
76,304
|
|
$
|
54,145
|
|
Note
10 - Product
Warranties
The
Company's products are under warranty against defects in material and
workmanship for a maximum of two years. We have established accruals to cover
future warranty costs of approximately $8,401 and $7,373 as of November 30,
2006
and February 28, 2006, respectively. We estimate our warranty accrual using
historical trends. We believe that these trends are the most reliable method
by
which we can estimate our warranty liability.
The
following table summarizes the activity in the Company's accrual for the
three-month and nine-month periods ended November 30, 2006 and fiscal year ended
February 28, 2006:
ACCRUAL
FOR WARRANTY RETURNS
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
November
30, 2006
|
|
February
28,
|
|
|
|
(Three
Months)
|
|
(Nine
Months)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
6,148
|
|
$
|
7,373
|
|
$
|
5,767
|
|
Additions
to the accrual
|
|
|
6,764
|
|
|
15,245
|
|
|
22,901
|
|
Reductions
of the accrual - payments and credits issued
|
|
|
(4,511
|
)
|
|
(14,217
|
)
|
|
(21,295
|
)
|
Balance
at the end of the period
|
|
$
|
8,401
|
|
$
|
8,401
|
|
$
|
7,373
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
11 - Income
Taxes
Hong
Kong Income Taxes
- On May
10, 2006, the Inland Revenue Department (the “IRD”) and the Company reached a
settlement regarding tax liabilities for the fiscal years 1995 through 1997.
This agreement was subsequently approved by the IRD’s Board of Review. For those
tax years, we agreed to an assessment of approximately $4,019 including
estimated penalties and interest. Our consolidated financial statements at
May
31, 2006 and February 28, 2006 included adequate provisions for this liability.
As a result of this tax settlement, in the first quarter of fiscal 2007, we
reversed $192 of tax provision previously established and recorded $279 of
associated interest. During the second fiscal quarter of 2007, the liability
was
paid with $3,282 of tax reserve certificates and the balance in
cash.
For
the
fiscal years 1998 through 2003, the IRD has assessed a total of $25,461 (U.S.)
in tax on certain profits of our foreign subsidiaries. Hong Kong levies taxes
on
income earned from certain activities previously conducted in Hong Kong.
Negotiations with the IRD regarding these issues are ongoing, and it is unclear
at this time when they will be resolved.
In
connection with the IRD's tax assessment for the fiscal years 1998 through
2003,
we have purchased tax reserve certificates in Hong Kong totaling $25,144. Tax
reserve certificates represent the prepayment by a taxpayer of potential tax
liabilities. The amounts paid for tax reserve certificates are refundable in
the
event that the value of the tax reserve certificates exceeds the related tax
liability. These certificates are denominated in Hong Kong dollars and are
subject to the risks associated with foreign currency fluctuations.
If
the
IRD were to successfully assert the same position for fiscal years after fiscal
year 2003, the resulting assessment could total $18,673 (U.S.) in taxes for
fiscal years 2004 and 2005. We would vigorously disagree with any such proposed
adjustments and would aggressively contest this matter through the applicable
taxing authority and judicial process, as appropriate.
Although
the final resolution of the proposed adjustments is uncertain and involves
unsettled areas of the law, based on currently available information, we have
provided for our best estimate of the probable tax liability for this matter.
While the resolution of the issue may result in tax liabilities that are
significantly higher or lower than the reserves established for this matter,
management currently believes that the resolution will not have a material
effect on our consolidated financial position or liquidity. However, an
unfavorable resolution could have a material effect on our consolidated results
of operations or cash flows in the quarter in which an adjustment is recorded
or
the tax is due or paid.
Effective
March 2005, we had concluded the conduct of all operating activities in Hong
Kong that we believe were the basis of the IRD’s assessments. In the third
quarter of fiscal 2005, the Company established a Macao offshore company (“MOC”)
and began operating from Macao. As a MOC, we have been granted an indefinite
tax
holiday and currently pay no taxes. Accordingly, no additional accruals for
Hong
Kong contingent tax liabilities beyond fiscal 2005 have been provided.
United
States Income Taxes
- The
Internal Revenue Service (the “IRS”) has completed its audits of the U.S.
consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We
previously disclosed that the IRS provided notice of proposed adjustments to
taxes of $13,424 for the three years under audit. We have resolved the various
tax issues and reached an agreement on additional tax in the amount of $3,568.
The resulting tax liability had already been provided for in our tax reserves
and prior to the current fiscal year we had decreased our tax accruals related
to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This
additional tax liability and associated interest of $914 were settled in the
fourth quarter of fiscal 2006.
The
IRS
is auditing our U.S. consolidated federal tax returns for fiscal years 2003
and
2004 and has provided notice of proposed adjustments of $5,953 to taxes for
the
years under audit. The Company is vigorously contesting these adjustments.
Although the ultimate outcome of the dispute with the IRS cannot be predicted
with certainty, management is of the opinion that adequate provisions for taxes
in those years have been made in the Company’s consolidated condensed financial
statements.
Repatriation
of Foreign Earnings
- On
February 22, 2006, the Board of Directors of a subsidiary of the Company
approved the repatriation, pursuant to The American Jobs Creation Act of 2004
(the “AJCA”), of $48,554 in foreign earnings. As a result, we incurred a
one-time tax charge of $2,792 in the fourth fiscal quarter ending February
28,
2006.
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 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 United
States. If such income were subject to U.S. federal income taxes, our effective
income tax rate would increase materially. The AJCA included an anti-inversion
provision that denies certain tax benefits to companies that have reincorporated
outside the United States after March 4, 2003. We completed our reincorporation
in 1994; therefore, our inverted corporate structure is grandfathered by the
AJCA.
In
addition to future changes in tax laws, our position on various tax matters
may
be challenged. Our ability to maintain our position that the parent company
is
not a Controlled Foreign Corporation (as defined under the U.S. Internal Revenue
Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled
Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders
(i.e., those owning 10 percent or more of its shares) together own more than
50
percent of the shares in such corporation. If a change of ownership were to
occur such that the parent company became a Controlled Foreign Corporation,
such
a change could have a material negative effect on the largest U.S. shareholders
and, in turn, on our business.
The
calculation of our tax liabilities involves dealing with uncertainties in the
application of other complex tax regulations. We recognize liabilities for
anticipated tax audit issues in the United States and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes
will
be due. If we ultimately determine that payment of these amounts are not
probable, we reverse the liability and recognize a tax benefit during the period
in which we determine that the liability is no longer probable. We record an
additional charge in our provision for taxes in the period in which we determine
that the recorded tax liability is less than we expect the ultimate assessment
to be.
Note
12 - Long
Term-Debt
A
summary
of long-term debt was as follows:
LONG-TERM
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of Interest Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
November
30,
|
|
Fiscal
|
|
|
|
|
|
November
30,
|
|
February
28,
|
|
|
Borrowed
|
|
2006
|
|
2006
|
|
Payable
|
|
Matures
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$40,000
unsecured Senior Note Payable at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed
interest rate of 7.01%. Interest payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly,
principal of $10,000 payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annually
beginning on January 2005.
|
|
01/96
|
|
|
7.01
|
%
|
|
7.01
|
%
|
|
7.01
|
%
|
|
01/08
|
|
$
|
20,000
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$15,000
unsecured Senior Note Payable at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed
interest rate of 7.24%. Interest payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly,
principal of $3,000 payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annually
beginning on July 2008.
|
|
07/97
|
|
|
7.24
|
%
|
|
7.24
|
%
|
|
7.24
|
%
|
|
07/12
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000
unsecured floating interest rate 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Senior Notes. Interest set and payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly
at three-month LIBOR plus 85 basis
|
|
|
|
|
5.89
|
%
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
points.
Principal is due at maturity. Notes
|
|
|
|
|
to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
can
be prepaid without penalty. *
|
|
06/04
|
|
|
6.35
|
%
|
|
5.371
|
%
|
|
5.89
|
%
|
|
06/09
|
|
|
100,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$50,000
unsecured floating interest rate 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Senior Notes. Interest set and payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly
at three-month LIBOR plus 85 basis
|
|
|
|
|
5.89
|
%
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
points.
Principal is due at maturity. Notes can
|
|
|
|
|
to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
be
prepaid without penalty. *
|
|
06/04
|
|
|
6.35
|
%
|
|
5.371
|
%
|
|
5.89
|
%
|
|
06/11
|
|
|
50,000
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$75,000
unsecured floating interest rate 10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Senior Notes. Interest set and payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly
at three-month LIBOR plus 90 basis
|
|
|
|
|
6.01
|
%
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
points.
Principal is due at maturity. Notes can
|
|
|
|
|
to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
be
prepaid without penalty. *
|
|
06/04
|
|
|
6.40
|
%
|
|
5.421
|
%
|
|
6.01
|
%
|
|
06/14
|
|
|
75,000
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12,634
unsecured Industrial Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Bond. Interest is set and payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
quarterly
at Company's election at either Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prime
or applicable LIBOR plus 75 to 125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basis
points as determined by loan agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
formula.
Principal converted to five-year
|
|
|
|
|
|
|
|
5.295
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds
in May 2006, balance due
|
|
|
|
|
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May,
2011. **
|
|
08/05
|
|
|
6.65
|
%
|
|
5.42
|
%
|
|
6.65
|
%
|
|
05/11
|
|
|
7,660
|
|
|
4,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,660
|
|
|
264,974
|
|
Less
current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
(10,000
|
)
|
Long-term
debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,660
|
|
$
|
254,974
|
|
* |
Floating
interest rates have been hedged with interest rate swaps to effectively
fix interest rates as discussed later in this
note.
|
** |
On
September 15, 2006, the Company prepaid without penalty $4,974 of
the
Industrial Development Revenue Bond as discussed later in this
note.
|
The
following table contains a summary of the components of our interest expense
for
the periods covered by our consolidated condensed statements of
income:
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended November 30,
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Commitment Fees
|
|
$
|
4,392
|
|
$
|
4,073
|
|
$
|
13,220
|
|
$
|
10,730
|
|
Deferred
Finance Costs
|
|
|
213
|
|
|
186
|
|
|
587
|
|
|
587
|
|
Interest
Rate Swap Settlements
|
|
|
(118
|
)
|
|
|
|
|
(118
|
)
|
|
|
|
Total
Interest Expense
|
|
$
|
4,487
|
|
$
|
4,259
|
|
$
|
13,689
|
|
$
|
11,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
of
our long-term debt is guaranteed by either the parent company, Helen of Troy
Limited, and/or certain subsidiaries on a joint and several basis and has
customary covenants covering Debt/EBITDA ratios, fixed charge coverage ratios,
consolidated net worth levels, and other financial requirements. Certain
covenants as of the latest balance sheet date, limit our total outstanding
indebtedness from all sources to no more than 3.5 times the latest twelve months
trailing EBITDA. These covenants effectively limited our ability to incur no
more than $40,333 of additional debt from all sources, including draws on our
Revolving Line of Credit Agreement. Additionally, our debt agreements restrict
us from incurring liens on any of our properties, except under certain
conditions. As of November 30, 2006, we are in compliance with all the terms
of
these agreements.
On
September 15, 2006, the Company prepaid without penalty $4,974 of the Industrial
Development Revenue Bond and agreed with its holder that the remaining balance
would be due at maturity in May 2011. Management continues to be able, at its
discretion, to prepay any or all of the remaining balance due on the bond
without penalty.
On
September 28, 2006, the Company entered into interest rate hedge agreements
in
conjunction with its outstanding unsecured floating interest rate $100,000,
5
Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes (the “swaps”). The
swaps are a hedge of the variable LIBOR rates used to reset the floating rates
on the Senior Notes. The swaps effectively fix the interest rates on the 5,
7
and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning
September 29, 2006. The swaps settle quarterly and terminate upon maturity
of
the related debt. The swaps are considered cash flow hedges under SFAS No.
133
because they are intended to hedge, and are effective as a hedge, against
variable cash flows.
Note
13 - Contractual
Obligations
Our
contractual obligations and commercial commitments, as of November 30, 2006
were:
PAYMENTS
DUE BY PERIOD - TWELVE MONTHS ENDED NOVEMBER 30:
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
After
|
|
|
|
Total
|
|
1
year
|
|
2
years
|
|
3
years
|
|
4
years
|
|
5
years
|
|
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt - floating rate
|
|
$
|
232,660
|
|
$
|
|
|
$
|
|
|
$
|
100,000
|
|
$
|
|
|
$
|
57,660
|
|
$
|
75,000
|
|
Term
debt - fixed rate
|
|
|
35,000
|
|
|
10,000
|
|
|
13,000
|
|
|
3,000
|
|
|
3,000
|
|
|
3,000
|
|
|
3,000
|
|
Long-term
incentive plan payouts
|
|
|
3,110
|
|
|
1,498
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on floating rate debt *
|
|
|
66,252
|
|
|
13,815
|
|
|
13,815
|
|
|
11,852
|
|
|
7,925
|
|
|
6,825
|
|
|
12,020
|
|
Interest
on fixed rate debt
|
|
|
4,813
|
|
|
1,846
|
|
|
1,121
|
|
|
787
|
|
|
570
|
|
|
353
|
|
|
136
|
|
Open
purchase orders
|
|
|
67,979
|
|
|
67,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
royalty payments
|
|
|
59,068
|
|
|
2,911
|
|
|
2,832
|
|
|
2,752
|
|
|
5,104
|
|
|
6,241
|
|
|
39,228
|
|
Advertising
and promotional
|
|
|
22,205
|
|
|
10,696
|
|
|
6,398
|
|
|
1,934
|
|
|
1,377
|
|
|
800
|
|
|
1,000
|
|
Operating
leases
|
|
|
2,726
|
|
|
1,744
|
|
|
572
|
|
|
314
|
|
|
96
|
|
|
|
|
|
|
|
Capital
spending commitments
|
|
|
492
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
468
|
|
|
418
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
494,773
|
|
$
|
111,399
|
|
$
|
39,400
|
|
$
|
120,639
|
|
$
|
18,072
|
|
$
|
74,879
|
|
$
|
130,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The
future obligation for interest on our variable rate debt has historically
been estimated assuming the rates in effect as of the end of the
latest
fiscal quarter on which we are reporting. As mentioned above in Note
12,
on September 28, 2006, the Company entered into interest rate hedge
agreements in conjunction with its outstanding unsecured floating
interest
rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior
Notes
(the “swaps”). The swaps are a hedge of the variable LIBOR rates used to
reset the floating rates on the Senior Notes. The swaps effectively
fix
the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89,
5.89 and
6.01 percent, respectively, beginning September 29, 2006. Accordingly,
the
future interest obligations related to this debt has been estimated
using
these rates. We also have an unsecured Industrial Development Revenue
Bond, whose rate is subject to periodic adjustment. The bond’s interest
rate has not been hedged. Accordingly, we estimated our future obligation
for interest on it using the rates in effect as of November 30, 2006.
This
is only an estimate, actual rates on the bond may vary over time.
For
instance, a one percent increase in interest rates could add approximately
$77 per year to floating rate interest expense over the bond’s remaining
maturity.
|
We
lease
certain facilities, equipment and vehicles under operating leases, which expire
at various dates through fiscal 2011. Certain of the leases contain escalation
clauses and renewal or purchase options.
On
February 2, 2006, we sold a 619,000 square foot distribution facility in
Southaven, Mississippi for $16,850 recording a gain on the sale of $1,304.
We
entered into an initial lease agreement with the new owners through April 2006
calling for monthly rentals of $141 per month including insurance and property
tax payments.
In
the
first quarter of fiscal 2007, we obtained an extension on the lease of our
formerly owned distribution facility. As a result we will now be making monthly
lease payments of $175 including insurance and property tax payments through
the
end of the new lease term, which expires on February 28, 2007. The distribution
facility is primarily used for appliances inventory, which we are in the process
of moving from this facility to our new 1,200,000 square foot distribution
facility, also located in Southaven, Mississippi. This extension of the
agreement was made in order to provide us additional flexibility in the timing
of the transition of our remaining operations between facilities.
Capital
spending commitments include $21 for remodeling
and furnishing office facilities and approximately $471 due on a project to
install additional warehouse racking and forklifts, which will allow us to
improve space utilization in our new Southaven, Mississippi distribution
facility.
Rent
expense related to our operating leases was $1,132 and $3,374 for the
three-month
and nine-month periods ended November 30, 2006, respectively, and $853 and
$2,077 for the three-month and nine-month periods ended November 30, 2005,
respectively.
Note
14 - Forward
Contracts
Our
functional currency is the U.S. Dollar. By operating internationally, we are
subject to foreign currency risk from transactions denominated in currencies
other than the U.S. Dollar ("foreign currencies"). Such transactions include
sales, certain inventory purchases and operating expenses. As a result of such
transactions, portions of our cash, trade accounts receivable, and trade
accounts payable are denominated in foreign currencies. During the three-month
and nine-month periods ended November 30, 2006, we transacted approximately
17
and 16 percent, respectively of our net sales in foreign currencies. During
the
three-month and nine-month periods ended November 30, 2005, we transacted
approximately 18 and 15 percent, respectively of our net sales in foreign
currencies. These sales were primarily denominated in the British Pound, the
Euro, the Canadian Dollar, the Brazilian Real and the Mexican Peso. We make
most
of our inventory purchases from the Far East and use the U.S. Dollar for such
purchases.
We
identify foreign currency risk by regularly monitoring our foreign
currency-denominated transactions and balances. Where operating conditions
permit, we reduce foreign currency risk by purchasing most of our inventory
with
U.S. Dollars and by converting cash balances denominated in foreign currencies
to U.S. Dollars.
We
also
hedge against foreign currency exchange rate-risk by using a series of forward
contracts designated as cash flow hedges to protect against the foreign currency
exchange risk inherent in our forecasted transactions denominated in currencies
other than the U.S. Dollar. In these transactions, we execute a forward currency
contract that will settle at the end of a forecasted period. During the
forecasted period, a hedging relationship is created because the size and terms
of the forward contract are designed so that its fair market value will move
in
the opposite direction and approximate magnitude of the underlying foreign
currency’s forecasted exchange gain or loss. To the extent we forecast the
expected foreign currency cash flows from the period the forward contract is
entered into until the date it will settle with reasonable accuracy, we
significantly lower or materially eliminate a particular currency’s exchange
risk exposure over the life of the related forward contract.
For
transactions designated as foreign currency cash flow hedges, the effective
portion of the change in the fair value (arising from the change in the spot
rates from period to period) is deferred in other comprehensive income. These
amounts are subsequently recognized in "Selling, general, and administrative
expense" in the consolidated condensed statements of income in the same period
as the forecasted transactions close out over the remaining balance of their
terms. The ineffective portion of the change in fair value (arising from the
change in the difference between the spot rate and the forward rate) is
recognized in the period it occurred. These amounts are also recognized in
"Selling, general, and administrative expense" in the consolidated condensed
statements of income. We do not enter into any forward exchange contracts or
similar instruments for trading or other speculative purposes.
During
the third quarter of fiscal 2007, the Company decided to actively manage most
of
its floating rate debt using interest rate swaps. The Company entered into
three
interest rate swaps that convert an aggregate notional principal of $225,000
from floating interest rate payments under its 5, 7 and 10 Year Senior Notes
to
fixed interest rate payments ranging from 5.89 to 6.01 percent. In these
transactions, we executed three contracts to pay fixed rates of interest on
an
aggregate notional principal amount of $225,000 at rates currently ranging
from
5.04 to 5.11 percent while simultaneously receiving floating rate interest
payments currently set at 5.37 percent on the same notional amount. The fixed
rate side of the swap will not change over the life of the swap. The floating
rate payments are reset quarterly based on three month LIBOR. The resets are
concurrent with the interest payments made on the underlying debt. These swaps
are used to reduce the Company’s risk of the possibility of increased interest
costs; however, should interest rates drop significantly, we could also lose
the
benefit that floating rate debt can provide in a declining interest rate
environment.
The
swaps
are considered 100 percent effective. Gains and losses related to the swaps,
net
of related tax effects are reported as a component of “Accumulated other
comprehensive income” and will not be reclassified into earnings until the
conclusion of the hedge. A partial net settlement occurs quarterly concurrent
with interest payments made on the underlying debt. The settlement is the net
difference between the fixed rates payable and the floating rates receivable
over the quarter under the swap contracts. The settlement is recognized as
a
component of "Interest expense" in the consolidated condensed statements of
income.
The
following table summarizes the various forward contracts and interest rate
swap
contracts we designated as cash flow hedges that were open at November 30,
2006
and February 28, 2006:
CASH
FLOW HEDGES
|
|
|
November
30, 2006
|
|
|
Contract
|
|
Currency
to
|
|
Notional
|
|
Contract
|
|
Range
of Maturities
|
|
Spot
Rate at Contract
|
|
Spot
Rate at November 30,
|
|
Weighted
Average Forward Rate at
|
|
Weighted
Average Forward Rate at November 30,
|
|
Market
Value of the Contract in U.S. Dollars
|
|
Type
|
|
Deliver
|
|
Amount
|
|
Date
|
|
From
|
|
To
|
|
Date
|
|
2006
|
|
Inception
|
|
2006
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
|
|
|
Pounds
|
|
|
£10,000,000
|
|
|
1/26/2005
|
|
|
12/11/2006
|
|
|
2/9/2007
|
|
|
1.8700
|
|
|
1.9661
|
|
|
1.8228
|
|
|
1.9657
|
|
|
($1,428
|
)
|
Sell
|
|
|
Pounds
|
|
|
£10,000,000
|
|
|
5/12/2006
|
|
|
12/14/2007
|
|
|
2/14/2008
|
|
|
1.8940
|
|
|
1.9661
|
|
|
1.9010
|
|
|
1.9590
|
|
|
($580
|
)
|
Sell
|
|
|
Pounds
|
|
|
£5,000,000
|
|
|
11/28/2006
|
|
|
12/11/2008
|
|
|
1/15/2009
|
|
|
1.9385
|
|
|
1.9661
|
|
|
1.9242
|
|
|
1.9482
|
|
|
($120
|
)
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($2,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
|
|
|
Dollars
|
|
$
|
100,000,000
|
|
|
9/28/2006
|
|
|
6/29/2009
|
|
|
|
|
|
(Pay
fixed rate at 5.04%, receive floating rate at 5.37%)
|
|
|
($598
|
)
|
Swap
|
|
|
Dollars
|
|
$
|
50,000,000
|
|
|
9/28/2006
|
|
|
6/29/2011
|
|
|
|
|
|
(Pay
fixed rate at 5.04%, receive floating rate at 5.37%)
|
|
|
($597
|
)
|
Swap
|
|
|
Dollars
|
|
$
|
75,000,000
|
|
|
9/28/2006
|
|
|
6/29/2014
|
|
|
|
|
|
(Pay
fixed rate at 5.11%, receive floating rate at 5.37%)
|
|
|
($1,521
|
)
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($2,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($4,845
|
)
|
|
|
February
28, 2006
|
|
Contract
|
|
Currency
to
|
|
Notional
|
|
Contract
|
|
Range
of Maturities
|
|
Spot
Rate at Contract
|
|
Spot
Rate at Feb. 28,
|
|
Weighted
Average Forward Rate at
|
|
Weighted
Average Forward Rate at Feb. 28,
|
|
Market
Value of the Contract in U.S. Dollars
|
|
Type
|
|
Deliver
|
|
Amount
|
|
Date
|
|
|
|
To
|
|
Date
|
|
2006
|
|
Inception
|
|
2006
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
|
|
|
Pounds
|
|
|
£10,000,000
|
|
|
1/26/2005
|
|
|
12/11/2006
|
|
|
2/9/2007
|
|
|
1.8700
|
|
|
1.7540
|
|
|
1.8228
|
|
|
1.7644
|
|
$
|
584
|
|
The
Company is exposed to credit risk in the event of non-performance by the other
party (a large financial institution) to its current existing forward and swap
contracts. However, the Company does not anticipate non-performance by the
other
party.
Note
15 - Repurchase
of Helen of Troy Shares
During
the quarter ended August 31, 2003, our Board of Directors approved a resolution
authorizing the purchase, in open market or through private transactions, of
up
to 3,000,000 common shares over an initial period extending through May 31,
2006. On April 25, 2006, our Board of Directors approved a resolution to extend
the existing plan for three more years through May 31, 2009. During the fiscal
quarters ended November 30, 2006 and 2005, respectively, we did not repurchase
any common shares. From September 1, 2003 through November 30, 2006, we have
repurchased 1,563,836 shares at a total cost of $45,612, or an average price
per
share of $29.17. An additional 1,436,164 shares remain authorized for purchase
under this plan.
Note
16 - Customer
and Supplier Concentrations
Customers
- Sales
to our largest customer and its affiliate accounted for approximately 22 percent
and 25 percent of our net sales in fiscal 2006 and 2005, respectively. Sales
to
our second largest customer accounted for approximately 10 percent and 8 percent
of our net sales in fiscal 2006 and 2005, respectively. No other customers
accounted for ten percent or more of net sales during those fiscal years. Sales
to our top five customers accounted for approximately 46 percent and 44 percent
in fiscal 2006 and 2005, respectively.
Suppliers
- We use
third party manufacturers to fulfill our manufacturing needs. Most of these
manufacturers are in
the
Far
East,
primarily in the Peoples' Republic of China. Most of our grooming, skin care
and
hair care products are currently manufactured in North America.
We
have
found that contract manufacturing maximizes our flexibility and responsiveness
to industry and consumer trends while minimizing the need for capital
expenditures and the risk embedded in such expenditures. Manufacturers
who produce our products use formulas, molds, and certain other tooling, some
of
which we own, in manufacturing those products. Both our business segments employ
numerous technical and quality control persons to assure high product quality.
We
have
relationships with over 200 third-party manufacturers. Of those, the top two
manufacturers currently fulfill approximately 24 percent of our product
requirements. Our top five suppliers currently fulfill approximately 43 percent
of our product requirements.
We
do not
have long-term contracts with our manufacturers. We rely on our longstanding
relationships with these suppliers to assure adequate sources of supply. Should
one or more of our manufacturers stop producing product on our behalf, it could
have a material adverse effect on our business, financial condition, and results
from operations.
Note
17 - Acquisition
of Trademarks, Rights Under License Agreements and Other
Property
On
September 25, 2006, the Company acquired all rights to trademarks, certain
patents, formulas, tooling and production processes to Vessel, Inc.’s
rechargeable lighting products under various brand names, including Candela® and
Candeloo(TM). The products will be sold by the Company’s Housewares segment.
We
believe
the acquired trademarks have indefinite economic lives.
The
following schedule presents the assets acquired at closing and management’s
preliminary purchase price allocation:
Assets
Acquired from Vessel, Inc.
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
354
|
|
Patents
|
|
|
120
|
|
Fixed
Assets
|
|
|
26
|
|
Total
assets acquired
|
|
$
|
500
|
|
|
|
|
|
|
On
December 6, 2006, we entered into a licensing arrangement with MBL/Tigi
Products, L.P. and MBL/Toni & Guy Products L.P. for the use of the BED HEAD®
by TIGI and TONI&GUY® trademarks for personal care products in the Western
Hemisphere. The Company will introduce a complete line of hair care appliance
products under the BED HEAD® by TIGI and TONI&GUY® brand names that
eventually will include hair dryers, hair styling irons and straighteners,
hot
air brushes, hair setters, combs, brushes and hair care accessories, as well
as
a variety of other personal care products. Initial marketing will commence
in
the United States, followed by the remainder of the Western Hemisphere, with
product shipments to begin during the next fiscal year.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
discussion contains a number of forward-looking statements, all of which are
based on current expectations. Actual results may differ materially due to
a
number of factors, including those discussed in Part I, Item 3. "Quantitative
and Qualitative Disclosures about Market Risk", "Information Regarding Forward
Looking Statements", Part II, Item 1A, “Risk Factors” and in the Company's most
recent Annual Report on Form 10-K. This discussion should be read in conjunction
with our consolidated condensed financial statements included under Part I,
Item
1 of this Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 2006.
OVERVIEW
OF THE QUARTER'S AND YEAR-TO-DATE ACTIVITIES:
The
third
fiscal quarter’s net sales traditionally average approximately 34 percent of the
fiscal year's total net sales on a historical basis, and is our highest volume
quarter each fiscal year.
During
the quarter, we continued to refine and improve our abilities to operate our
new
1,200,000 square foot Southaven, Mississippi distribution facility. We have
completed a project to add approximately $1,500 of storage racking, and
associated handling equipment to the facility to better utilize its space.
Starting in December 2006, we commenced the consolidation of our domestic
Personal Care appliance inventory into the new distribution facility. The lease
on the previously owned distribution facility that housed the inventory will
expire at the end of the current fiscal year. Our current intent is to have
the
appliance move completed by the end of this fiscal year. The current need to
operate out of two facilities continues to result in some duplication of costs.
We
do not
expect to achieve the complete anticipated cost savings relating to our
distribution facility consolidation until some
point later in fiscal 2008.
During
the quarter, our Housewares segment acquired intellectual property rights,
including trademarks and patents to market rechargeable
lighting products under various brand names, including Candela® and Candeloo(TM)
from Vessel, Inc. This provides us a new category of products that are a good
strategic fit with our existing business. Under the acquisition agreement,
we
will allow Vessel, Inc. to continue to sell its product inventories through
May
2007 in exchange for a commission on the sales. Meanwhile, we are in the process
of designing new packaging and products and expect to have these available
for
shipment in June 2007.
In
the
Personal Care segment, on December 6, 2006, we concluded negotiations for a
licensing arrangement with MBL/Tigi Products, L.P. and MBL/Toni & Guy
Products L.P. for the use of the BED HEAD® by TIGI and TONI&GUY® trademarks
for personal care appliances in the Western Hemisphere. The Company will
introduce a complete line of hair care appliance products under the BED HEAD® by
TIGI and TONI&GUY® brand names that eventually will include hair dryers,
hair styling irons and straighteners, hot air brushes, hair setters, combs,
brushes and hair care accessories, as well as a variety of other personal care
products. Initial marketing will commence in the United States, followed by
the
remainder of the Western Hemisphere, with product shipments to begin during
the
next fiscal year.
Highlights
of the three- and nine-months ended November 30, 2006 follow:
· |
Consolidated
net sales for the fiscal quarter just ended increased 8.1 percent
to
$213,437 compared to $197,458 for the same period last year. Consolidated
net sales for the nine month period ending November 30, 2006 increased
7.9
percent to $491,050 compared to $455,239 for the same period last
year.
The quarter just ended produced the highest recorded quarterly sales
in
the Company’s history. Both the quarter and year to date periods produced
sales increases across all major product lines, when compared to
the same
fiscal periods last year.
|
· |
Consolidated
gross profit margin as a percentage of net sales for the fiscal quarter
just ended decreased 0.7 percentage points to 42.9 percent compared
to
43.6 percent for the same period last year. Consolidated gross profit
margin for the nine-month period ending November 30, 2006 decreased
1.0
percentage point to 44.0 percent compared to 45.0 percent for the
same
period last year.
|
· |
Selling,
general and administrative expense as a percentage of net sales for
the
fiscal quarter just ended increased 0.1 percentage points to 29.2
percent
compared to 29.1 percent for the same period last year. Selling,
general
and administrative expense for the the nine-month period ending November
30, 2006 increased 0.2 percentage points to 32.5 percent compared
to 32.3
percent for the same period last year. The marginal percentage point
increases for the three- and nine-months ended November 30, 2006
is mostly
due to the impact of increases in depreciation and higher facility
related
costs from the operational transition of our domestic distribution
system,
increased personnel costs, and compliance charges paid to vendors
for
claims associated with our Housewares segment’s order processing and
shipping issues that occurred earlier during the fiscal year.
|
· |
Our
financial position continues to strengthen when compared to our financial
position as of November 30, 2005. While total assets decreased 2.0
percent, or $19,162, to $931,975 at November 30, 2006 when compared
with
November 30, 2005, most of the decrease was attributable to reductions
in
inventory levels over those held at November 30, 2005. Total current
and
long-term debt outstanding at November 30, 2006 was $267,660 compared
to
$334,974 outstanding at November 30, 2005. Total stockholders’ equity was
$515,657 at November 30, 2006 compared to $468,896 at November 30,
2005.
|
We
will
be transitioning Mexico and other Latin American operations to our global
information system late in fiscal 2007 and in fiscal 2008. In addition, our
Housewares segment recently expanded the scope of its operations in Japan and
the United Kingdom, including opening a new sales office in Japan, with efforts
to install and implement appropriate software systems for these operations
underway. Due to the complexities of these efforts, we expect to continue to
experience a period of significant change.
Personal
Care Segment
Net
sales
in the segment for the third fiscal quarter increased 7.9 percent to $173,741
compared with $161,007 for the same period last year. Net sales for the nine
month period ending November 30, 2006 increased 7.6 percent to $390,041 compared
with $362,384 for the same period last year. All major product lines in this
segment showed increases in the third quarter when compared with the same period
last year.
Domestically,
we operate in mature markets where we compete on product innovation, price,
quality and customer service. We continuously adjust our product mix, pricing
and marketing programs to try to maintain, and in some cases, acquire more
retail shelf space. Changes in product mix are generally allowing us to realize
higher average unit prices, which offset in some categories, unit volume
decreases. Over the last year, the prices of raw materials such as copper,
steel, plastics and alcohol have experienced significant increases and have
only
just begun to moderate. We continue to discuss the need to raise prices with
our
customers and have already put certain increases into effect. In some cases,
we
have been successful raising prices to our customers, or passing cost increases
on by moving customers to newer product models with enhancements that justify
a
higher price. In other cases, we have not been successful. Sales price increases
and product enhancements can have long lead times before their impact is
realized. The extent to which we will be able to continue with price increases,
the timing, and the ultimate impact of such increases on net sales is uncertain.
Accordingly we have experienced margin pressure in this segment.
· |
Appliances.
Products in this line include electronic curling irons, thermal brushes,
hair straighteners, hair crimpers, hair dryers, massagers, spa products,
foot baths, electric clippers and trimmers. Net sales for the three-
and
nine-month periods ended November 30, 2006 increased approximately
7.9
percent and 7.2 percent, respectively, over the same periods in the
prior
year. We have succeeded in moving our business to higher unit prices
with
increased unit volumes. For the quarter and year-to-date, increases
in our
average unit selling price contributed approximately 3.6 and 4.0
percent,
respectively, to net sales growth while increases in our unit volumes
contributed approximately 4.3 and 3.2 percent, respectively to net
sales
growth.
|
For
the
quarter and year-to-date, North American operations contributed approximately
4.5 and 3.9 percent, respectively, and European and Latin American operations
contributed approximately 3.4 and 3.3 percent, respectively, to net sales
growth. Revlon®, Vidal Sassoon®, Hot Tools®, Dr. Scholl's®, Wigo®, Sunbeam®, and
Health o Meter® were key selling brands in this line.
In
March
2006, we secured the rights in certain European and Asian Markets to introduce
a
line of hair care appliances under the Toni & Guy brand name. Toni & Guy
is an international chain of hair salons throughout Europe that has expanded
operations into certain key urban markets in the United States. We believe
our
association with Toni & Guy will create new sales opportunities for our
products in Europe. During the second fiscal quarter 2006, we began shipment
of
products under the Toni & Guy brand.
In
August, we began shipping our new Fusion Tools® line of professional appliances
designed to compete at the higher end of the professional market.
On
December 6, 2006, we entered into a licensing arrangement with MBL/Tigi
Products, L.P. and MBL/Toni & Guy Products L.P. for the use of the BED HEAD®
by TIGI and TONI&GUY® trademarks for personal care appliances in the Western
Hemisphere. The Company will introduce a complete line of hair care appliance
products under the BED HEAD® by TIGI and TONI&GUY® brand names that
eventually will include hair dryers, hair styling irons and straighteners,
hot
air brushes, hair setters, combs, brushes and hair care accessories, as well
as
a variety of other personal care products. Initial marketing will commence
in
the United States, followed by the remainder of the Western Hemisphere, with
product shipments scheduled to begin during the next fiscal year.
Grooming,
Skin Care, and Hair Products.
Products in this line include liquid hair styling products, men’s fragrances,
men’s deodorants, body powder, and skin care products. Our grooming, skin care,
and hair care portfolio includes the Brut®, Sea Breeze®, Vitalis®, Condition®
3-in-1, Ammens®, and Skin Milk® brand names. Net sales for the three- and
nine-month periods ended November 30, 2006 increased approximately 6.7 and
3.8
percent, respectively, when compared against the same periods in the prior
year.
Most
of
the sales increase in this line for the third fiscal quarter came from our
Latin
American region. Growth resulted from the performance of Brut® in the Mexican
market, new distribution and continued expansion of our product lines across
the
Latin American region. Our domestic net sales for the quarter were bolstered
by
the introduction of Brut Revolution®, a newly formulated, glass bottled,
higher-end men’s cologne that sells at higher price points than the brand’s
traditional plastic bottled line.
· |
Brushes,
Combs, and Accessories.
Net sales for the three- and nine-month periods ended November 30,
2006
increased approximately 12.0 percent and 23.5 percent, respectively
over
the same periods in the prior year. This was due to new customers
and
product development and positioning changes made over the last year.
Our
new lines and mix of Vidal Sassoon® and Revlon® accessories, high end
private label products, and other product initiatives are achieving
higher
unit prices along with new distribution. Vidal Sassoon®, Revlon® and
Karina® were the key selling brands in this line. As mentioned above, BED
HEAD® by TIGI and the TONI&GUY® brand names will provide opportunities
for additional sales in this line of
business.
|
Housewares
Segment
Our
Housewares segment includes the operations of OXO International, acquired in
fiscal 2005. OXO Good Grips®, OXO Steel™ and OXO SoftWorks® are our key brands
in this segment. Our Housewares segment’s products include kitchen tools,
cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash
cans, storage and organization products, hand tools, gardening tools, kitchen
mitts and trivets, and barbeque tools.
During
the quarter, our Housewares segment acquired intellectual property rights,
including trademarks and patents to market rechargeable
lighting products under various brand names, including Candela® and Candeloo(TM)
from Vessel, Inc. We do not expect to see sales from new product rollouts of
this line until mid to late fiscal 2008.
Net
sales
in the segment for the third fiscal quarter increased 8.9 percent to $39,696
compared with $36,451 for the same period last year. Net sales for the nine
month period ending November 30, 2006 increased 8.8 percent to $101,009 compared
with $92,855 for the same period last year.
For
the
third fiscal quarter ended November 30, 2006, higher average unit prices and
a
modest increase in unit volumes favorably impacted net sales by approximately
8.5 and 0.4 percent, respectively when compared to the same period last year.
Unit prices are increasing because the Houseware segment’s business has been
expanding its product mix into higher priced goods such as trash cans, tea
kettles, and hand tools. Unit volumes increased primarily through growth with
existing accounts as well as new distribution in the grocery channel.
For
the
nine-months ended November 30, 2006, higher average unit prices favorably
impacted net sales by approximately 11.5 percent. As mentioned above, unit
prices increased because the Houseware segment’s business has been expanding its
product mix into higher price point goods such as trash cans, tea kettles,
and
hand tools. This was partially offset by first fiscal quarter declines in unit
volumes due to issues associated with our transition to our new distribution
center. The first quarter declines had a year to date negative 2.7 percent
impact on sales.
We
have
begun to expand our Housewares segment’s sales operations in the United Kingdom
and Japan. In the second quarter, we terminated certain existing distribution
agreements we had in these countries and are establishing our own selling
offices, leveraging certain existing facilities, infrastructure and sales
contacts, where possible. We believe that with relatively modest additional
infrastructure investments, we can enhance our presence in those markets. This
is a long range initiative and we do not expect any meaningful sales impact
from
these efforts through the end of the current fiscal year.
RESULTS
OF OPERATIONS
Comparison
of fiscal quarter and nine-month periods ended November 30, 2006 to the same
periods ended November 30, 2005.
The
following table sets forth, for the periods indicated, our selected operating
data, in U.S. dollars, as a percentage of net sales, and as a year-over-year
percentage change.
SELECTED
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net Sales
|
|
Quarter
ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Care Segment
|
|
$
|
173,741
|
|
$
|
161,007
|
|
$
|
12,734
|
|
|
7.9
|
%
|
|
81.4
|
%
|
|
81.5
|
%
|
Housewares
Segment
|
|
|
39,696
|
|
|
36,451
|
|
|
3,245
|
|
|
8.9
|
%
|
|
18.6
|
%
|
|
18.5
|
%
|
Total
net sales
|
|
|
213,437
|
|
|
197,458
|
|
|
15,979
|
|
|
8.1
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
121,960
|
|
|
111,414
|
|
|
10,546
|
|
|
9.5
|
%
|
|
57.1
|
%
|
|
56.4
|
%
|
Gross
profit
|
|
|
91,477
|
|
|
86,044
|
|
|
5,433
|
|
|
6.3
|
%
|
|
42.9
|
%
|
|
43.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expense
|
|
|
62,375
|
|
|
57,396
|
|
|
4,979
|
|
|
8.7
|
%
|
|
29.2
|
%
|
|
29.1
|
%
|
Operating
income
|
|
|
29,102
|
|
|
28,648
|
|
|
454
|
|
|
1.6
|
%
|
|
13.6
|
%
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4,487
|
)
|
|
(4,259
|
)
|
|
(228
|
)
|
|
5.4
|
%
|
|
-2.1
|
%
|
|
-2.2
|
%
|
Other
income (expense), net
|
|
|
863
|
|
|
(623
|
)
|
|
1,486
|
|
|
*
|
|
|
0.4
|
%
|
|
-0.3
|
%
|
Total
other expense, net
|
|
|
(3,624
|
)
|
|
(4,882
|
)
|
|
1,258
|
|
|
-25.8
|
%
|
|
-1.7
|
%
|
|
-2.5
|
%
|
Earnings
before income taxes
|
|
|
25,478
|
|
|
23,766
|
|
|
1,712
|
|
|
7.2
|
%
|
|
11.9
|
%
|
|
12.0
|
%
|
Income
tax expense
|
|
|
2,665
|
|
|
1,100
|
|
|
1,565
|
|
|
*
|
|
|
1.2
|
%
|
|
0.6
|
%
|
Net
earnings
|
|
$
|
22,813
|
|
$
|
22,666
|
|
$
|
147
|
|
|
0.6
|
%
|
|
10.7
|
%
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
%
of Net Sales
|
|
Nine
Months ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Care Segment
|
|
$
|
390,041
|
|
$
|
362,384
|
|
$
|
27,657
|
|
|
7.6
|
%
|
|
79.4
|
%
|
|
79.6
|
%
|
Housewares
Segment
|
|
|
101,009
|
|
|
92,855
|
|
|
8,154
|
|
|
8.8
|
%
|
|
20.6
|
%
|
|
20.4
|
%
|
Total
net sales
|
|
|
491,050
|
|
|
455,239
|
|
|
35,811
|
|
|
7.9
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
274,964
|
|
|
250,285
|
|
|
24,679
|
|
|
9.9
|
%
|
|
56.0
|
%
|
|
55.0
|
%
|
Gross
profit
|
|
|
216,086
|
|
|
204,954
|
|
|
11,132
|
|
|
5.4
|
%
|
|
44.0
|
%
|
|
45.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expense
|
|
|
159,428
|
|
|
146,878
|
|
|
12,550
|
|
|
8.5
|
%
|
|
32.5
|
%
|
|
32.3
|
%
|
Operating
income
|
|
|
56,658
|
|
|
58,076
|
|
|
(1,418
|
)
|
|
-2.4
|
%
|
|
11.5
|
%
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(13,689
|
)
|
|
(11,317
|
)
|
|
(2,372
|
)
|
|
21.0
|
%
|
|
-2.8
|
%
|
|
-2.5
|
%
|
Other
income (expense), net
|
|
|
1,940
|
|
|
(277
|
)
|
|
2,217
|
|
|
*
|
|
|
0.4
|
%
|
|
-0.1
|
%
|
Total
other expense, net
|
|
|
(11,749
|
)
|
|
(11,594
|
)
|
|
(155
|
)
|
|
1.3
|
%
|
|
-2.4
|
%
|
|
-2.5
|
%
|
Earnings
before income taxes
|
|
|
44,909
|
|
|
46,482
|
|
|
(1,573
|
)
|
|
-3.4
|
%
|
|
9.1
|
%
|
|
10.2
|
%
|
Income
tax expense
|
|
|
4,543
|
|
|
3,816
|
|
|
727
|
|
|
19.1
|
%
|
|
0.9
|
%
|
|
0.8
|
%
|
Net
earnings
|
|
$
|
40,366
|
|
$
|
42,666
|
|
$
|
(2,300
|
)
|
|
-5.4
|
%
|
|
8.2
|
%
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Calculation is Not Meaningful
Consolidated
Sales and Gross Profit Margins
Consolidated
net sales for the third fiscal quarter ending November 30, 2006 increased 8.1
percent to $213,437 compared with $197,458 for the same period last year.
Consolidated net sales for the nine-month period ending November 30, 2006
increased 7.9 percent to $491,050 compared with $455,239 for the same period
last year. Lighting products provided $18 of commission revenue from new product
acquisitions for the three- and nine months ending November 30, 2006. Regarding
lighting products, we are in the process of designing new packaging and products
and expect to have these available for shipment in June 2007.
Substantially
all growth during the quarter came from our core business (business we operated
during the same fiscal period last year). For the fiscal quarter ending November
30, 2005, new product acquisitions included one month’s net sales of Skin Milk®
and Time Block® lines of skin care products, acquired in September 2004. For the
nine-month period ending November 30, 2005, new product acquisitions included
OXO Housewares products until May 31, 2005 and the Skin Milk® and Time Block®
lines of skin care products until September 30, 2005. The following table sets
forth the impact acquisitions had on our net sales:
IMPACT
OF ACQUISITIONS ON NET SALES
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended November 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Prior
year's net sales for the same period
|
|
$
|
197,458
|
|
$
|
205,682
|
|
|
|
|
|
|
|
|
|
Components
of net sales change:
|
|
|
|
|
|
|
|
Core
business net sales change
|
|
|
15,961
|
|
|
(8,519
|
)
|
Net
sales from acquisitions (non-core business net sales)
|
|
|
18
|
|
|
295
|
|
Change
in net sales
|
|
|
15,979
|
|
|
(8,224
|
)
|
Net
sales
|
|
$
|
213,437
|
|
$
|
197,458
|
|
|
|
|
|
|
|
|
|
Total
net sales growth
|
|
|
8.1
|
%
|
|
-4.0
|
%
|
Core
business net sales change
|
|
|
8.1
|
%
|
|
-4.1
|
%
|
Net
sales change from acquisitions (non-core business net sales
change)
|
|
|
0.0
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Prior
year's net sales for the same period
|
|
$
|
455,239
|
|
$
|
453,932
|
|
|
|
|
|
|
|
|
|
Components
of net sales change:
|
|
|
|
|
|
|
|
Core
business net sales change
|
|
|
35,793
|
|
|
(28,168
|
)
|
Net
sales from acquisitions (non-core business net sales)
|
|
|
18
|
|
|
29,475
|
|
Change
in net sales
|
|
|
35,811
|
|
|
1,307
|
|
Net
sales
|
|
$
|
491,050
|
|
$
|
455,239
|
|
|
|
|
|
|
|
|
|
Total
net sales growth
|
|
|
7.9
|
%
|
|
0.3
|
%
|
Core
business net sales change
|
|
|
7.9
|
%
|
|
-6.2
|
%
|
Net
sales change from acquisitions (non-core business net sales
change)
|
|
|
0.0
|
%
|
|
6.5
|
%
|
For
the
three-months ended November 30, 2006, our Personal Care segment contributed
$12,734, or 6.4 percent to our consolidated net sales growth and our Housewares
segment contributed $3,245, or 1.7 percent to our consolidated net sales growth
for a combined growth rate of 8.1 percent.
For
the
nine-months ended November 30, 2006, our Personal Care segment contributed
$27,657, or 6.1 percent to our consolidated net sales growth and our Housewares
segment contributed $8,154, or 1.8 percent to our consolidated net sales growth
for a combined growth rate of 7.9 percent.
In
our
Personal Care segment, overall product mix changes allowed us to realize higher
average unit prices for the three- and nine month periods ended November 30,
2006. During those periods, average unit price increases contributed 3.6 and
4.0
percent, respectively, to sales growth while average unit volumes contributed
4.3 and 3.2 percent, respectively, to sales growth over the same periods in
the
prior year.
In
our
Housewares segment, product mix changes also allowed us to realize higher
average unit prices.
For
the
three- and nine-month periods ended November 30, 2006, average unit prices
increases contributed 8.5 and 11.5 percent, respectively, to sales growth over
the same periods in the prior year. For the three-months ended November 30,
2006, unit volume increases contributed a 0.4 percent to our sales growth over
the same period in the prior year. For the nine-month period ended November
30,
2006, we experienced an overall unit volume decline of 2.7 percent over the
same
period in the prior year. The decline in unit volumes was due
to
issues associated with our transition to our new distribution center during
the
first fiscal quarter.
Consolidated
gross profit, as a percentage of sales for the three- and nine-month periods
ended November 30, 2006, decreased 0.7 and 1.0 percent to 42.9 and 44.0 percent,
respectively, compared to 43.6 and 45.0 percent, respectively, for the same
periods in the prior year. The decrease in gross profit is primarily due
to:
· |
Price
concessions, allowances and accommodations granted to customers for
late
shipments in our Housewares segment during the first fiscal
quarter.
|
· |
The
Housewares segment’s expansion into higher unit price, lower margin
product lines.
|
· |
Margin
pressure in our Personal Care segment due to raw materials price
increases.
|
· |
Promotional
pricing and close-out selling throughout the fiscal year, primarily
in the
Personal Care segment, in order to reduce domestic inventory
levels.
|
· |
An
increase in the amount of direct import programs we manage for our
customers. Under a direct import program, we design and arrange for
the
shipment of product specifically for a particular customer. The product
is
shipped with the customer as the importer of record and title to
the goods
transfers upon departure from our manufacturers. The customer is
responsible for all inbound transportation and importation costs
which
results in us charging a reduced price on the related
goods.
|
In
the
fiscal quarter ended November 30, 2006, margins continued to benefit from an
overall favorable impact on net sales of exchange rates. The U.S. Dollar
reversed its first fiscal quarter year-over-year trend of strengthening against
the British Pound and Euro and began to weaken. The dollar continued its trend
of strengthening against the Mexican Peso. The overall net impact of foreign
currency changes was to provide approximately $1,535 and $2,249 of additional
sales dollars for the three- and nine-month periods ended November 30, 2006
when
compared to the same periods in the prior year. For the nine-month period ended
November 30, 2006, the British Pound, the Euro, Canadian Dollar and Brazil
Real
were a source of exchange rate gains, which were partially offset by unfavorable
exchange rates for the Mexican Peso and other Latin American currencies.
Selling,
general, and administrative expense
Selling,
general, and administrative expense, expressed as a percentage of net sales,
increased slightly for the three- and nine-months ended November 30, 2006 to
29.2 and 32.5 percent, respectively, from 29.1 and 32.3 percent, respectively
for the same periods in the prior year. The marginal increases during these
periods were due to the impact of increases in depreciation and higher facility
related costs from the operational transition of our domestic distribution
system, increased personnel costs, and compliance charges for claims associated
with our Housewares segment’s order processing and shipping issues that occurred
earlier during the fiscal year.
Operating
Income by Segment:
The
following table sets forth, for the periods indicated, our operating income
by
segment, as a percentage of net sales, and as a year-over-year percentage
change:
OPERATING
INCOME BY SEGMENT
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
%
of Segment Net Sales
|
|
Quarter
Ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Care
|
|
$
|
20,077
|
|
$
|
19,045
|
|
$
|
1,032
|
|
|
5.4
|
%
|
|
11.6
|
%
|
|
11.8
|
%
|
Housewares
|
|
|
9,025
|
|
|
9,603
|
|
|
(578
|
)
|
|
-6.0
|
%
|
|
22.7
|
%
|
|
26.3
|
%
|
Total
operating income
|
|
$
|
29,102
|
|
$
|
28,648
|
|
$
|
454
|
|
|
1.6
|
%
|
|
13.6
|
%
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
of Segment Net Sales
|
|
Nine
Months Ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Care
|
|
$
|
35,970
|
|
$
|
33,396
|
|
$
|
2,574
|
|
|
7.7
|
%
|
|
9.2
|
%
|
|
9.2
|
%
|
Housewares
|
|
|
20,688
|
|
|
24,680
|
|
|
(3,992
|
)
|
|
-16.2
|
%
|
|
20.5
|
%
|
|
26.6
|
%
|
Total
operating income
|
|
$
|
56,658
|
|
$
|
58,076
|
|
$
|
(1,418
|
)
|
|
-2.4
|
%
|
|
11.5
|
%
|
|
12.8
|
%
|
In
addition to the changes in operating income components discussed above, during
the three- and nine-month periods ended November 30, 2006, we began allocating
corporate overhead to our Housewares segment. The operating income for the
three- and nine-month periods ended November 30, 2005 does not include this
allocation for the reasons discussed below.
Operating
profit for each operating segment is computed based on net sales, less cost
of
goods sold and any selling, general, and administrative expenses associated
with
the segment. The selling, general, and administrative expenses used to compute
each segment's operating profit are comprised of SG&A directly associated
with the segment, plus overhead expenses that are allocable to the operating
segment. In connection with the acquisition of our Housewares segment, the
seller agreed to perform certain operating functions for the segment for a
transitional period of time that ended February 28, 2006. The costs of these
functions were reflected in SG&A for the Housewares segment’s operating
income. During the transitional period, we did not make an allocation of our
corporate overhead to Housewares. For the three- and nine-month periods ended
November 30, 2006, we began making allocations of corporate overhead and
distribution center expenses to Housewares in lieu of the transition charges
recorded in the prior year. These allocations had a negative impact on the
operating income from the Housewares segment. For the three- and nine-month
periods ended November 30, 2006, we allocated expenses totaling $3,690 and
$9,448, respectively, to the Housewares segment, some of which were previously
absorbed by the Personal Care segment. For the three- and nine-month periods
ended November 30, 2005, transition charges of $3,303 and $8,087, respectively,
were used to compute the Housewares segments operating income. For additional
discussion of these charges, see Note 5 to the accompanying consolidated
condensed financial statements.
The
recent transition of our Houseware segment’s operations to our internal
operating systems and our new distribution facility in Southaven, Mississippi
and the pending consolidation of our domestic appliance inventories into the
same new distribution facility have caused us to incur, and will continue to
cause us to incur, additional expenses that we believe will decline when
operations in the new distribution facility stabilize at some point later in
fiscal 2008.
We
are in
the process of re-evaluating our allocation methodology, and plan to change
our
methodology in fiscal 2008 to better reflect the evolving economics of our
operation. At that time, we expect the new methodology to result in some
reduction in operating income for the Housewares segment, offset by an increase
in the operating income for the Personal Care segment. Until we finalize our
approach, the extent of this operating income impact between the segments cannot
be determined.
Interest
expense and other income / expense
Interest
expense for the three- and nine-month periods ended November 30, 2006 increased
to $4,487 and $13,689, respectively, compared to $4,259 and $11,317,
respectively, for the same periods in the prior year. The overall increase
is
the result of increased interest rates on our floating rate debt and interest
expense recorded in our first fiscal quarter ended May 31, 2006 in connection
with a Hong Kong tax settlement.
On
September 28, 2006, the Company entered into interest rate hedge agreements
in
conjunction with its outstanding unsecured floating interest rate $100,000,
5
Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes (the “swaps”). The
swaps are a hedge of the variable LIBOR rates used to reset the floating rates
on the Senior Notes. The swaps effectively fixed the interest rates on the
5, 7
and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning
September 29, 2006.
Other
income, net for the three- and nine-month periods ended November 30, 2006 was
$863 and $1,940, respectively, compared to net expenses of ($623) and ($277),
respectively, for the same periods in the prior year. The following table sets
forth, for the periods indicated, the key components of other income and
expense, as a percentage of net sales, and as a year-over-year percentage
change:
|
|
|
|
|
|
|
|
|
|
|
%
of Net Sales
|
|
Quarter
Ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
395
|
|
$
|
575
|
|
$
|
(180
|
)
|
|
*
|
|
|
0.2
|
%
|
|
*
|
|
Net
unrealized gains (losses) on securities
|
|
|
10
|
|
|
(97
|
)
|
|
107
|
|
|
*
|
|
|
*
|
|
|
0.1
|
%
|
Miscellaneous
other income (expense), net
|
|
|
458
|
|
|
(1,101
|
)
|
|
1,559
|
|
|
*
|
|
|
*
|
|
|
-0.6
|
%
|
Total
other income (expense), net
|
|
$
|
863
|
|
$
|
(623
|
)
|
$
|
1,486
|
|
|
*
|
|
|
0.4
|
%
|
|
-0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
of Net Sales
|
|
Nine
Months Ended November 30,
|
|
2006
|
|
2005
|
|
$
Change
|
|
%
Change
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
1,029
|
|
$
|
710
|
|
$
|
319
|
|
|
*
|
|
|
0.2
|
%
|
|
0.2
|
%
|
Net
unrealized gains on securities
|
|
|
34
|
|
|
(90
|
)
|
|
124
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Miscellaneous
other income (expense), net
|
|
|
877
|
|
|
(897
|
)
|
|
1,774
|
|
|
*
|
|
|
0.2
|
%
|
|
-0.2
|
%
|
Total
other income (expense), net
|
|
$
|
1,940
|
|
$
|
(277
|
)
|
$
|
2,217
|
|
|
*
|
|
|
0.4
|
%
|
|
-0.1
|
%
|
*
Calculation is not meaningful
Interest
income was lower for the three months ended November 30, 2006, when compared
to
the same period last year because last year’s balance included $463 of interest
income on an income tax receivable. Interest income was higher for the nine
months ended November 30, 2006 when compared to the same period last year due
to
higher levels of temporarily invested cash being held thus far this year and
higher interest rates earned.
Miscellaneous
other income for the three- and nine-month period ended November 30, 2006,
includes a $450 gain on a litigation settlement in the third quarter and a
$422
first quarter gain from the sale of 3.9 acres of raw land adjacent to our El
Paso, Texas office and distribution center. The three- and nine-month periods
ended November 30, 2005 included a $1,550 net settlement loss arising from
claims under a bankruptcy plan of reorganization for Tactica International,
Inc., a former 55 percent owned subsidiary and discontinued segment of the
Company offset by $400 of miscellaneous other income due to a favorable legal
settlement.
Income
tax expense
Income
tax expense for the three-month and nine-month periods ended November 30, 2006
was 10.5 and 10.1 percent of earnings before income taxes, respectively, versus
4.6 and 8.2 percent of earnings before income taxes, respectively, for the
same
periods in the prior year. Our tax expense for the third fiscal quarter
continues to increase to more normalized levels on a year-to-date basis over
the
percentages of earnings recorded for the first half of the current fiscal year.
This is due to:
|
· |
In
the first fiscal quarter of the current year, we reversed $192
of tax
provision previously established in connection with a Hong Kong
tax
settlement. This had the effect of lowering that quarter’s tax expense by
2.7 percent; and
|
|
· |
During
the second and third quarters of the 2007 fiscal year, more income
was
recognized in higher tax rate jurisdictions than was recognized
in the
first fiscal quarter.
|
The
prior
year’s quarterly effective tax rate was unusually low as a result of two
factors: first, during the third quarter of fiscal 2006 we incurred lower
taxable income from operations in the United States and had tax losses in
European countries, both of which are higher tax rate jurisdictions, and second,
the favorable tax impact of the Tactica net settlement loss (as previously
discussed), which was incurred in the United States, a high tax rate
jurisdiction.
FINANCIAL
CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Selected
measures of our liquidity and capital resources as of November 30, 2006 and
November 30, 2005 are shown below:
SELECTED
MEASURES OF OUR LIQUIDITY AND CAPITAL RESOURCES
|
|
|
Nine
Months Ended November 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accounts
Receivable Turnover (Days) (1)
|
|
|
78.5
|
|
|
85.7
|
|
Inventory
Turnover (Times) (1)
|
|
|
2.0
|
|
|
1.9
|
|
Working
Capital (in
thousands)
|
|
$
|
237,052
|
|
$
|
169,122
|
|
Current
Ratio
|
|
|
2.5
: 1
|
|
|
1.8
: 1
|
|
Ending
Debt to Ending Equity Ratio (2)
|
|
|
51.9
|
%
|
|
71.4
|
%
|
Return
on Average Equity (1)
|
|
|
9.7
|
%
|
|
12.6
|
%
|
(1) |
Accounts
receivable turnover, inventory turnover, and return on average equity
computations use 12-month trailing sales, cost of sales, or net income
components as required by the particular measure. The current and
four
prior quarters' ending balances of accounts receivable, inventory,
and
equity are used for the purposes of computing the average balance
component as required by the particular
measure.
|
(2) |
Total
debt is defined as all debt outstanding at the balance sheet date.
This
includes the sum of the following lines when they appear on our
consolidated condensed balance sheets: "Revolving line of credit",
"Current portion of long-term debt", and "Long-term debt, less
current
portion."
|
Operating
Activities
Our
cash
balance was $59,017 at November 30, 2006, compared to $18,320 at February 28,
2006. Operating activities provided $39,860 of cash during the first nine months
of fiscal 2007, compared to $19,664 of cash consumed during the same period
in
fiscal 2006.
Accounts
receivable increased $61,156 to $168,445 as of November 30, 2006, compared
to
$107,289 at the end of fiscal 2006. Accounts receivable turnover improved to
78.5 days at November 30, 2006 from 85.7 days at November 30, 2005. The improved
turnover is due to improving receivables management. Our twelve month trailing
sales was $625,558 at November 30, 2006, compared to $582,856 at November 30,
2005, while over the same period, our average receivables were $134,529 and
$136,867, respectively.
Inventories
decreased $22,246 to $146,155 as of November 30, 2006, compared to $168,401
at
the end of fiscal 2006. Inventory turnover improved to 2.0 at the end of
November 2006 compared to 1.9 at the end of November 2005. At November 30,
2005,
inventory was $184,741. Inventories have decreased significantly as a result
of
the following factors:
|
· |
Last
fiscal year, we built up certain inventories due to new product
introductions and to buffer against potential fourth quarter disruptions
from the relocation of Housewares inventories in Monee, Illinois
and
Grooming inventories in El Paso, Texas to a new distribution facility
in
Southaven, Mississippi. While we expect to commence the relocation
of our
domestic appliance inventories from an existing facility to the
new
distribution facility in Southaven, Mississippi, we do not believe
we will
need the level of buffer stock for our appliance inventories that
we built
in advance of the previous
relocations.
|
|
· |
Last
year, in some product categories we increased our purchases to
take
advantage of favorable prices, which we expected to increase as
a result
of increases in fuel prices and the prices of raw materials such
as
copper, steel and plastics. With prices this year starting to moderate,
we
did not believe that there was a need for such actions this
year.
|
Working
capital increased to $237,052 at November 30, 2006, compared to $169,122 at
November 30, 2005. Our current ratio increased to 2.5:1 at November 30, 2006,
compared to 1.8:1 at November 30, 2005. The
improvements in our working capital and current ratio positions over the past
year is the result of the strength of our cash flow and improved receivables
and
inventory management, which allowed us to pay down $67,314 of debt while
increasing our investable cash by $39,063.
Investing
Activities
Investing
activities used $5,621 of cash during the nine months ended November 30, 2006.
Listed below are some significant highlights of our investing
activities:
|
· |
We
spent $507 on the Housewares segment conversion to our new information
systems.
|
|
· |
We
spent $830 to acquire office space in Mexico City and $179 to remodel
and
furnish this and other
facilities.
|
|
· |
We
spent $1,469 on additional storage racking, handling equipment
and
building improvements in our new Southaven, Mississippi distribution
facility.
|
|
· |
We
spent $1,194 on molds and tooling, $776 on information technology
infrastructure, and $583 for recurring additions and/or replacements
of
fixed assets in the normal and ordinary course of
business.
|
|
· |
We
spent $354 for lighting product trademarks acquired from Vessel,
Inc.
|
|
· |
We
spent $395 on patent costs and registrations, including $120 of
patents
acquired from Vessel, Inc.
|
|
· |
We
sold 3.9 acres of raw land adjacent to our El Paso, Texas office
and
distribution center. The land was sold for $666 and resulted in
a gain on
the sale of $422.
|
Financing
Activities
Financing
activities provided $6,458 of cash during the nine months ended November 30,
2006. Highlights of those activities follow.
|
· |
We
drew $7,660 against our $15,000 industrial revenue bond established
to
acquire equipment, machinery and related assets for our new Southaven,
Mississippi distribution facility. At May 31, 2006, we converted
the
$12,634 total drawn into a five-year Industrial Development Revenue
Bond.
We prepaid $4,974 of this debt in September 2006.
|
|
· |
For
the three- and nine-month periods ended November 30, 2006, proceeds
from
employee option exercises provided $3,150 and $3,452 of cash,
respectively.
|
|
· |
In
July 2006, purchases through our employee stock purchase plan provided
$190 of cash.
|
Our
ability to access our Revolving Line of Credit facility is subject to our
compliance with the terms and conditions of the credit facility and long-term
debt agreements, including financial covenants. The financial covenants require
us to maintain certain Debt/EBITDA ratios, fixed charge coverage ratios,
consolidated net worth levels, and other financial requirements. Certain
covenants as of November 30, 2006, limit our total outstanding indebtedness
from
all sources to no more than 3.5 times the latest twelve months trailing EBITDA.
These covenants effectively limited our ability to incur no more than $40,333
of
additional debt from all sources, including draws on our Revolving Line of
Credit Agreement. Additionally, our debt agreements restrict us from incurring
liens on any of our properties, except under certain conditions. In the event
we
were to default on any of our other debt, it would constitute a default under
our credit facilities as well. As of November 30, 2006, we are in compliance
with the terms of the various credit agreements.
Contractual
Obligations:
Our
contractual obligations and commercial commitments, as of November 30, 2006
were:
PAYMENTS
DUE BY PERIOD - TWELVE MONTHS ENDED NOVEMBER 30:
(in
thousands)
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
After
|
|
|
|
Total
|
|
1
year
|
|
2
years
|
|
3
years
|
|
4
years
|
|
5
years
|
|
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt - floating rate
|
|
$
|
232,660
|
|
$
|
|
|
$
|
|
|
$
|
100,000
|
|
$
|
|
|
$
|
57,660
|
|
$
|
75,000
|
|
Term
debt - fixed rate
|
|
|
35,000
|
|
|
10,000
|
|
|
13,000
|
|
|
3,000
|
|
|
3,000
|
|
|
3,000
|
|
|
3,000
|
|
Long-term
incentive plan payouts
|
|
|
3,110
|
|
|
1,498
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on floating rate debt *
|
|
|
66,252
|
|
|
13,815
|
|
|
13,815
|
|
|
11,852
|
|
|
7,925
|
|
|
6,825
|
|
|
12,020
|
|
Interest
on fixed rate debt
|
|
|
4,813
|
|
|
1,846
|
|
|
1,121
|
|
|
787
|
|
|
570
|
|
|
353
|
|
|
136
|
|
Open
purchase orders
|
|
|
67,979
|
|
|
67,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
royalty payments
|
|
|
59,068
|
|
|
2,911
|
|
|
2,832
|
|
|
2,752
|
|
|
5,104
|
|
|
6,241
|
|
|
39,228
|
|
Advertising
and promotional
|
|
|
22,205
|
|
|
10,696
|
|
|
6,398
|
|
|
1,934
|
|
|
1,377
|
|
|
800
|
|
|
1,000
|
|
Operating
leases
|
|
|
2,726
|
|
|
1,744
|
|
|
572
|
|
|
314
|
|
|
96
|
|
|
|
|
|
|
|
Capital
spending commitments
|
|
|
492
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
468
|
|
|
418
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
494,773
|
|
$
|
111,399
|
|
$
|
39,400
|
|
$
|
120,639
|
|
$
|
18,072
|
|
$
|
74,879
|
|
$
|
130,384
|
|
* |
The
future obligation for interest on our variable rate debt has historically
been estimated assuming the rates in effect as of the end of the
latest
fiscal quarter on which we are reporting. As mentioned above in Note
12,
on September 28, 2006, the Company entered into interest rate hedge
agreements in conjunction with its outstanding unsecured floating
interest
rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior
Notes
(the “swaps”). The swaps are a hedge of the variable LIBOR rates used to
reset the floating rates on the Senior Notes. The swaps effectively
fix
the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89,
5.89 and
6.01 percent, respectively, beginning September 29, 2006. Accordingly,
the
future interest obligations related to this debt has been estimated
using
these rates. We also have an unsecured Industrial Development Revenue
Bond, whose rate is subject to periodic adjustment. The bond’s interest
rate has not been hedged. Accordingly, we estimated our future obligation
for interest on it using the rates in effect as of November 30, 2006.
This
is only an estimate, actual rates on the bond may vary over time.
For
instance, a one percent increase in interest rates could add
approximately $77 per year to floating rate interest expense over
the
bond’s remaining maturity.
|
Off-Balance
Sheet Arrangements:
We
have
no existing activities involving special purpose entities or off-balance sheet
financing.
Current
and Future Capital Needs:
As
of
November 30, 2006, we have no outstanding
borrowings or open letters of credit against our $75,000 Revolving Line of
Credit Facility, nor have we needed to draw on this facility during the current
fiscal year. Based
on
our current financial condition and current operations, we believe that cash
flows from operations and available financing sources will continue to provide
sufficient capital resources to fund the Company's foreseeable short and
long-term liquidity requirements. We expect our capital needs to stem primarily
from the need to purchase sufficient levels of inventory, to carry normal levels
of accounts receivable on our balance sheet, to fund normal levels of capital
expenditure, to continue to enhance our North American distribution and
logistics capabilities, and to continue to expand the scope of our operations
in
selected European, Asian and Latin American markets. Over the longer term,
we
expect we will have sufficient capability to repay maturities of our fixed
and
floating rate debt through a combination of cash generated from operations,
the
issuance of additional common shares, and the proceeds of associated new
financings.
The
Company may elect to repurchase additional shares of its common stock from
time
to time based upon its assessment of its liquidity position and market
conditions at the time, and subject to limitations contained in its debt
agreements.
We
continue to evaluate acquisition opportunities on a regular basis and may
augment our internal growth with acquisitions of complementary businesses or
product lines. We may finance acquisition activity with available cash, the
issuance of common shares, or with additional debt, depending upon the size
and
nature of any such transaction and the status of the capital markets at the
time
of such acquisition.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
SEC
defines critical accounting policies as "those that are both most important
to
the portrayal of a company's financial condition and results, and require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain." Preparation of our financial statements involves the application
of
several such policies. These policies include: estimates used in computing
share
based compensation expense, estimates of our exposure to liability for income
taxes, estimates of credits to be issued to customers for sales that have
already been recorded, the valuation of inventory on a lower-of-cost-or-market
basis, the carrying value of long-lived assets, and the economic useful life
of
intangible assets.
Stock
Options -
Effective March 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), using
the modified prospective method and therefore has not restated results for
prior
periods. Under this transition method, stock-based compensation expense starting
in the first quarter of fiscal 2007 includes compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of
March
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, “Accounting for Stock-based Compensation”
(“SFAS 123”). Share-based compensation expense for all awards granted after
February 28, 2006 is based on the grant-date fair value estimated in accordance
with the provision of SFAS 123R. The Company recognizes stock based compensation
expense on a straight-line basis over the requisite service period of the award,
which is generally the underlying option’s vesting term. Prior to the adoption
of SFAS 123R, the Company recognized stock-based compensation expense by
applying the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees”. In March 2005,
the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s
interpretation of SFAS 123R as it pertains to public companies. The Company
has
considered the provisions of SAB 107 in its adoption of SFAS 123R. Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of subjective assumptions, including the
expected life of the awards and stock price volatility. The assumptions used
in
calculating the fair value represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different assumptions,
our
compensation expense could be materially different in the future. In addition,
we are required to estimate the expected pre-vesting forfeiture rate and only
recognize expense for those shares expected to vest. If our actual pre-vesting
forfeiture rate is materially different from our estimate, the stock-based
compensation expense could be significantly different from our estimates. See
Note 2 to the consolidated condensed financial statements for a further
discussion of stock-based compensation.
Income
Taxes
-
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 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
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
liabilities for anticipated tax audit issues in the United States and other
tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If we ultimately determine that payment of these
amounts are unnecessary, we reverse the liability and recognize a tax benefit
during the period in which we determine that the liability is no longer
necessary. We record an additional charge in our provision for taxes in the
period in which we determine that the recorded tax liability is less than we
expect the ultimate assessment to be.
Estimates
of credits to be issued to customers
- We
regularly receive requests for credits from retailers for returned products
or
in connection with sales incentives, such as cooperative advertising and volume
rebate agreements. We reduce sales or increase selling, general, and
administrative expenses, depending on the nature of the credits, for estimated
future credits to customers. Our estimates of these amounts are based either
on
historical information about credits issued, relative to total sales, or on
specific knowledge of incentives offered to retailers. This process entails
a
significant amount of inherent subjectivity and uncertainty.
Valuation
of inventory
- We
account for our inventory using a first-in-first-out system in which we record
inventory on our balance sheet at the lower of its average cost or its net
realizable value. Determination of net realizable value requires us to estimate
the point in time that an item's net realizable value drops below its cost.
We
regularly review our inventory for slow-moving items and for items that we
are
unable to sell at prices above their original cost. When we identify such an
item, we reduce its book value to the net amount that we expect to realize
upon
its sale. This process entails a significant amount of inherent subjectivity
and
uncertainty.
Carrying
value of long-lived assets
- We
apply the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") and Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144") in assessing the carrying values of our
long-lived assets. SFAS 142 and SFAS 144 both require that we consider whether
circumstances or conditions exist which suggest that the carrying value of
a
long-lived asset might be impaired. If such circumstances or conditions exist,
further steps are required in order to determine whether the carrying value
of
the asset exceeds its fair market value. If analyses indicate that the asset's
carrying value does exceed its fair market value, the next step is to record
a
loss equal to the excess of the asset's carrying value over its fair value.
The
steps required by SFAS 142 and SFAS 144 entail significant amounts of judgment
and subjectivity. We completed our analysis of the carrying value of our
goodwill and other intangible assets during the first quarter of fiscal 2007,
and accordingly, recorded no impairment.
Economic
useful life of intangible assets
- We
apply Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") in determining the useful economic lives of
intangible assets that we acquire and that we report on our consolidated balance
sheets. SFAS 142 requires that we amortize intangible assets, such as licenses
and trademarks, over their economic useful lives, unless those assets' economic
useful lives are indefinite. If an intangible asset's economic useful life
is
deemed to be indefinite, that asset is not amortized. When we acquire an
intangible asset, we consider factors such as the asset's history, our plans
for
that asset, and the market for products associated with the asset. We consider
these same factors when reviewing the economic useful lives of our previously
acquired intangible assets as well. We review the economic useful lives of
our
intangible assets at least annually. The determination of the economic useful
life of an intangible asset requires a significant amount of judgment and
entails significant subjectivity and uncertainty. We have completed our analysis
of the remaining useful economic lives of our intangible assets during the
first
quarter of fiscal 2007 and determined that the useful lives currently being
used
to determine amortization of each asset are appropriate.
For
a
more comprehensive list of our accounting policies, we encourage you to read
Note 1 - Summary of Significant Accounting Policies, accompanying the
consolidated financial statements included in our latest annual report on Form
10-K. Note 1 in the consolidated financial statements included with Form 10-K
contains several other policies, including policies governing the timing of
revenue recognition, that are important to the preparation of our consolidated
financial statements, but do not meet the SEC's definition of critical
accounting policies because they do not involve subjective or complex
judgments.
NEW
ACCOUNTING GUIDANCE
Liability
Recognition on Endorsement Split-Dollar Life Insurance Arrangements
-
In June
2006, the EITF reached a consensus on EITF Issue No. 06-4 ("EITF 06-4"),
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements," which requires the
application of the provisions of FASB SFAS 106 (“SFAS 106”), “Employers’
Accounting for Postretirement Benefits Other Than Pensions” to endorsement
split-dollar life insurance arrangements. SFAS 106 would require the Company
to
recognize a liability for the discounted future benefit obligation that the
Company will have to pay upon the death of the underlying insured employee.
An
endorsement-type arrangement generally exists when the Company owns and controls
all incidents of ownership of the underlying policies. EITF 06-4 is currently
effective for fiscal years beginning after December 15, 2007. The Company may
have certain policies subject to the provisions of this new pronouncement and
is
currently determining the effect the adoption of EITF 06-4 will have on its
financial statements.
Uncertainty
in Income Taxes -
In July
2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income
Taxes—An Interpretation of Statement of Financial Accounting Standards No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements, and prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December
15,
2006. The Company is currently determining the effect, if any, the adoption
of
FIN 48 will have on its financial statements.
Fair
Value Measurements -
In
September 2006, FASB issued SFAS 157 “Fair Value Measurements.” This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements. Accordingly,
this
Statement does not require any new fair value measurements, but will potentially
require additional disclosures regarding existing fair value measurements we
currently report. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company is currently determining the effect, if any,
this pronouncement will have on its financial statements.
Effects
of Misstatements -
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how
prior year misstatements should be taken into consideration when quantifying
misstatements in current year financial statements for purposes of determining
whether the current year’s financial statements are materially misstated. SAB
108 permits registrants to record the cumulative
effect of initial adoption by recording the necessary “correcting” adjustments
to the carrying values of assets and liabilities as of the beginning of that
year with the offsetting adjustment recorded to the opening balance of retained
earnings only if material under the dual method. SAB 108 is effective for fiscal
years ending on or after November 15, 2006. The Company does not believe the
adoption of SAB 108 will have a material impact on the Company’s financial
statements.
Changes
in interest rates and currency exchange rates are our primary financial market
risks. Fluctuation in interest rates causes variation in the amount of interest
that we can earn on our available cash and the amount of interest expense we
incur on our short-term and long-term borrowings. Interest on our long-term
debt
outstanding as of November 30, 2006 is both floating and fixed. Fixed rates
are
in place on $35,000 of senior notes at rates ranging from 7.01 percent to 7.24
percent.
Floating
rates are in place on $232,660 of debt. Interest rates on these notes are reset
as described in Note 12 to our consolidated condensed financial statements.
Interest rates during the latest fiscal quarter on these notes ranged from
5.89
to 6.65 percent. During
the third quarter of fiscal 2007, the Company decided to actively manage most
of
its floating rate debt using interest rate swaps. The Company entered into
three
interest rate swaps that convert an aggregate notional principal of $225,000
from floating interest rate payments under its 5, 7 and 10 Year Senior notes
to
fixed interest rate payments ranging from 5.89 to 6.01 percent. In these
transactions, we executed three contracts to pay fixed rates of interest on
an
aggregate notional principal amount of $225,000 at rates currently ranging
from
5.04 to 5.11 percent while simultaneously receiving floating rate interest
payments currently set at 5.37 percent on the same notional amount. The fixed
rate side of the swap will not change over the life of the swap. The floating
rate payments are reset quarterly based on three month LIBOR. The resets are
concurrent with the interest payments made on the underlying debt. These swaps
are used to reduce the Company’s risk of the possibility of increased interest
costs; however, should interest rates drop significantly, we could also lose
the
benefit that floating rate debt can provide in a declining interest rate
environment
We
also
have an unsecured Industrial Development Revenue Bond, whose rate is subject
to
periodic adjustment. The bond’s interest rate has not been hedged. Accordingly,
we estimated our future obligation for interest on it using the rates in effect
as of November 30, 2006. This is only an estimate, actual rates on the bond
may
vary over time. A one percent increase in interest rates could add approximately
$77 per year to floating rate interest expense over the bond’s remaining
maturity.
These
levels of debt, the future impact of any draws against our Revolving Line of
Credit Agreement, whose interest rates can vary with the term of each draw,
and
the uncertainty regarding the level of future interest rates, increases our
risk
profile.
Because
we purchase a majority of our inventory using U.S. Dollars, we are subject
to
minimal short-term foreign exchange rate risk in purchasing inventory. However,
long-term declines in the value of the U.S. Dollar could subject us to higher
inventory costs. Such an increase in inventory costs could occur if foreign
vendors were to react to such a decline by raising prices. Sales in the United
States are transacted in U.S. Dollars. The majority of our sales in the United
Kingdom are transacted in British Pounds, in France and Germany is transacted
in
Euros, in Mexico is transacted in Pesos, in Brazil is transacted in Reals,
and
in Canada is transacted in Canadian Dollars. When the U.S. Dollar strengthens
against other currencies in which we transact sales, we are exposed to foreign
exchange losses on those sales because our foreign currency sales prices are
not
adjusted for currency fluctuations. When the U.S. Dollar weakens against those
currencies, we realize foreign currency gains.
During
the three-month and nine-month periods ended November 30, 2006, we transacted
approximately 17 and 16 percent, respectively of our net sales in foreign
currencies. During the three-month and nine-month periods ended November 30,
2005, we transacted approximately 18 and 15 percent, respectively of our net
sales in foreign currencies. For the three-month and nine-month periods ended
November 30, 2006, we incurred net foreign exchange gains of $487 and $1,373,
respectively. During the same fiscal periods in the prior year, we
incurred net foreign exchange losses of $379 and $1,305.
We
hedge
against foreign currency exchange rate risk by entering into a series of forward
contracts designated as cash flow hedges to protect against the foreign currency
exchange risk inherent in our forecasted transactions denominated in certain
currencies other than the U.S. Dollar. In
these
transactions, we execute a forward currency contract that will settle at the
end
of a forecasted period. During the forecasted period, a hedging relationship
is
created because the size and terms of the forward contract are designed so
that
its fair market value will move in the opposite direction and approximate
magnitude of the underlying foreign currency’s forecasted exchange gain or loss.
To the extent we forecast the expected foreign currency cash flows from the
period the forward contract is entered into until the date it will settle with
reasonable accuracy, we significantly lower or materially eliminate a particular
currency’s exchange risk exposure over the life of the related forward contract.
For
transactions designated as cash flow hedges, the effective portion of the change
in the fair value (arising from the change in the spot rates from period to
period) is deferred in Other Comprehensive Income. These amounts are
subsequently recognized in "Selling, general, and administrative expense" in
the
consolidated statements of income in the same period as the forecasted
transactions close out over the remaining balance of their terms. The
ineffective portion of the change in fair value (arising from the change in
the
difference between the spot rate and the forward rate) is recognized in the
period it occurred. These amounts are also recognized in "Selling, general,
and
administrative expense" in the consolidated statements of income. Our cash
flow
hedges, while executed in order to minimize our foreign currency exchange rate
risk, do subject us to fair value fluctuations on the underlying contracts.
We
do not enter into any forward exchange contracts or similar instruments for
trading or other speculative purposes.
The
following table summarizes the various forward contracts and interest rate
swap
contracts we designated as cash flow hedges that were open at November 30,
2006
and February 28, 2006:
|
|
November
30, 2006
|
|
Contract
|
|
Currency
to
|
|
Notional
|
|
Contract
|
|
Range
of Maturities
|
|
Spot
Rate at Contract
|
|
Spot
Rate at November 30,
|
|
Weighted
Average Forward Rate at
|
|
Weighted
Average Forward Rate at November 30,
|
|
Market
Value of the Contract in U.S. Dollars
|
|
Type
|
|
Deliver
|
|
Amount
|
|
Date
|
|
From
|
|
To
|
|
Date
|
|
2006
|
|
Inception
|
|
2006
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
|
|
|
Pounds
|
|
£ |
10,000,000
|
|
|
1/26/2005
|
|
|
12/11/2006
|
|
|
2/9/2007
|
|
|
1.8700
|
|
|
1.9661
|
|
|
1.8228
|
|
|
1.9657
|
|
|
($1,428
|
)
|
Sell
|
|
|
Pounds
|
|
£ |
10,000,000
|
|
|
5/12/2006
|
|
|
12/14/2007
|
|
|
2/14/2008
|
|
|
1.8940
|
|
|
1.9661
|
|
|
1.9010
|
|
|
1.9590
|
|
|
($580
|
)
|
Sell
|
|
|
Pounds
|
|
£ |
5,000,000
|
|
|
11/28/2006
|
|
|
12/11/2008
|
|
|
1/15/2009
|
|
|
1.9385
|
|
|
1.9661
|
|
|
1.9242
|
|
|
1.9482
|
|
|
($120
|
)
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($2,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
|
|
|
Dollars
|
|
$
|
100,000,000
|
|
|
9/28/2006
|
|
|
6/29/2009
|
|
|
(Pay
fixed rate at 5.04%, receive floating rate at 5.37%)
|
|
|
($598
|
)
|
Swap
|
|
|
Dollars
|
|
$
|
50,000,000
|
|
|
9/28/2006
|
|
|
6/29/2011
|
|
|
(Pay
fixed rate at 5.04%, receive floating rate at 5.37%)
|
|
|
($597
|
)
|
Swap
|
|
|
Dollars
|
|
$
|
75,000,000
|
|
|
9/28/2006
|
|
|
6/29/2014
|
|
|
(Pay
fixed rate at 5.11%, receive floating rate at 5.37%)
|
|
|
($1,521
|
)
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($2,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($4,845
|
) |
|
|
February
28, 2006
|
|
Contract
|
|
Currency
to
|
|
Notional
|
|
Contract
|
|
Range
of Maturities
|
|
Spot
Rate at Contract
|
|
Spot
Rate at Feb. 28,
|
|
Weighted
Average Forward Rate at
|
|
Weighted
Average Forward Rate at Feb. 28,
|
|
Market
Value of the Contract in U.S. Dollars
|
|
Type
|
|
Deliver
|
|
Amount
|
|
Date
|
|
From
|
|
To
|
|
Date
|
|
2006
|
|
Inception
|
|
2006
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
|
|
|
Pounds
|
|
|
£10,000,000
|
|
|
1/26/2005
|
|
|
12/11/2006
|
|
|
2/9/2007
|
|
|
1.8700
|
|
|
1.7540
|
|
|
1.8228
|
|
|
1.7644
|
|
$
|
584
|
|
We
expect
that as currency market conditions warrant, and our foreign denominated
transaction exposure grows, we will continue to execute additional contracts
in
order to hedge against certain potential foreign exchange losses.
The
Company is exposed to credit risk in the event of non-performance by
the other
party (a large financial institution) to its current existing forward
and swap
contracts. However, the Company does not anticipate non-performance by
the other
party.
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
Certain
written and oral statements made by our Company and subsidiaries of our Company
may constitute "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1995. This includes statements made in
this
report, in other filings with the SEC, in press releases, and in certain other
oral and written presentations. Generally, the words "anticipates", "believes",
"expects", "plans", "may", "will", "should", "seeks", "estimates", “project”,
"predict", "potential", "continue", "intends", and other similar words identify
forward-looking statements. All statements that address operating results,
events or developments that we expect or anticipate will occur in the future,
including statements related to sales, earnings per share results, and
statements expressing general expectations about future operating results,
are
forward-looking statements and are based upon the Company’s current expectations
and various assumptions. The Company believes there is a reasonable basis for
its expectations and assumptions, but there can be no assurance that the Company
will realize its expectations or that the Company's assumptions will prove
correct. Forward-looking statements are subject to risks that could cause them
to differ materially from actual results. Accordingly, the Company cautions
readers not to place undue reliance on forward-looking statements. We believe
that these risks include but are not limited to the risks described in this
report under Part II, Item 1A. “Risk Factors", and risks otherwise described
from time to time in our SEC reports as filed. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, under the supervision and with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the
effectiveness of our disclosure controls and procedures as defined in Rule
13a-15(e) promulgated under the Exchange Act as of the end of the period covered
by this report. Based on these evaluations management believes that our
disclosure controls and procedures are effective and ensure that information
we
are required to disclose in our SEC is accumulated and communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure and is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms.
Our
management, including the CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent all
error
and all fraud. A control system, no matter how well designed and operated,
can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect
the
fact that there are resource constraints, and the benefits of controls must
be
considered relative to their costs. Because of the inherent limitations in
all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have
been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts
of
some persons, by collusion of two or more people, or by management override
of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
In
the
process of our evaluation, among other matters, we considered the existence
of
any “significant deficiencies” or “material weaknesses” in our internal control
over financial reporting, and whether we had identified any acts of fraud
involving personnel with a significant role in our internal control over
financial reporting. In the professional auditing literature, “significant
deficiencies” are referred to as “reportable conditions,” which are deficiencies
in the design or operation of controls that could adversely affect our ability
to record, process, summarize and report financial data in the financial
statements. Auditing literature defines “material weakness” as a particularly
serious reportable condition in which the internal control does not reduce
to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the financial statements
and the risk that such misstatements would not be detected within a timely
period by employees in the normal course of performing their assigned functions.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In
connection with the evaluation described above, we identified no change in
our
internal control over financial reporting that occurred during our fiscal
quarter ended November 30, 2006, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Securities
Class Action Litigation - Class
action lawsuits have been filed and consolidated into one action against the
Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and
Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial
Officer, on behalf of purchasers of publicly traded securities of the Company.
The Company understands that the plaintiffs allege violations of Sections 10(b)
and 20(a) of the Exchange Act of 1934, and Rule 10b-5 thereunder, on the grounds
that the Company and the two officers engaged in a scheme to defraud the
Company’s shareholders through the issuance of positive earnings guidance
intended to artificially inflate the Company’s share price so that Mr. Rubin
could sell almost 400,000 of the Company’s common shares at an inflated price.
The plaintiffs are seeking unspecified damages, interest, fees, costs, an
accounting of the insider trading proceeds, and injunctive relief, including
an
accounting of and the imposition of a constructive trust and/or asset freeze
on
the defendants’ insider trading proceeds. The class period stated in the
complaint was October 12, 2004 through October 10, 2005.
The
lawsuit was brought in the United States District Court for the Western District
of Texas. The Company intends to defend the foregoing lawsuit vigorously, but,
because the lawsuit is still in the preliminary stages, the Company cannot
predict the outcome and is not currently able to evaluate the likelihood of
success or the range of potential loss, if any, that might be incurred in
connection with the action. However, if the Company were to lose on any issues
connected with the lawsuit or if the lawsuit is not settled on favorable terms,
the judgement or settlement may have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows. There
is
a risk that such litigation could result in substantial costs and divert
management’s attention and resources from its business, which could adversely
affect the Company's business. The Company carries insurance that provides
an
aggregate coverage of $20 million after a self-insured retention of $500
thousand for the period during which the claims were filed, but cannot evaluate
at this time whether such coverage will be adequate to cover losses, if any,
arising out of the lawsuit.
On
May
15, 2006, the Company filed a motion to dismiss the aforementioned lawsuit
citing numerous deficiencies with the claims asserted in the lawsuit. On June
29, 2006, the plaintiffs filed with the court their opposition to the Company’s
motion to dismiss. On July 17, 2006, the Company filed a reply rebutting the
plaintiffs’ June 29th opposition. As of the date this report was filed, this
matter was before the court for its consideration.
Hong
Kong Income Taxes
- On May
10, 2006, the IRD and the Company reached a settlement regarding tax liabilities
for the fiscal years 1995 through 1997. This agreement was subsequently approved
by the IRD’s Board of Review. For those tax years, we agreed to an assessment of
approximately $4,019 including estimated penalties and interest. Our
consolidated financial statements at May 31, 2006 and February 28, 2006 included
adequate provisions for this liability. As a result of this tax settlement,
in
the first fiscal quarter of 2007, we reversed $192 of tax provision previously
established and recorded $279 of associated interest. During the second fiscal
quarter, the liability was paid with $3,282 of tax reserve certificates and
the
balance in cash.
For
the
fiscal years 1998 through 2003, the IRD has assessed a total of $25,461 (U.S.)
in tax on certain profits of our foreign subsidiaries. Hong Kong levies taxes
on
income earned from certain activities previously conducted in Hong Kong.
Negotiations with the IRD regarding these issues are ongoing, and it is unclear
at this time when they will be resolved.
In
connection with the IRD's tax assessment for the fiscal years 1998 through
2003,
we have purchased tax reserve certificates in Hong Kong totaling $25,144. Tax
reserve certificates represent the prepayment by a taxpayer of potential tax
liabilities. The amounts paid for tax reserve certificates are refundable in
the
event that the value of the tax reserve certificates exceeds the related tax
liability. These certificates are denominated in Hong Kong dollars and are
subject to the risks associated with foreign currency fluctuations.
If
the
IRD were to successfully assert the same position for fiscal years after fiscal
year 2003, the resulting assessment could total $18,673 (U.S.) in taxes for
fiscal years 2004 and 2005. We would vigorously disagree with any such proposed
adjustments and would aggressively contest this matter through the applicable
taxing authority and judicial process, as appropriate.
Although
the final resolution of the proposed adjustments is uncertain and involves
unsettled areas of the law, based on currently available information, we have
provided for our best estimate of the probable tax liability for this matter.
While the resolution of the issue may result in tax liabilities that are
significantly higher or lower than the reserves established for this matter,
management currently believes that the resolution will not have a material
effect on our consolidated financial position or liquidity. However, an
unfavorable resolution could have a material effect on our consolidated results
of operations or cash flows in the quarter in which an adjustment is recorded
or
the tax is due or paid.
United
States Income Taxes
- The
IRS has completed its audits of the U.S. consolidated federal tax returns for
fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided
notice of proposed adjustments to taxes of $13,424 for the three years under
audit. We have resolved the various tax issues and reached an agreement on
additional tax in the amount of $3,568. The resulting tax liability had already
been provided for in our tax reserves and prior to the current fiscal year
we
had decreased our tax accruals related to the IRS audits for fiscal years 2000,
2001 and 2002, accordingly. This additional tax liability and associated
interest of $914 were settled in the fourth quarter of fiscal 2006.
The
IRS
is auditing our U.S. consolidated federal tax returns for fiscal years 2003
and
2004 and has provided notice of proposed adjustments of $5,953 to taxes for
the
years under audit. The Company is vigorously contesting these adjustments.
Although the ultimate outcome of the dispute with the IRS cannot be predicted
with certainty, management is of the opinion that adequate provisions for taxes
in those years have been made in the Company’s consolidated condensed financial
statements.
Other
Matters -
We
are
involved in various other legal claims and proceedings in the normal course
of
operations. We believe the outcome of these matters will not have a material
adverse effect on our consolidated financial position, results of operations,
or
liquidity.
The
ownership of our common shares involves a number of risks and uncertainties.
In
evaluating us and our business before making an investment decision regarding
our securities, potential investors should carefully consider the risk factors
and uncertainties described in "Item 1A. Risk Factors" to Part I of our Annual
Report on Form 10-K for the year ended February 28, 2006 as well as the risk
factors listed below, which supplement the risk factors contained in our Form
10-K. If any of the events or circumstances described in our 10-K or listed
below actually occur, our business, financial condition or results of operations
could be materially adversely affected. The risks contained in our 10-K and
those listed below are not the only risks that we face. Additional risks that
we
do not yet know of or that we currently think are not significant may also
impact our business operation.
We
have experienced delays in implementing the consolidation of our inventories
into our new Southaven, Mississippi distribution facility. Additional delays
could have a material adverse impact on our operations and
profitability.
Our
business operations are dependent on our logistical systems, which include
our
order management system and our computerized warehouse management system. These
logistical systems depend on our new Global Enterprise Resource Planning System.
On September 7, 2004, we implemented our new Global Enterprise Resource Planning
System, along with other new technologies. Following the implementation of
this
new system, most of our businesses (other than our Housewares segment) ran
under
one integrated information system. We continue to closely monitor the new system
and make normal and expected adjustments to improve its effectiveness.
Complications resulting from process adjustments could potentially cause
considerable disruptions to our business. The change to the new system continues
to involve risk. Application program bugs, system conflict crashes, user error,
data integrity issues, customer data conflicts and integration issues with
certain remaining legacy systems all pose potential risks. Implementing new
data
standards and converting existing data to accommodate the new system's
requirements have required a significant effort across our entire organization.
During
the third fiscal quarter of 2005, we began the implementation and transition
of
our Housewares segment to the new system. The information system transition
was
completed late in the fourth fiscal quarter of 2006. We continue to implement
several significant functionality enhancements related to both the Housewares
segment’s and Personal Care segment’s systems. We expect this process will
continue during fiscal 2007.
The
Housewares segment’s move to our new 1,200,000 square foot distribution facility
in Southaven, Mississippi and conversion to related distribution systems began
in December 2005 and is substantially complete. Our Housewares segment
distribution and logistics requirements differ significantly from our
traditional Personal Care segment business. In our Housewares segment, we were
required to improve our ability to deliver larger, more complex assortments
in
smaller individual item volumes to a much more diverse group of retailers,
as
compared to our Personal Care segment. Conversions of this nature involve
extremely complex processes, characterized by interruptions and the diversion
of
management's attention for a period of time after the conversion as the
organization adapts to the new system and seeks to respond quickly to its
day-to-day operations requirements. Initially, we experienced distribution
order
processing and shipment delays. These delays were the result of software issues,
adapting to the new equipment, new employees, and the operation of the new
distribution facility. The delays caused a backlog in orders and in some cases,
order cancellations. Throughout the first fiscal quarter of 2007 we continued
to
work to resolve the technical and operational issues that were causing the
delays and address the issues with affected customers. By the end of the
quarter, we believe we had addressed the most significant issues and the new
facility began to attain its originally planned operational throughput. In
the
fourth quarter of fiscal 2006, we also completed the move of our grooming,
skin
care, and hair products inventories from our El Paso, Texas distribution
facility to the new Southaven, Mississippi distribution facility and commenced
shipments from that facility. In this move, we experienced transitional issues,
but none of the magnitude or impact as those we experienced with the Housewares
segment.
We
currently plan to move the balance of our domestic Personal Care segment
appliance inventory out of an existing leased facility and into our new
Southaven, Mississippi distribution
facility
during the fourth fiscal quarter of 2007. This move includes the following
key
steps:
|
· |
Installation
of additional
storage racking and handling equipment in the new facility in order
to
optimize space utilization and distribution handling
capacity;
|
|
· |
The
physical transfer of inventory from the leased facility to the
new
facility; and
|
|
· |
Configuration
and testing of information systems and processes in the new
warehouse.
|
Any
problems encountered in connection with executing any of the foregoing steps
could have an adverse effect on the Company’s ability to fill orders for
domestic appliances and other products which could adversely affect the
Company’s revenues and profitability and/or impair the domestic appliance and
other business. While
we
believe we have the process and appropriate management in place to effectively
manage the transition and rapidly respond to mitigate any issues that may arise
as a result of the transition, there can be no assurance that additional
disruptions will not occur.
We
rely on our Global Enterprise Resource Planning System for a significant portion
of our operations. Certain international operations still need to be
transitioned to the new system. Our failure to, or delays in, successfully
transitioning all our operations onto this system, could have a material adverse
impact on our operations and profitability.
We
have
begun transitioning Mexico and other Latin American operations to our new system
and expect this process to continue throughout most of fiscal 2008. In addition,
our Housewares segment recently opened selling offices in Japan and Great
Britain and efforts to install and implement appropriate software systems for
these operations are underway. Due to the complexities of these efforts, we
expect to continue to experience a period of significant change and refining
of
the system for several months. We expect that the transition to the new system
will continue to be challenging for us and will require close monitoring to
keep
our documentation and application of internal controls current. Also, the
transition of these operations to our new system may result in an increased
risk
of errors which may require more controls than we expect to need once these
systems are fully transitioned and stable.
We
expect
that these and other planned implementations and functional software
enhancements will continue to strain our internal resources, could further
impact our business, and may result in higher implementation costs and
reallocation of human resources. While we believe we have the process and
appropriate management in place to effectively manage these changes and rapidly
respond to mitigate any issues that may arise as a result of the transition,
there can be no assurance that additional disruptions will not occur.
To
support these new technologies, we are continuously building and supporting
a
much larger and more complex information technology infrastructure. Increased
computing capacity, power requirements, back-up capacities, broadband network
infrastructure and increased security requirements are all potential areas
for
failure and risk. We continue to rely on outside vendors to assist us with
implementation and enhancements and will continue to rely on certain vendors
to
assist us in maintaining some of our infrastructure. Should they fail to perform
due to events outside our control, it could affect our service levels and
threaten our ability to conduct business. We continue to transition many of
these third party services to our in-house staff. The transition from third
party services to in-house staffing of such services poses risks that could
cause additional business disruptions. Finally, natural disasters may disrupt
our infrastructure and our disaster recovery process may not be sufficient
to
protect against loss.
Any
interruption in our logistical systems would impact our ability to procure
our
products from our factories and suppliers, transport them to our distribution
facilities, and store and deliver them to our customers on time and in the
correct amounts. These and other factors described above could have a material
and adverse affect on our business, financial condition and results of
operations.
During
the quarter ended August 31, 2003, our Board of Directors authorized us to
purchase, in the open market or through private transactions, up to 3,000,000
shares of our common stock over a period extending to May 31, 2006. On April
25,
2006, our Board of Directors approved a resolution to extend the existing plan
for three more years through May 31, 2009. During the three- and nine-months
ended November 30, 2006 and 2005, respectively, we did not repurchase any common
shares. From September 1, 2003 through November 30, 2006, we have repurchased
1,563,836 shares at a total cost of $45,611,690 or an average share price of
$29.17. An additional 1,436,164 shares are authorized for purchase under this
plan.
|
31.1 |
Certification
of the Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2 |
Certification
of the Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1 |
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2 |
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
HELEN
OF TROY LIMITED
(Registrant)
|
|
|
|
Date: January
9, 2007
|
|
/s/
Gerald J. Rubin
|
|
Gerald
J. Rubin
|
|
Chairman
of the Board, Chief
|
|
Executive
Officer, President, Director
|
|
and
Principal Executive Officer
|
|
|
|
Date: January
9, 2007
|
|
/s/
Thomas J. Benson
|
|
Thomas
J. Benson
|
|
Senior
Vice-President
|
|
and
Chief Financial Officer
|
|
|
|
Date: January
9, 2007
|
|
/s/
Richard J. Oppenheim
|
|
Richard
J. Oppenheim
|
|
Financial
Controller
|
|
and
Principal Accounting Officer
|
Index
to Exhibits
|
Certification
of the Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Certification
of the Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed
herewith.
**
Furnished herewith.