UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2020May 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number: 001-14669
HELEN OF TROY LIMITED
(Exact name of registrant as specified in its charter)
Bermuda 74-2692550
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Clarendon House, 2 Church Street, Hamilton, Bermuda
(Address of principal executive offices)
1 Helen of Troy Plaza, El Paso, Texas 79912
(Registrant’s United States Mailing Address) (Zip Code)
(915) 225-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Shares, $0.10 par value per share | | HELE | | The NASDAQ Stock Market LLC |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of December 29, 2020,July 1, 2021, there were 24,395,78424,098,751 common shares, $0.10 par value per share, outstanding.
HELEN OF TROY LIMITED AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| | (in thousands, except shares and par value) | (in thousands, except shares and par value) | November 30, 2020 | | February 29, 2020 | (in thousands, except shares and par value) | May 31, 2021 | | February 28, 2021 |
| Assets | Assets | | | | Assets | | | |
| Assets, current: | Assets, current: | | | | Assets, current: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 156,661 | | | $ | 24,467 | | Cash and cash equivalents | $ | 37,368 | | | $ | 45,120 | |
| Receivables - principally trade, less allowances of $3,956 and $1,461 | 500,070 | | | 348,023 | | |
| Receivables - principally trade, less allowances of $594 and $998 | | Receivables - principally trade, less allowances of $594 and $998 | 406,409 | | | 382,449 | |
| Inventory | Inventory | 383,440 | | | 256,311 | | Inventory | 540,129 | | | 481,611 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 10,591 | | | 9,229 | | Prepaid expenses and other current assets | 18,584 | | | 16,170 | |
| | Income taxes receivable | | Income taxes receivable | 4,938 | | | 6,720 | |
| Assets held for sale | Assets held for sale | 39,306 | | | 44,806 | | Assets held for sale | 48,646 | | | 39,867 | |
| Total assets, current | Total assets, current | 1,090,068 | | | 682,836 | | Total assets, current | 1,056,074 | | | 971,937 | |
| | Property and equipment, net of accumulated depreciation of $144,462 and $132,340 | 135,795 | | | 132,107 | | |
| Property and equipment, net of accumulated depreciation of $145,915 and $140,379 | | Property and equipment, net of accumulated depreciation of $145,915 and $140,379 | 134,450 | | | 136,535 | |
| Goodwill | Goodwill | 739,901 | | | 739,901 | | Goodwill | 739,901 | | | 739,901 | |
| Other intangible assets, net of accumulated amortization of $162,425 and $148,891 | 288,617 | | | 300,952 | | |
| Other intangible assets, net of accumulated amortization of $154,224 and $151,240 | | Other intangible assets, net of accumulated amortization of $154,224 and $151,240 | 354,642 | | | 357,264 | |
| Operating lease assets | Operating lease assets | 32,277 | | | 32,645 | | Operating lease assets | 31,905 | | | 32,533 | |
| Deferred tax assets, net | Deferred tax assets, net | 21,568 | | | 14,635 | | Deferred tax assets, net | 26,431 | | | 21,748 | |
| Other assets, net of accumulated amortization of $2,167 and $2,167 | 3,518 | | | 807 | | |
| Other assets | | Other assets | 4,689 | | | 3,570 | |
| Total assets | Total assets | $ | 2,311,744 | | | $ | 1,903,883 | | Total assets | $ | 2,348,092 | | | $ | 2,263,488 | |
| | Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | | | Liabilities and Stockholders' Equity | | | |
| Liabilities, current: | Liabilities, current: | | | | Liabilities, current: | | | |
| Accounts payable, principally trade | Accounts payable, principally trade | $ | 301,175 | | | $ | 152,674 | | Accounts payable, principally trade | $ | 317,573 | | | $ | 334,807 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 289,568 | | | 183,157 | | Accrued expenses and other current liabilities | 232,604 | | | 271,179 | |
| Income taxes payable | Income taxes payable | 5,878 | | | 1,181 | | Income taxes payable | 13,917 | | | 7,022 | |
| Long-term debt, current maturities | Long-term debt, current maturities | 1,884 | | | 1,884 | | Long-term debt, current maturities | 1,884 | | | 1,884 | |
| Liabilities held for sale | | Liabilities held for sale | 5,757 | | | 0 | |
| Total liabilities, current | Total liabilities, current | 598,505 | | | 338,896 | | Total liabilities, current | 571,735 | | | 614,892 | |
| | Long-term debt, excluding current maturities | Long-term debt, excluding current maturities | 438,497 | | | 337,421 | | Long-term debt, excluding current maturities | 509,090 | | | 341,746 | |
| Lease liabilities, non-current | Lease liabilities, non-current | 39,279 | | | 40,861 | | Lease liabilities, non-current | 37,788 | | | 38,352 | |
| Deferred tax liabilities, net | Deferred tax liabilities, net | 5,636 | | | 4,224 | | Deferred tax liabilities, net | 6,432 | | | 5,735 | |
| Other liabilities, non-current | Other liabilities, non-current | 19,389 | | | 20,758 | | Other liabilities, non-current | 20,966 | | | 23,416 | |
| Total liabilities | Total liabilities | 1,101,306 | | | 742,160 | | Total liabilities | 1,146,011 | | | 1,024,141 | |
| | Commitments and contingencies | Commitments and contingencies | 0 | | 0 | Commitments and contingencies | 0 | | 0 |
| | Stockholders' equity: | Stockholders' equity: | | | | Stockholders' equity: | | | |
| Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; NaN issued | Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; NaN issued | 0 | | | 0 | | Cumulative preferred stock, non-voting, $1.00 par. Authorized 2,000,000 shares; NaN issued | 0 | | | 0 | |
| Common stock, $0.10 par. Authorized 50,000,000 shares; 24,394,007 and 25,193,766 shares issued and outstanding | 2,439 | | | 2,519 | | |
| Common stock, $0.10 par. Authorized 50,000,000 shares; 24,097,766 and 24,405,921 shares issued and outstanding | | Common stock, $0.10 par. Authorized 50,000,000 shares; 24,097,766 and 24,405,921 shares issued and outstanding | 2,410 | | | 2,441 | |
| Additional paid in capital | Additional paid in capital | 277,289 | | | 268,043 | | Additional paid in capital | 283,394 | | | 283,396 | |
Accumulated other comprehensive loss
| Accumulated other comprehensive loss
| (12,285) | | | (7,005) | | Accumulated other comprehensive loss
| (12,453) | | | (11,656) | |
| Retained earnings | Retained earnings | 942,995 | | | 898,166 | | Retained earnings | 928,730 | | | 965,166 | |
| Total stockholders' equity | Total stockholders' equity | 1,210,438 | | | 1,161,723 | | Total stockholders' equity | 1,202,081 | | | 1,239,347 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 2,311,744 | | | $ | 1,903,883 | | Total liabilities and stockholders' equity | $ | 2,348,092 | | | $ | 2,263,488 | |
See accompanying notes to condensed consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | Three Months Ended May 31, |
| (in thousands, except per share data) | (in thousands, except per share data) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share data) | 2021 | | 2020 |
| Sales revenue, net | Sales revenue, net | $ | 637,737 | | | $ | 474,737 | | | $ | 1,589,424 | | | $ | 1,265,067 | | Sales revenue, net | $ | 541,223 | | | $ | 420,835 | |
| Cost of goods sold | Cost of goods sold | 350,410 | | | 264,764 | | | 892,460 | | | 723,216 | | Cost of goods sold | 320,631 | | | 241,534 | |
| Gross profit | Gross profit | 287,327 | | | 209,973 | | | 696,964 | | | 541,851 | | Gross profit | 220,592 | | | 179,301 | |
| | Selling, general and administrative expense (“SG&A”) | Selling, general and administrative expense (“SG&A”) | 186,630 | | | 130,692 | | | 439,646 | | | 359,794 | | Selling, general and administrative expense (“SG&A”) | 155,751 | | | 121,989 | |
| | Restructuring charges | Restructuring charges | (12) | | | 12 | | | 355 | | | 1,061 | | Restructuring charges | 6 | | | 333 | |
| Operating income | Operating income | 100,709 | | | 79,269 | | | 256,963 | | | 180,996 | | Operating income | 64,835 | | | 56,979 | |
| | Non-operating income, net | Non-operating income, net | 93 | | | 92 | | | 440 | | | 313 | | Non-operating income, net | 102 | | | 236 | |
| Interest expense | Interest expense | (2,926) | | | (2,767) | | | (9,568) | | | (9,291) | | Interest expense | 2,995 | | | 3,846 | |
| Income before income tax | Income before income tax | 97,876 | | | 76,594 | | | 247,835 | | | 172,018 | | Income before income tax | 61,942 | | | 53,369 | |
| | Income tax expense | 13,721 | | | 7,895 | | | 16,061 | | | 16,530 | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 4,970 | | | (6,917) | |
| Net income | Net income | $ | 84,155 | | | $ | 68,699 | | | $ | 231,774 | | | $ | 155,488 | | Net income | $ | 56,972 | | | $ | 60,286 | |
| | | Earnings per share (“EPS”): | Earnings per share (“EPS”): | | | | | Earnings per share (“EPS”): | | | |
| Basic | Basic | $ | 3.37 | | | $ | 2.73 | | | $ | 9.20 | | | $ | 6.19 | | Basic | $ | 2.34 | | | $ | 2.39 | |
| Diluted | Diluted | 3.34 | | | 2.71 | | | 9.14 | | | 6.15 | | Diluted | 2.31 | | | 2.37 | |
| | | Weighted average shares used in computing EPS: | Weighted average shares used in computing EPS: | | | | | Weighted average shares used in computing EPS: | | | |
| Basic | Basic | 24,965 | | | 25,161 | | | 25,182 | | | 25,099 | | Basic | 24,349 | | | 25,254 | |
| Diluted | Diluted | 25,192 | | | 25,396 | | | 25,350 | | | 25,295 | | Diluted | 24,636 | | | 25,397 | |
See accompanying notes to condensed consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | Three Months Ended May 31, |
| (in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | 2021 | | 2020 |
| Net income | Net income | $ | 84,155 | | | $ | 68,699 | | | $ | 231,774 | | | $ | 155,488 | | Net income | $ | 56,972 | | | $ | 60,286 | |
| Other comprehensive income (loss), net of tax: | | |
| Other comprehensive loss, net of tax: | | Other comprehensive loss, net of tax: | |
| Cash flow hedge activity - interest rate swaps | Cash flow hedge activity - interest rate swaps | 1,180 | | | 1,599 | | | (696) | | | (5,562) | | Cash flow hedge activity - interest rate swaps | 757 | | | (2,607) | |
| Cash flow hedge activity - foreign currency contracts | Cash flow hedge activity - foreign currency contracts | 855 | | | (1,729) | | | (4,584) | | | (514) | | Cash flow hedge activity - foreign currency contracts | (1,554) | | | 695 | |
| Total other comprehensive income (loss), net of tax | 2,035 | | | (130) | | | (5,280) | | | (6,076) | | |
| Total other comprehensive loss, net of tax | | Total other comprehensive loss, net of tax | (797) | | | (1,912) | |
| Comprehensive income | Comprehensive income | $ | 86,190 | | | $ | 68,569 | | | $ | 226,494 | | | $ | 149,412 | | Comprehensive income | $ | 56,175 | | | $ | 58,374 | |
See accompanying notes to condensed consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| | | Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Shareholders' Equity | | Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Shareholders' Equity |
| (in thousands, including shares) | (in thousands, including shares) | Shares | Par
Value | (in thousands, including shares) | Shares | Par
Value |
| Balances at August 31, 2020 | 25,328 | | $ | 2,533 | | $ | 274,643 | | $ | (14,320) | | $ | 1,045,673 | | $ | 1,308,529 | | |
| Net income | — | | — | | — | | — | | 84,155 | | 84,155 | | |
| | Other comprehensive income, net of tax | — | | — | | — | | 2,035 | | — | | 2,035 | | |
| Exercise of stock options | 1 | | 0 | | 70 | | — | | — | | 70 | | |
| Net issuance and settlement of restricted stock | 20 | | 2 | | (2) | | — | | — | | 0 | | |
| Issuance of common stock related to stock purchase plan | 12 | | 1 | | 1,709 | | — | | — | | 1,710 | | |
| Common stock repurchased and retired | (967) | | (97) | | (5,870) | | — | | (186,833) | | (192,800) | | |
| Share-based compensation | — | | — | | 6,739 | | — | | — | | 6,739 | | |
| | Balances at November 30, 2020 | 24,394 | | $ | 2,439 | | $ | 277,289 | | $ | (12,285) | | $ | 942,995 | | $ | 1,210,438 | | |
| | Balances at February 29, 2020 | Balances at February 29, 2020 | 25,194 | | $ | 2,519 | | $ | 268,043 | | $ | (7,005) | | $ | 898,166 | | $ | 1,161,723 | | Balances at February 29, 2020 | 25,194 | | $ | 2,519 | | $ | 268,043 | | $ | (7,005) | | $ | 898,166 | | $ | 1,161,723 | |
| Net income | Net income | — | | — | | — | | — | | 231,774 | | 231,774 | | Net income | — | | — | | — | | — | | 60,286 | | 60,286 | |
| | Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | — | | — | | — | | (5,280) | | — | | (5,280) | | Other comprehensive loss, net of tax | — | | — | | — | | (1,912) | | — | | (1,912) | |
| Exercise of stock options | Exercise of stock options | 13 | | 2 | | 915 | | — | | — | | 917 | | Exercise of stock options | 8 | | 1 | | 475 | | — | | — | | 476 | |
| Net issuance and settlement of restricted stock | 189 | | 19 | | (19) | | — | | — | | 0 | | |
| Issuance and settlement of restricted stock | | Issuance and settlement of restricted stock | 165 | | 17 | | (17) | | — | | — | | 0 | |
| Issuance of common stock related to stock purchase plan | Issuance of common stock related to stock purchase plan | 27 | | 2 | | 3,609 | | — | | — | | 3,611 | | Issuance of common stock related to stock purchase plan | 15 | | 1 | | 1,900 | | — | | — | | 1,901 | |
| Common stock repurchased and retired | Common stock repurchased and retired | (1,029) | | (103) | | (15,913) | | — | | (186,945) | | (202,961) | | Common stock repurchased and retired | (61) | | (6) | | (9,895) | | — | | (112) | | (10,013) | |
| Share-based compensation | Share-based compensation | — | | — | | 20,654 | | — | | — | | 20,654 | | Share-based compensation | — | | — | | 9,291 | | — | | — | | 9,291 | |
| | Balances at November 30, 2020 | 24,394 | | $ | 2,439 | | $ | 277,289 | | $ | (12,285) | | $ | 942,995 | | $ | 1,210,438 | | |
| Balances at May 31, 2020 | | Balances at May 31, 2020 | 25,321 | | $ | 2,532 | | $ | 269,797 | | $ | (8,917) | | $ | 958,340 | | $ | 1,221,752 | |
| | Balances at August 31, 2019 | 25,130 | | $ | 2,513 | | $ | 256,995 | | $ | (4,755) | | $ | 832,622 | | $ | 1,087,375 | | |
| Balances at February 28, 2021 | | Balances at February 28, 2021 | 24,406 | | $ | 2,441 | | $ | 283,396 | | $ | (11,656) | | $ | 965,166 | | $ | 1,239,347 | |
| Net income | Net income | — | | — | | — | | — | | 68,699 | | 68,699 | | Net income | — | | — | | — | | — | | 56,972 | | 56,972 | |
| | Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | — | | — | | — | | (130) | | — | | (130) | | Other comprehensive loss, net of tax | — | | — | | — | | (797) | | — | | (797) | |
| Exercise of stock options | Exercise of stock options | 7 | | 1 | | 556 | | — | | — | | 557 | | Exercise of stock options | 4 | | — | | 275 | | — | | — | | 275 | |
| Net issuance and settlement of restricted stock | 21 | | 3 | | (3) | | — | | — | | 0 | | |
| Issuance and settlement of restricted stock | | Issuance and settlement of restricted stock | 177 | | 18 | | (18) | | — | | — | | 0 | |
| Issuance of common stock related to stock purchase plan | Issuance of common stock related to stock purchase plan | 15 | | 1 | | 1,426 | | — | | — | | 1,427 | | Issuance of common stock related to stock purchase plan | 13 | | 1 | | 2,337 | | — | | — | | 2,338 | |
| Common stock repurchased and retired | Common stock repurchased and retired | (6) | | (1) | | (1,001) | | — | | 0 | | (1,002) | | Common stock repurchased and retired | (502) | | (50) | | (16,616) | | — | | (93,408) | | (110,074) | |
| Share-based compensation | Share-based compensation | — | | — | | 4,758 | | — | | — | | 4,758 | | Share-based compensation | — | | — | | 14,020 | | — | | — | | 14,020 | |
| | Balances at November 30, 2019 | 25,167 | | $ | 2,517 | | $ | 262,731 | | $ | (4,885) | | $ | 901,321 | | $ | 1,161,684 | | |
| | Balances at February 28, 2019 | 24,946 | | $ | 2,495 | | $ | 246,585 | | $ | 1,191 | | $ | 746,366 | | $ | 996,637 | | |
| Net income | — | | — | | — | | — | | 155,488 | | 155,488 | | |
| | Other comprehensive loss, net of tax | — | | — | | — | | (6,076) | | — | | (6,076) | | |
| Exercise of stock options | 69 | | 7 | | 4,183 | | — | | — | | 4,190 | | |
| Net issuance and settlement of restricted stock | 199 | | 21 | | (21) | | — | | — | | 0 | | |
| Issuance of common stock related to stock purchase plan | 30 | | 2 | | 2,833 | | — | | — | | 2,835 | | |
| Common stock repurchased and retired | (77) | | (8) | | (9,592) | | — | | (533) | | (10,133) | | |
| Share-based compensation | — | | — | | 18,743 | | — | | — | | 18,743 | | |
| | Balances at November 30, 2019 | 25,167 | | $ | 2,517 | | $ | 262,731 | | $ | (4,885) | | $ | 901,321 | | $ | 1,161,684 | | |
| Balances at May 31, 2021 | | Balances at May 31, 2021 | 24,098 | | $ | 2,410 | | $ | 283,394 | | $ | (12,453) | | $ | 928,730 | | $ | 1,202,081 | |
See accompanying notes to condensed consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | Nine Months Ended November 30, | | Three Months Ended May 31, |
| (in thousands) | (in thousands) | 2020 | | 2019 | (in thousands) | 2021 | | 2020 |
| Cash provided by operating activities: | Cash provided by operating activities: | | | | Cash provided by operating activities: | | | |
| Net income | Net income | $ | 231,774 | | | $ | 155,488 | | Net income | $ | 56,972 | | | $ | 60,286 | |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | | Adjustments to reconcile net income to net cash (used) provided by operating activities: | | | |
| Depreciation and amortization | Depreciation and amortization | 27,995 | | | 24,876 | | Depreciation and amortization | 8,713 | | | 9,140 | |
| Amortization of financing costs | Amortization of financing costs | 772 | | | 763 | | Amortization of financing costs | 243 | | | 267 | |
| Non-cash operating lease expense | Non-cash operating lease expense | 4,910 | | | 1,371 | | Non-cash operating lease expense | 2,027 | | | 1,558 | |
| Provision for doubtful receivables | 3,445 | | | 484 | | |
| Provision for credit losses | | Provision for credit losses | 0 | | | 1,738 | |
| Non-cash share-based compensation | Non-cash share-based compensation | 20,654 | | | 18,743 | | Non-cash share-based compensation | 14,020 | | | 9,291 | |
| | Loss (gain) on the sale or disposal of property and equipment | 75 | | | (14) | | |
| Loss on the sale or disposal of property and equipment | | Loss on the sale or disposal of property and equipment | 0 | | | 6 | |
| Deferred income taxes and tax credits | Deferred income taxes and tax credits | (4,132) | | | (511) | | Deferred income taxes and tax credits | (3,811) | | | 2,274 | |
| Changes in operating capital: | Changes in operating capital: | | | | Changes in operating capital: | | | |
| Receivables | Receivables | (155,492) | | | (85,747) | | Receivables | (38,747) | | | 13,516 | |
| Inventories | (121,629) | | | (31,317) | | |
| Inventory | | Inventory | (58,860) | | | (16,017) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | (2,915) | | | (1,269) | | Prepaid expenses and other current assets | (2,414) | | | 1,490 | |
| Other assets and liabilities, net | Other assets and liabilities, net | (6,617) | | | 21,091 | | Other assets and liabilities, net | (3,185) | | | (3,907) | |
| Accounts payable | Accounts payable | 148,501 | | | (2,037) | | Accounts payable | (10,885) | | | 40,963 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 95,612 | | | 477 | | Accrued expenses and other current liabilities | (35,574) | | | (16,010) | |
| Accrued income taxes | Accrued income taxes | 6,793 | | | (980) | | Accrued income taxes | 8,116 | | | (11,769) | |
Net cash provided by operating activities
| 249,746 | | | 101,418 | | |
| Net cash (used) provided by operating activities | | Net cash (used) provided by operating activities | (63,385) | | | 92,826 | |
| | | Cash used in investing activities: | | | | |
| Cash used by investing activities: | | Cash used by investing activities: | | | |
| Capital and intangible asset expenditures | Capital and intangible asset expenditures | (19,423) | | | (13,247) | | Capital and intangible asset expenditures | (4,006) | | | (6,451) | |
| Proceeds from the sale of property and equipment | 0 | | | 3 | | |
Net cash used in investing activities
| (19,423) | | | (13,244) | | |
| Net cash used by investing activities
| | Net cash used by investing activities
| (4,006) | | | (6,451) | |
| | | Cash used in financing activities: | | | | |
| Cash provided (used) by financing activities: | | Cash provided (used) by financing activities: | | | |
| Proceeds from line of credit | Proceeds from line of credit | 917,400 | | | 406,600 | | Proceeds from line of credit | 221,100 | | | 765,200 | |
| Repayment of line of credit | Repayment of line of credit | (811,400) | | | (482,000) | | Repayment of line of credit | (52,100) | | | (774,200) | |
| Repayment of long-term debt | Repayment of long-term debt | (1,900) | | | (1,900) | | Repayment of long-term debt | (1,900) | | | (1,900) | |
| Payment of financing costs | Payment of financing costs | (3,796) | | | 0 | | Payment of financing costs | 0 | | | (3,789) | |
| Proceeds from share issuances under share-based compensation plans | Proceeds from share issuances under share-based compensation plans | 4,528 | | | 7,025 | | Proceeds from share issuances under share-based compensation plans | 2,613 | | | 2,377 | |
| | Payments for repurchases of common stock | Payments for repurchases of common stock | (202,961) | | | (10,133) | | Payments for repurchases of common stock | (110,074) | | | (10,013) | |
Net cash used in financing activities
| (98,129) | | | (80,408) | | |
Net cash provided (used) by financing activities
| | Net cash provided (used) by financing activities
| 59,639 | | | (22,325) | |
| | Net increase in cash and cash equivalents
| 132,194 | | | 7,766 | | |
Net (decrease) increase in cash and cash equivalents
| | Net (decrease) increase in cash and cash equivalents
| (7,752) | | | 64,050 | |
| Cash and cash equivalents, beginning balance | Cash and cash equivalents, beginning balance | 24,467 | | | 11,871 | | Cash and cash equivalents, beginning balance | 45,120 | | | 24,467 | |
| Cash and cash equivalents, ending balance | Cash and cash equivalents, ending balance | $ | 156,661 | | | $ | 19,637 | | Cash and cash equivalents, ending balance | $ | 37,368 | | | $ | 88,517 | |
| | | Supplemental non-cash items not included above resulting from the adoption of ASC 842 | | |
| Initial recognition of operating lease asset | $ | — | | | $ | (37,082) | | |
| Initial recognition of lease liabilities | — | | | 47,223 | | |
| Accrued expenses and other current liabilities | — | | | (2,873) | | |
| Other assets and liabilities, net | — | | | (7,311) | | |
| Prepaid expenses and other current assets | — | | | 43 | | |
|
See accompanying notes to condensed consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
November 30, 2020May 31, 2021
Note 1 - Basis of Presentation and Related Information
Corporate Overview
The accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of November 30, 2020May 31, 2021 and February 29, 2020,28, 2021, and the results of our consolidated operations for the interim periods presented. We follow the same accounting policies when preparing quarterly financial data as we use for preparing annual data. These statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K for the fiscal year ended February 29, 2020,28, 2021 (“Form 10-K”), and our other reports on file with the Securities and Exchange Commission (“SEC”(the “SEC”).
When used in these notes, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries.subsidiaries, which are all wholly-owned. We refer to our common shares, par value $0.10 per share, as “common stock.” References to the “FASB”“the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to accounting principles generally accepted in the United States (“U.S.of America (the “U.S.”) Generally Accepted Accounting Principles.. References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a global designer, developer, importer, marketer,leading consumer products company offering creative products and distributor of an expandingsolutions for our customers through a diversified portfolio of brand-name consumer products. We havebrands. As of May 31, 2021, we operated 3 segments: Housewares, Health & Home, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home and on the go. Product offerings includego to help with food preparation, toolscooking, cleaning, organization, beverage service, and storage containers; cleaning, bath and garden tools and accessories; infant and toddler care products; and insulated beverage, food containers and coolers.other tasks to ease everyday living for families. The Health & Home segment focuses onprovides healthcare and home environment products including health care devices, such as thermometers, humidifiers, blood pressure monitors, and heating pads; water filtration systems;systems, and small home appliances such as portable heaters, fans, and air purifiers.appliances. Our Beauty segment provides mass and prestige market beauty appliance and personal care products include electricincluding hair care, beauty care and wellness appliances;styling appliances, grooming tools, and accessories;decorative haircare accessories, and liquid-, solid- and powder-based personal care and grooming products.
Our business is seasonal due to different calendar events, holidays and seasonal weather patterns. Our fiscal reporting period ends on the last day in February. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.
On January 23, 2020, we completed the acquisition of Drybar Products LLC (“Drybar Products”), for approximately $255.9 million in cash, subject to certain customary closing adjustments. Drybar Products is an innovative, trend-setting prestige hair care and styling brand. As part of the transaction, Helen of Troy granted a worldwide license to Drybar Holdings LLC, the owner and long-time operator of Drybar blowout salons, to use the Drybar trademark in their continued operation of Drybar salons. The salons will exclusively use, promote, and sell Drybar products globally. See Note 7 for additional information on the acquisition.U.S.
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Beauty segment's mass channel personal care business (“Personal Care”). The net assets to be disposed of include intangible assets, inventory, andcertain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our mass channel liquids, powder and aerosol products includingunder brands such as Pert, Brut, Sure and Infusium. We expectAccordingly, we have classified the identified net assets of the disposal group as held for sale. The Personal Care divestiture to occur withinwas completed during the second quarter of fiscal 2022. See Notes 3 and 16 for additional information.
2021. Accordingly, we have classified the identified assets of the disposal group as held for sale. For additional information, see Note 5.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) to be a pandemic. COVID-19 continues to spread throughout the United States and the world, with the continued potential for catastrophic impact. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores or limited hours of operation, which has resulted inand materially lower store traffic, at some of our brick and mortar retailers. The economic impact of historic unemployment and consumer uncertainty has also resulted in reduced demand for some of our more discretionary product lines.primarily during fiscal 2021. Additionally, COVID-19 has also disrupted certain parts of our supply chain,chain. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in certain cases has limitedhigher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill demand. COVID-19 has favorably impactedsome orders on a timely basis. Additionally, the extent of COVID-19's impact on the demand for certain of our product lines that are more defensive, meet certain healthcare or healthy living needs, or meetin the needs of consumers that are spending more time at home as a resultfuture will depend on future developments, including the duration, spread and intensity of the pandemic. COVID-19 has also favorably impactedpandemic, our online channel in a meaningful way,continued ability to source and distribute our products, as brickwell as any future government actions affecting consumers and mortar shopping options have been limited or considered unsafe. Although the favorable impactsglobal economy generally, all of COVID-19 outweighedwhich are uncertain and difficult to predict considering the unfavorable impacts during the nine month period ended November 30, 2020, this situation continues to change rapidly and additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today.evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in accordance with GAAP and include all of our subsidiaries. Our condensed consolidated financial statements are prepared in U.S. Dollars. All intercompany accountsbalances and transactions are eliminated in consolidation.
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. The severity, duration and the economic consequences of COVID-19 are uncertain, evolving and difficult to predict. Therefore, our estimates and assumptions may change materially in future periods in response to COVID-19. Actual results may differ materially from those estimates.
Reclassifications
We have reclassified, combined or separately disclosed certain amounts in the prior years’ condensed consolidated financial statements and accompanying footnotes to conform with the current period’s presentation.
Note 2 - New Accounting Pronouncements
Except for the changes discussed below, thereThere have been no changes in the information provided in our Form 10-K for the fiscal year ended February 29, 2020.
Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and will be effective for us in the first quarter of fiscal 2022. We are currently evaluating the impact this guidance may have on our consolidated financial statements.
Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting and other transactions affected by reference rate reform to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU was effective upon issuance, on March 12, 2020, and may be applied through December 31, 2022. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (with subsequent targeted amendments), which modifies the measurements of expected credit losses for certain financial instruments and financial assets, including trade receivables. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.10-K.
Note 3 - Revenue Recognition
We adopted the provisions of ASU 2014-09 in the first quarter of fiscal 2019,Assets and we elected to adopt the standard using the retrospective method. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our revenue is primarily generated from the sale of non-customized consumer products to customers. These products are promised goods that are distinct performance obligations. Revenue is recognized when control of, and title to, the product sold transfers to the customer in accordance with applicable shipping terms, which can occur on the date of shipment or the date of receipt by the customer, depending on the customer and the agreed upon shipping terms. Payment terms from the sale of our products are typically due to us in thirty to ninety days after the date of sale. Therefore, the timing and amount of revenue recognized was not materially impacted by the new guidance. We have thus concluded that the adoption of the guidance did not have a material impact on our consolidated financial statements. The provisions of the new guidance did, however, impact the classification of certain consideration paid to our customers. We therefore have reclassified an immaterial amount of such payments from SG&A to a reduction of net sales revenue for all periods presented. Also, in accordance
with the guidance, we reclassified an immaterial amount of estimated sales returns from a reduction of receivables to accrued expenses and other current liabilities for all periods presented. We elected to adopt the guidance using the full retrospective method.
We measure revenue as the amount of consideration for which we expect to be entitled, in exchange for transferring goods. Certain customers may receive cash incentives such as customer discounts (including volume or trade discounts), advertising discounts and other customer-related programs which are accounted for as variable consideration. In some cases, we apply judgment, such as contractual rates and historical payment trends, when estimating variable consideration. In accordance with the guidance, most variable consideration is classified as a reduction to net sales.
Sales taxes and other similar taxes are excluded from revenue. We elected to account for shipping and handling activities as a fulfillment cost as permitted by the guidance. We do not have unsatisfied performance obligations since our performance obligations are satisfied at a single point in time.
Note 4 - Leases
Adoption of the new lease standard resulted in the recording of lease assets and lease liabilities of approximately $37.1 million and $47.2 million, respectively, as of March 1, 2019. The difference between the lease assets and lease liabilities primarily relates to unamortized lease incentives and deferred rent recorded in accordance with the previous lease guidance. The new standard did not materially impact our consolidated statements of income or cash flows.
We primarily have leases for office space, which are classified as operating leases. Operating leases are included in operating lease assets, accrued expenses and other current liabilities, and lease liabilities, non-current in our consolidated balance sheets. Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our lease contracts do not provide an explicit interest rate, we use an estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
We include options to extend or terminate the lease in the lease term for accounting considerations, when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of less than 1 to 12 years. Lease expense for lease payments is recognized on a straight-line basis over the lease term in a manner similar to previous accounting guidance. We do not recognize leases with an initial term of twelve months or less on the balance sheet and instead recognize the related lease payments as expense in the condensed consolidated statements of income on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for all asset classes. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense recognized in the condensed consolidated statements of income during the three and nine month periods ended November 30, 2020, was $1.8 millionand$5.0 million, respectively, compared to $1.5 million and $4.8 million, respectively, for the same periods last year. Short-term lease expense is excluded from this amount and is not material. For the three and nine month periods ended November 30, 2020, rent expense related to all our operating leases was $2.4 million and $6.6 million, respectively, compared to $2.1 million and $5.8 million for the same periods last year. The non-cash component of lease expense is included as an adjustment to reconcile net income to net cash provided by operating activities in the condensed consolidated statements of cash flows.
A summary of supplemental lease information is as follows:
| | | | | |
| November 30, 2020 |
Weighted average remaining lease term (years)
| 10.0 |
Weighted average discount rate | 6.10% |
Year-to-date cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases (in thousands)
| $ | 4,998 | |
A summary of our estimated lease payments, imputed interest and liabilities as of November 30, 2020 are as follows:
| | | | | |
(in thousands) | |
Fiscal 2021 (balance for remainder of fiscal year) | $ | 1,826 | |
Fiscal 2022 | 7,128 | |
Fiscal 2023 | 6,123 | |
Fiscal 2024 | 5,332 | |
Fiscal 2025 | 5,762 | |
Thereafter | 34,370 | |
Total future lease payments | 60,541 | |
Less: imputed interest | (16,492) | |
Present value of lease liability | $ | 44,049 | |
| | | | | |
| November 30, 2020 |
Lease liabilities, current (1) | $ | 4,770 | |
Lease liabilities, non-current | 39,279 | |
Total lease liability | $ | 44,049 | |
(1)Included as part of “Accrued expenses and other current liabilities” on the condensed consolidated balance sheet.
Note 5 - AssetsLiabilities Held for Sale
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care.Care business and accordingly, we classified the identified net assets of the disposal group as held for sale. The net assets to be disposed of include intangible assets, inventory, andcertain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. We expect the divestiture to occur within fiscal 2021 and have classified the identified assets of the disposal group as held for sale. The business is currently being marketed and the process is ongoing.
The carrying amounts of the major classes of assets for Personal Care that were classified as helddivestiture was completed during the second quarter of fiscal 2022. See Note 16 for sale are as follows:
| | | | | | | | | | | |
| (in thousands) | November 30, 2020 | | February 29, 2020 |
| Assets: | | | |
| Inventory | $ | 11,650 | | | $ | 17,150 | |
| Property and equipment, net of accumulated depreciation of $403 | 83 | | | 83 | |
| Goodwill, net of cumulative impairments of $71,993 | 9,849 | | | 9,849 | |
| Other intangible assets, net of accumulated amortization of $4,474 | 17,724 | | | 17,724 | |
| Total assets held for sale | $ | 39,306 | | | $ | 44,806 | |
Note 6 - Supplemental Balance Sheet Information
PROPERTY AND EQUIPMENT
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Estimated
Useful Lives
(Years) | | November 30, 2020 | | February 29, 2020 |
| Land | | - | | | $ | 12,644 | | | $ | 12,644 | |
| Building and improvements | 3 | - | 40 | | 117,061 | | | 115,592 | |
| Computer, software, furniture and other equipment | 3 | - | 15 | | 98,382 | | | 89,257 | |
| Tools, molds and other production equipment | 3 | - | 7 | | 43,001 | | | 37,652 | |
| Construction in progress | | - | | | 9,169 | | | 9,302 | |
| Property and equipment, gross | | | | | 280,257 | | | 264,447 | |
| Less accumulated depreciation | | | | | (144,462) | | | (132,340) | |
| Property and equipment, net | | | | | $ | 135,795 | | | $ | 132,107 | |
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| | | | | | | | | | | |
| (in thousands) | November 30, 2020 | | February 29, 2020 |
| Accrued compensation, benefits and payroll taxes | $ | 54,667 | | | $ | 49,624 | |
| Accrued sales discounts and allowances | 55,832 | | | 34,176 | |
| Accrued sales returns | 31,919 | | | 22,972 | |
| Accrued advertising | 60,549 | | | 31,351 | |
| Other | 86,601 | | | 45,034 | |
| Total accrued expenses and other current liabilities | $ | 289,568 | | | $ | 183,157 | |
Note 7 - Acquisitions
Drybar Products Acquisition
On January 23, 2020, we completed the acquisition of Drybar Products for approximately $255.9 million in cash, subject to certain customary closing adjustments. Acquisition-related expenses incurred during fiscal 2020 were approximately $2.5 million before tax. The purchase price was funded by borrowings under the Company's revolving credit agreement.
Drybar is an innovative, trend-setting prestige hair care and styling brand in the multi-billion-dollar beauty industry. As part of the transaction, we granted a worldwide license to Drybar Holdings LLC, the owner and long-time operator of Drybar blowout salons, to use the Drybar trademark in their continued operation of Drybar salons. The salons will exclusively use, promote, and sell Drybar products globally.
We accounted for the acquisition as a purchase of a business and recorded the excess purchase price as goodwill. We completed our analysis of the economic lives of the assets acquired and determined the appropriate fair values of the acquired assets. We assigned $30.0 million to trade names and are amortizing over a 15 year expected life. We assigned $17.0 million to customer relationships and are amortizing over a 14.5 year expected life. We used historical attrition rates to assign the expected life. We assigned $10.0 million to a consulting agreement and $6.0 million to a non-compete provision, and we are amortizing these assets over expected lives of 5 and 10 years, respectively.
The following schedule presents the net assets recorded upon the acquisition of Drybar Products on January 23, 2020:
| | | | | |
(in thousands)
| |
Assets: | |
Receivables | $ | 7,710 | |
Inventory | 16,603 | |
Prepaid expenses and other current assets | 190 | |
Property and equipment | 1,472 | |
Goodwill | 172,933 | |
Trade names - definite | 30,000 | |
Other intangible assets - definite | 33,000 | |
Subtotal - assets | 261,908 | |
Liabilities: | |
Accounts payable | 1,948 | |
Accrued expenses | 4,099 | |
Subtotal - liabilities | 6,047 | |
Net assets recorded | $ | 255,861 | |
The fair valuescarrying amounts of the abovemajor classes of assets acquired and liabilities assumedfor our Personal Care business that were estimated by applying income and market approaches. Key assumptions include various discount rates based upon a 12.6% weighted average cost of capital; royalty rates used in the determination of trade names and customer relationship asset values of 5.0% and 3.0%, respectively; and a customer attrition rate used in the determination of customer relationship values of 6.7% per year.classified as held for sale are as follows:
| | | | | | | | | | | |
| (in thousands) | May 31, 2021 | | February 28, 2021 |
| Receivables, net of allowance of $89 and $30 | $ | 16,415 | | | $ | 7,979 | |
| Inventory | 13,010 | | | 12,667 | |
| Property and equipment, net of accumulated depreciation of $403 | 100 | | | 100 | |
| Goodwill, net of accumulated impairment of $80,445 | 1,397 | | | 1,397 | |
| Other intangible assets, net of accumulated amortization of $4,474 | 17,724 | | | 17,724 | |
| Assets held for sale | $ | 48,646 | | | $ | 39,867 | |
| | | |
| Accrued sales discounts and allowances | $ | 5,757 | | | $ | 0 | |
| Liabilities held for sale | $ | 5,757 | | | $ | 0 | |
Note 4 - Accrued Expenses and Other Current Liabilities
| | | | | | | | | | | |
| (in thousands) | May 31, 2021 | | February 28, 2021 |
| Accrued compensation, benefits and payroll taxes | $ | 26,089 | | | $ | 66,385 | |
| Accrued sales discounts and allowances | 57,758 | | | 59,426 | |
| Accrued sales returns | 30,344 | | | 29,434 | |
| Accrued advertising | 45,528 | | | 50,923 | |
| Other | 72,885 | | | 65,011 | |
| Total accrued expenses and other current liabilities | $ | 232,604 | | | $ | 271,179 | |
Note 8 - Goodwill and Intangible Assets
We perform annual impairment tests each fiscal year during the fourth quarter and interim impairment tests, if and when necessary. For the three and nine month periods ended November 30, 2020 and 2019, we did not record any impairment charges.
The following table summarizes the carrying amounts and accumulated amortization for all intangible assets by segment as of the end of the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | February 29, 2020 |
| (in thousands) | Gross
Carrying
Amount | | Cumulative
Goodwill
Impairments | | Accumulated
Amortization | | Net Book
Value | | Gross
Carrying
Amount | | Cumulative
Goodwill
Impairments
(1) | | Accumulated
Amortization
(2) | | Net Book
Value |
| Housewares: | | | | | | | | | | | | | | | |
| Goodwill | $ | 282,056 | | | $ | 0 | | | $ | — | | | $ | 282,056 | | | $ | 282,056 | | | $ | 0 | | | $ | — | | | $ | 282,056 | |
| Trademarks - indefinite | 134,200 | | | — | | | — | | | 134,200 | | | 134,200 | | | — | | | — | | | 134,200 | |
| Other intangibles - finite | 43,063 | | | — | | | (23,011) | | | 20,052 | | | 42,095 | | | — | | | (21,469) | | | 20,626 | |
| Subtotal | 459,319 | | | — | | | (23,011) | | | 436,308 | | | 458,351 | | | — | | | (21,469) | | | 436,882 | |
| | | | | | | | | | | | | | | |
| Health & Home: | | | | | | | | | | | | | | | |
| Goodwill | 284,913 | | | 0 | | | — | | | 284,913 | | | 284,913 | | | 0 | | | — | | | 284,913 | |
| Trademarks - indefinite | 54,000 | | | — | | | — | | | 54,000 | | | 54,000 | | | — | | | — | | | 54,000 | |
| Licenses - finite | 17,050 | | | — | | | (16,015) | | | 1,035 | | | 17,050 | | | — | | | (15,752) | | | 1,298 | |
| Licenses - indefinite | 7,400 | | | — | | | — | | | 7,400 | | | 7,400 | | | — | | | — | | | 7,400 | |
| Other intangibles - finite | 118,446 | | | — | | | (105,293) | | | 13,153 | | | 118,223 | | | — | | | (98,142) | | | 20,081 | |
| Subtotal | 481,809 | | | — | | | (121,308) | | | 360,501 | | | 481,586 | | | — | | | (113,894) | | | 367,692 | |
| | | | | | | | | | | | | | | |
| Beauty: | | | | | | | | | | | | | | | |
| Goodwill | 172,932 | | | 0 | | | — | | | 172,932 | | | 244,925 | | | (71,993) | | | — | | | 172,932 | |
| Trademarks - finite | 30,151 | | | — | | | (1,827) | | | 28,324 | | | 33,392 | | | — | | | (3,564) | | | 29,828 | |
| Licenses - finite | 13,697 | | | — | | | (13,037) | | | 660 | | | 13,697 | | | — | | | (12,800) | | | 897 | |
| Other intangibles - finite | 33,035 | | | — | | | (3,242) | | | 29,793 | | | 79,171 | | | — | | | (46,549) | | | 32,622 | |
| Subtotal | 249,815 | | | 0 | | | (18,106) | | | 231,709 | | | 371,185 | | | (71,993) | | | (62,913) | | | 236,279 | |
| Total | $ | 1,190,943 | | | $ | 0 | | | $ | (162,425) | | | $ | 1,028,518 | | | $ | 1,311,122 | | | $ | (71,993) | | | $ | (198,276) | | | $ | 1,040,853 | |
(1)The cumulative goodwill impairment of approximately $72.0 million in the Beauty segment is related to goodwill associated with the Personal Care business, which was reclassified to assets held for sale.
(2)Includes the retirement and reclassification of accumulated amortization of $49.4 million related to assets associated with the Personal Care business, which were reclassified to assets held for sale.
The following tables summarize the aggregate amortization expense attributable to intangible assets recorded in SG&A in the condensed consolidated statements of income for the periods shown below, as well as our estimated amortization expense for fiscal 2021 through 2026:
| | | | | | | | | | | | | | |
| | | | |
| (in thousands) | | Three Months Ended | | Nine Months Ended |
| November 30, 2020 | | $ | 4,501 | | | $ | 13,527 | |
| November 30, 2019 | | 4,790 | | | 13,129 | |
| | | | | |
Estimated Amortization Expense(in thousands)
| |
Fiscal 2021 | $ | 16,751 | |
Fiscal 2022 | 10,361 | |
Fiscal 2023 | 10,287 | |
Fiscal 2024 | 9,902 | |
Fiscal 2025 | 9,281 | |
Fiscal 2026 | 7,252 | |
Note 95 - Share-Based Compensation Plans
We have equity awards outstanding under severalAs part of our compensation structure, we grant share-based compensation plans. During the threeawards to certain employees and nine month periods ended November 30, 2020, we had the following share-based compensation activity:
•We issued 770 and 2,842 shares to non-employee members of theour Board of Directors during the fiscal year. These awards may be subject to attainment of certain service conditions, performance conditions and/or market conditions. During the first quarter of fiscal 2022, we granted 83,227 service condition awards (“Service Condition Awards”) with a totalweighted average grant date fair value of $0.1 million$219.02. Additionally we granted 143,340 performance-based awards during the first quarter of fiscal 2022, of which 71,670 contained performance conditions (“Performance Condition Awards”) and $0.5 million, respectively,71,670 contained market conditions (“Market Condition Awards”) with weighted average grant date fair values of $216.20 and average share prices of $207.98 and $184.56,$156.08, respectively. Refer to our Form 10-K for further information on the Company's share-based compensation plans.
•We granted time-vested restricted stock units (“RSUs”) that may be settled for 39 and 2,747 shares of common stock, respectively. The RSUs have a weighted average grant price of $200.00 and $170.69 per share, respectively, for a total award fair value at date of grant of an insignificant amount and $0.5 million, respectively.recorded share-based compensation expense in SG&A as follows:
•We granted time-vested restricted stock awards (“RSAs”) that may vest for 4,171 and 42,143 shares of common stock, respectively. The RSAs have a weighted average grant price of $199.39 and $174.03 per share, respectively, for a total award fair value at date of grant of $0.8 million and $7.3 million, respectively.
•There were 0 grants of performance-based stock units (“PSUs”) during the three months ended November 30, 2020. During the nine months ended November 30, 2020, we granted PSUs that may be settled for 4,970 shares of common stock at target. The PSUs have a weighted average grant price of $170.27 per share, for a total award fair value at date of grant of $0.8 million.
•There were 0 grants of performance-based restricted stock awards (“PSAs”) during the three months ended November 30, 2020. During the nine months ended November 30, 2020, we granted PSAs that may vest for 86,004 shares of common stock at target. The PSAs have a weighted average grant price of $170.27 per share, for a total award fair value at date of grant of $14.6 million.
•RSUs for 18,196 and 64,948 shares vested, respectively, with a total fair value at settlement of $3.6 million and $11.3 million, respectively, and average share prices of $195.29 and $173.33, respectively.
•RSAs for 605 and 7,929 shares vested, respectively, with a total fair value at settlement of $0.1 million and $1.4 million, respectively, and average share prices of $201.29 and $174.75, respectively.
•There were 0 PSUs that vested and settled during the three months ended November 30, 2020. During the nine months ended November 30, 2020, PSUs for 112,720 shares vested and settled, with a total settlement date fair value of $18.6 million, and an average share price of $164.58.
•Employees exercised stock options to purchase 850 shares and 13,540 shares of common stock, respectively.
•There were 12,264 and 26,830 purchases of common stock, respectively, under the employee stock purchase plan at an average price of $139.88 and $134.78 per share, respectively. | | | | | | | | | | | |
| | Three Months Ended May 31, |
| (in thousands) | 2021 | | 2020 |
| Stock options | $ | 0 | | | $ | 12 | |
| Directors stock compensation | 160 | | | 182 | |
| Service Condition Awards | 1,940 | | | 1,920 | |
| Performance Condition Awards | 10,023 | | | 6,691 | |
| Market Condition Awards | 1,129 | | | 0 | |
| Employee stock purchase plan | 768 | | | 486 | |
| Share-based compensation expense | 14,020 | | | 9,291 | |
| Less income tax benefits | (859) | | | (606) | |
| Share-based compensation expense, net of tax | $ | 13,161 | | | $ | 8,685 | |
| | | |
|
| | | |
| | | |
| | | |
We recorded the following
Unrecognized Share-Based Compensation Expense
As of May 31, 2021, our total unrecognized share-based compensation expensefor all awards was $47.4 million, which will be recognized over a weighted average amortization period of 2.5 years. The total unrecognized share-based compensation reflects an estimate of target achievement for Performance Condition Awards granted during the first quarter of fiscal 2022 and fiscal 2021, and an estimate of 200% of target achievement for Performance Condition Awards granted in SG&A for the periods shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| (in thousands, except per share data) | 2020 | | 2019 | | 2020 | | 2019 |
| Stock options | $ | 3 | | | $ | 21 | | | $ | 18 | | | $ | 172 | |
| Directors stock compensation | 161 | | | 140 | | | 525 | | | 421 | |
| Performance based and other stock awards | 6,084 | | | 4,138 | | | 19,134 | | | 17,366 | |
| Employee stock purchase plan | 491 | | | 459 | | | 977 | | | 784 | |
| Share-based compensation expense | 6,739 | | | 4,758 | | | 20,654 | | | 18,743 | |
| Less income tax benefits | (403) | | | (343) | | | (1,406) | | | (1,434) | |
| Share-based compensation expense, net of income tax benefits | $ | 6,336 | | | $ | 4,415 | | | $ | 19,248 | | | $ | 17,309 | |
| | | | | | | |
| Impact of share-based compensation on EPS: |
| Basic | $ | 0.25 | | | $ | 0.18 | | | $ | 0.76 | | | $ | 0.69 | |
| Diluted | $ | 0.25 | | | $ | 0.17 | | | $ | 0.76 | | | $ | 0.68 | |
| | | | | | | |
Note 106 - RepurchaseRepurchases of Helen of Troy Common Stock
In May 2019, we announced that our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The authorization wasis effective until May 8, 2019 for a period of three years2022 and replaced our previousformer repurchase authorization, of which approximately $107.4 million remained. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities.authorization. As of November 30, 2020,May 31, 2021, our repurchase authorization allowed for the purchase of $190.0$79.6 million of common stock.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the equity holder can be paid forsettled by having the equity holder tender back to the Companyus a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares.
The following table summarizes our share repurchase activity for the periods shown:
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | Three Months Ended May 31, |
| (in thousands, except share and per share data) | (in thousands, except share and per share data) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except share and per share data) | 2021 | | 2020 |
| Common stock repurchased on the open market: | Common stock repurchased on the open market: | | | | | | | Common stock repurchased on the open market: | | |
| Number of shares | Number of shares | 960,829 | | | 0 | | | 960,829 | | | 0 | | Number of shares | 436,842 | | | 0 | |
| Aggregate value of shares | Aggregate value of shares | $ | 191,606 | | | $ | 0 | | | $ | 191,606 | | | $ | 0 | | Aggregate value of shares | $ | 95,484 | | | $ | 0 | |
| Average price per share | Average price per share | $ | 199.42 | | | $ | 0 | | | $ | 199.42 | | | $ | 0 | | Average price per share | $ | 218.58 | | | $ | 0 | |
| | Common stock received in connection with share-based compensation: | Common stock received in connection with share-based compensation: | | Common stock received in connection with share-based compensation: | |
| Number of shares | Number of shares | 6,115 | | | 6,509 | | | 67,740 | | | 77,067 | | Number of shares | 65,644 | | | 60,845 | |
| Aggregate value of shares | Aggregate value of shares | $ | 1,194 | | | $ | 1,002 | | | $ | 11,355 | | | $ | 10,133 | | Aggregate value of shares | $ | 14,590 | | | $ | 10,013 | |
| Average price per share | Average price per share | $ | 195.26 | | | $ | 153.88 | | | $ | 167.63 | | | $ | 131.48 | | Average price per share | $ | 222.26 | | | $ | 164.56 | |
Note 117 - Restructuring Plan
In October 2017, we announced that we had approved a restructuring plan (referred to as “Project Refuel”) intended to improve theenhance performance primarily in the Beauty and former Nutritional Supplements segments. Project Refuel includes charges for a reduction-in-force and the elimination of certain contracts. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $9.0$10.5 million to $11.0$12.5 million over the duration of the plan. We estimate the plan willto be completed during the first quarter of fiscal 2022 and expect to incur total restructuring charges of approximately $9.5$10.3 million over the duration of the plan.plan, of which $9.2 million have been incurred through the first quarter of fiscal 2022. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically.
AnWe incurred an insignificant change in the estimateamount and $0.3 million of pre-tax restructuring costs wasduring the three months ended May 31, 2021 and May 31, 2020, respectively, which are recorded duringas “Restructuring
charges” in the condensed consolidated statements of income. During the three month period ended November 30, 2020. For the nine month period ended November 30, 2020, we incurred pre-tax restructuring charges of $0.4 million. Since implementing Project Refuel, we have incurred $9.1 million of pre-tax restructuring costs as of November 30, 2020. During the three and nine month periods ended November 30, 2020,May 31, 2021, we made total cash restructuring payments of $0.2 million and $0.9 million, respectively, compared to $0.3 million and $1.8 million, respectively, for the same periods last year.$0.1 million. Since implementing Project Refuel, we have made total cash restructuring payments of $8.9 million. We had a remaining liability of $0.2$9.2 million as of November 30, 2020.May 31, 2021.
Note 128 - Commitments and Contingencies
Legal Matters
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.liquidity, except as described below.
Note 13 - Long-Term Debt
Credit AgreementRegulatory Matters
As a global company, we are subject to U.S. and foreign regulations, including environmental, health and
safety laws, and industry-specific product certifications. Many of February 29, 2020,the products we had a credit agreementsell are subject to
product safety laws and regulations in various jurisdictions. These laws and regulations specify the
maximum allowable levels of certain materials that may be contained in our products, provide statutory
prohibitions against misbranded and adulterated products, establish ingredients and manufacturing
procedures for certain products, specify product safety testing requirements, and set product
identification, labeling and claim requirements. Additionally, some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “Credit Agreement”“EPA”) with Bank of America, N.A., as administrative agent,U.S. Customs and other lenders that provided for an unsecured total revolving commitment of $1.0 billion. Borrowings accrued interest under one of two alternative methods (based upon a base rate or LIBOR) as described inBorder Protection, the Credit Agreement. With each borrowing against our credit line, we could electU.S. Food and Drug Administration, and the interest rate method based on our funding needs at the time. We also incurred loan commitment and letter of credit fees under the Credit Agreement.U.S. Consumer Product Safety Commission.
On March 13, 2020,We are currently in discussions with the EPA regarding the compliance of packaging claims on certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Health & Home segment that are sold in the U.S. The EPA has not raised any product quality, safety or performance issues. We expect these products to be available for distribution with the only changes being modified labeling or different packaging. As a result of these discussions, on May 27, 2021, we entered intovoluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we ensure that all labeling is in compliance and we work with the EPA towards an amendmentexpedient resolution. The EPA has approved modest changes to our labeling claims on our existing water filtration packaging, which we have begun to implement. We resumed shipment of these products and are actively working towards similar agreements regarding our air filtration and humidification packaging in continued collaboration with the Credit Agreement. The amendment extendedEPA. At our request, the maturityEPA issued a Stop Sale, Use or Removal Order on June 29, 2021, which, among other things, allows for the movement of certain of our products among our warehouses and will facilitate rework of the commitment underaffected air filtration packaging once agreed to with the Credit Agreement from December 7, 2021EPA. We believe this is meaningful progress towards a final resolution with the EPA. The stop shipment will remain in effect until we implement an approved labeling and repackaging plan. We expect that our consolidated and Health & Home segment’s fiscal 2022 net sales revenue, gross profit and operating income will be materially and adversely impacted by the stop shipment. At this time, we are not aware of any fines or penalties related to March 13, 2025. Further,this matter imposed against us by the amendment increasedEPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
In addition, during the unsecured revolving commitment from $1.0 billionfirst quarter of fiscal 2022, we recorded a $13.1 million charge to $1.25 billion.write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. The accordioncharge was amendedrecognized in cost of goods sold and is referred to increase it from $200 millionthroughout this Form 10-Q as “EPA compliance costs.” We expect to $300 millionincur additional compliance costs, which may include costs to relabel or repackage our existing inventory as well as incremental freight and storage costs, among other things. Costs to include the ability to use it for term loan commitments. The accordion permits the Company to request to increase its borrowing capacity, not to exceed the $300 million commitment in the aggregate, provided certain conditions are met, including lender approval. Any increase to term loan commitments and revolving loan commitments mustrelabel or repackage our existing inventory will be made on terms identical to the revolving loans under the Credit Agreement and must have a maturity date of no earlier than March 13, 2025. Following the amendment, borrowings under the Credit Agreement bear interest at either the base rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0% for base rate and LIBOR borrowings, respectively. Outstanding letters of credit reduce the borrowing availability undercapitalized into
inventory; however, many of the Credit Agreement on a dollar-for-dollar basis. Weother potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Health & Home segment’s gross profit and operating income. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our business, results of operations and financial condition could be adversely and materially impacted by our actions or in ways that we are not able to repay amounts borrowed at any time without penalty.
As of November 30, 2020, the outstanding revolving loan principal balance was $426.0 million (excluding prepaid financing fees) and the balance of outstanding letters of credit was $19.2 million.predict today. For the three and nine month periods ended November 30, 2020, borrowings under the Credit Agreement incurred interest expense at rates ranging from 1.14%additional information refer to 3.25% and 1.14% to 4.75%Part I, Item 2., respectively. As of November 30, 2020, the amount available for borrowings under the Credit Agreement was $804.8 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of November 30, 2020, these covenants did not limit our ability to incur $804.8 million of additional debt under the Credit Agreement.
Other Debt Agreements
As of November 30, 2020, we have an aggregate principal balance of $18.6 million (excluding prepaid financing fees) under a loan agreement (the “MBFC Loan”) with the Mississippi Business Finance Corporation (the “MBFC”), which was entered into in connection with the issuance by MBFC of taxable industrial development revenue bonds (the “Bonds”). The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. Since March 2018, the MBFC Loan can be called by the holder at any time. The remaining loan balance is payable as follows: $1.9 million annually on March 1, 2021 and 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
On May 14, 2020, Helen of Troy Limited and certain of its subsidiaries entered into the Sixth Amendment to Guaranty Agreement (the “Amended Guaranty”) in favor of Bank of America, N.A. The Amended Guaranty amends the Guaranty Agreement (as amended, the “Guaranty Agreement”), dated March 1, 2013, made by the Company and certain of its subsidiaries in favor of Bank of America, N.A. and other lenders. Certain of the representations and warranties, and covenants in the Guaranty Agreement were amended by the Amended Guaranty to include or modify certain baskets, exceptions and other customary provisions.
The Bonds were issued under a Trust Indenture, dated as of March 1, 2013 (as supplemented, the “Indenture”), by and between MBFC and U.S. Bank National Association, as trustee (the “Trustee”). On May 14, 2020, MBFC and U.S. Bank National Association, as Trustee, entered into the Fifth Supplemental Trust Indenture, effective May 14, 2020 (the “Fifth Supplemental Indenture”), with the consent of Kaz USA, Inc. (“Kaz USA”) and Bank of America, N.A., the purchaser of the Bonds. The Base Rate (as defined in the Indenture) and Eurodollar Rate (as defined in the Indenture) were each amended. As amended by the Fifth Supplemental Indenture, the Bonds and the related loans to Kaz USA will bear interest at a Base Rate or Eurodollar Rate plus a margin based on the Net Leverage Ratio (as defined in the Fifth Supplemental Indenture). The Fifth Supplemental Indenture amended the pricing grid for the Eurodollar and Base Rate margins.
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain key financial covenants defined in the accompanying Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations, - Financial Condition, Liquidity” including “EPA Compliance Costs” and Capital Resources - Credit and Other Debt Agreements. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on our properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are
cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt agreements. The commitments of the lenders to make loans to us under the Credit Agreement are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the Credit Agreement.Part II, Item 1A., “Risk Factors” included within this Form 10-Q.
As of November 30, 2020, we were in compliance with all covenants as defined under the terms of the Credit Agreement and our other debt agreements.
Note 9 - Long-Term Debt
A summary of our long-term debt including prepaid financing fees follows:
| | | | | | | | | | | | | | |
| (in thousands) | | | | November 30, 2020 | | February 29, 2020 |
| MBFC Loan (1) | | | | $ | 18,548 | | | $ | 20,451 | |
| Credit Agreement (2) | | | | 421,833 | | | 318,854 | |
| Total long-term debt | | | | 440,381 | | | 339,305 | |
| Less current maturities of long-term debt | | | | (1,884) | | | (1,884) | |
| Long-term debt, excluding current maturities | | | | $ | 438,497 | | | $ | 337,421 | |
| | | | | | | | | | | |
| (in thousands) | May 31, 2021 | | February 28, 2021 |
| Mississippi Business Finance Corporation Loan (the “MBFC Loan”) (1) | $ | 16,708 | | | $ | 18,607 | |
| Credit Agreement (2) | 498,000 | | | 329,000 | |
| Subtotal | 514,708 | | | 347,607 | |
| Unamortized prepaid financing fees | (3,734) | | | (3,977) | |
| Total long-term debt | 510,974 | | | 343,630 | |
| Less: current maturities of long-term debt | (1,884) | | | (1,884) | |
| Long-term debt, excluding current maturities | $ | 509,090 | | | $ | 341,746 | |
(1)The MBFC Loan is unsecured and bears floating interest based on either LIBORthe London Interbank Offered Rate (“LIBOR”) plus a margin of up to 2.0%, or a Base Rate plus a margin of up to 1.0%, as determined by the interest rate elected and the Net Leverage Ratio defined in the Indenture. Since March 2018, the loan may be called by the holderThe weighted average interest rate on borrowings outstanding was1.1% at any time. The loan can be prepaid without penalty. The remaining principal balance is payable as follows: $1.9 million annually on March 1,both May 31, 2021 and 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.February 28, 2021.
(2)The Credit Agreement's Agreement (defined below) is unsecured and bears floating interest at either the Base Rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0% for Base Rate and LIBOR borrowings, respectively. These floating interest rates are hedged with interest rate swaps to effectively fix interest rates on $225 million of the outstanding principal balance under the Credit Agreement (see Notes 14, 1510, 11, and 1612 for additional information regarding the interest rate swaps). The weighted average interest rate on borrowings outstanding was 1.1% at both May 31, 2021 and February 28, 2021.
At November 30, 2020Credit Agreement
We have a credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent, and February 29, 2020,other lenders that provides for an unsecured total revolving commitment of $1.25 billion. As of May 31, 2021, the balance of outstanding letters of credit was $19.2 million and the amount available for borrowings was $732.8 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of May 31, 2021, these covenants did not limit our long-termability to incur $732.8 million of additional debt has floating interest rates,under the Credit Agreement.
Debt Covenants
As of May 31, 2021, we were in compliance with all covenants as defined under the terms of the Credit Agreement and its book value approximates its fair value.our other debt agreements.
Note 1410 - Fair Value
We classify our various assets and liabilities recordedFair value is defined as the price that would be received to sell an asset or reportedpaid to transfer a liability in an orderly transaction between market participants at fair valuethe measurement date. Valuation techniques under a hierarchy prescribed by GAAP that prioritizes inputs
the accounting guidance related to fair value measurement techniquesmeasurements are based on observable and unobservable inputs. These inputs are classified into three broad levels:the following hierarchy:
Level 1:Observable inputs such as quotedQuoted prices for identical assets or liabilities in active markets;
Level 2:Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3:Unobservable inputs that reflect the reporting entity’s own assumptions.
Assets and liabilities subject to classification are classified upon acquisition. When circumstances dictate the transfer of an asset or liability to a different level, our policy is to recognize the transfer at the beginning of the reporting period in which the event resulting in the transfer occurred.
The following tables present the fair value of our financial assets and liabilities measured on a recurring basis as of the end of the periods shown:
| | | | | | | | | | | |
| | Fair Values (1) |
| | | |
| (in thousands) | November 30, 2020 | | February 29, 2020 |
| Assets: | | | |
| Money market accounts | $ | 118,559 | | | $ | 2,648 | |
| Interest rate swaps | 0 | | | 0 | |
| Foreign currency contracts | 7 | | | 2,083 | |
| Total assets | $ | 118,566 | | | $ | 4,731 | |
| | | | |
| Liabilities: | | | |
| Floating rate debt | $ | 440,381 | | | $ | 339,305 | |
| Interest rate swaps | 11,627 | | | 10,717 | |
| Foreign currency contracts | 5,328 | | | 159 | |
| Total liabilities | $ | 457,336 | | | $ | 350,181 | |
(1)Our financial assets and liabilities are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable. The following tables present the carrying amount and fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis and classified as Level 2 as follows:
| | | | | | | | | | | |
| | Carrying Amount and Fair Value |
| | | |
| (in thousands) | May 31, 2021 | | February 28, 2021 |
| Assets: | | | |
| Cash equivalents (money market accounts) | $ | 1,602 | | | $ | 1,631 | |
| | | |
| Foreign currency derivatives | 0 | | | 33 | |
| Total assets | $ | 1,602 | | | $ | 1,664 | |
| | | | |
| Liabilities: | | | |
| | | |
| Interest rate swaps | $ | 8,947 | | | $ | 9,941 | |
| Foreign currency derivatives | 8,612 | | | 6,550 | |
| Total liabilities | $ | 17,559 | | | $ | 16,491 | |
The carrying amounts of cash, accounts payable, accrued expenses and cash equivalents, receivablesother current liabilities and accountsincome taxes payable approximate fair value because of the short maturity of these items. The carrying amounts of receivables approximate fair value due to the effect of the related allowance for credit losses. The carrying amount of our floating rate debt approximates its fair value.
We use derivatives for hedging purposes andto manage our derivatives are primarily interest rate swaps,exposure to changes in foreign currency exchange rates, which can include foreign currency forward contracts, zero cost collars and cross-currency debt swaps. In addition, we use interest rate swaps to manage our exposure to changes in interest rates. All of our derivative assets and liabilities are recorded at fair value. See Notes 13, 1511 and 16 to these condensed consolidated financial statements12 for more information on our hedging activities.
We classify our floating rate debt as a Level 2 item because the estimation of the fair market value requires the use of a discount rate based upon current market rates of interest for obligations with comparable remaining terms. Such comparable rates are considered significant other observable market inputs. The book value of the floating rate debt approximates its fair value as of the reporting date.
Our other non-financial assets include goodwill, other intangible assets and assets held for sale, which we classify as Level 3 items. These assets are measured at fair value on a non-recurring basis as part of our impairment testing. Note 8 to these condensed consolidated financial statements contains additional information related to goodwill and intangible assets, and our impairment testing.derivatives.
Note 1511 - Financial Instruments and Risk Management
Foreign Currency Risk
OurThe U.S. Dollar is the functional currency for the Company and all of its subsidiaries and is also the U.S. Dollar.reporting currency for the Company. 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 threeApproximately 12% and nine month periods ended November 30, 2020, approximately 11% and 12%, respectively,15% of our net sales revenue was
denominated in foreign currencies compared to 17%during the three month periods ended May 31, 2021 and 14%, respectively, for the same periods last year.2020, respectively. These sales were primarily denominated in Euros, British Pounds, Euros, Mexican Pesos and Canadian Dollars, and Mexican Pesos.Dollars. We make most of our inventory purchases from vendors in the Far EastAsia Pacific market and primarily use the U.S. Dollar for such purchases.
In our condensed consolidated statements of income, foreign currency exchange rate gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines, and all other foreign currency exchange rate gains and losses are recognized in SG&A. During the three and nine month periodsperiod ended November 30, 2020,May 31, 2021, we recorded net exchange gains from foreign currency fluctuations, including the impact of currency hedges and the cross-currency debt swaps,exchange rate net gains of $0.4 million and $0.5 million, respectively, in SG&A compared to foreign currency exchange rate net foreign exchange gainslosses of $0.6$1.7 million and $2.2 million, respectively, for the same periodsperiod last year.
We hedge againstmitigate certain foreign currency exchange rate-riskrate risk by using a series of foreign currency contracts, which can include forward contracts and zero-cost collars, designated as cash flow hedges, and mark-to-market derivativescross-currency debt swaps to protect against the foreign currency exchange rate risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar.foreign currencies. We do not enter into any forward exchange contractsderivatives or similar instruments for trading or other speculative purposes. The effective portion ofOur foreign currency contracts are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value of these instrumentsrecorded in Other Comprehensive Loss (“OCI”) until the hedge transaction is reported insettled, at which point amounts are reclassified from Accumulated Other Comprehensive Income (Loss)Loss (“AOCI”) to our condensed consolidated statements of income. Derivatives for which we have not elected hedge accounting consist of our cross-currency debt swaps, and reclassified into SG&Aany changes in the same period theyfair value of the derivatives are settled. The ineffective portion,recorded in our condensed consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any year presented, is immediately recognized in SG&A.our condensed consolidated statements of income.
Interest Rate Risk
Interest on our outstanding debt as of November 30, 2020May 31, 2021 is based on floating interest rates. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. Floating interest rates are hedged with interest rate swaps to effectively fix interest rates on $225.0 million of the outstanding principal balance under the Credit Agreement, which totaled $426.0$498.0 million (excluding prepaid finance fees) as of November 30, 2020.May 31, 2021. Our interest rate swaps are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in OCI until the hedge transaction is settled, at which point amounts are reclassified from AOCI to our condensed consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any year presented, is immediately recognized in our condensed consolidated statements of income.
The following table summarizestables summarize the fair values of our derivative instruments as of the end of the periods shown:presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | November 30, 2020 |
Derivatives designated as hedging instruments | Hedge
Type | Final
Settlement Date | Notional Amount | | Prepaid
Expenses
and Other
Current Assets | | Other Assets | | Accrued
Expenses
and Other
Current Liabilities | | Other
Liabilities, Non- current |
| Zero-cost collar - Euro | Cash flow | 02/2021 | € | 2,000 | | | $ | 0 | | | $ | 0 | | | $ | 15 | | | $ | 0 | |
| Foreign currency contracts - sell Euro | Cash flow | 02/2022 | € | 46,000 | | | 0 | | | 0 | | | 1,758 | | | 433 | |
| Foreign currency contracts - sell Canadian Dollar | Cash flow | 02/2022 | $ | 26,000 | | | 0 | | | 0 | | | 763 | | | 93 | |
| Zero-cost collar - Pound | Cash flow | 02/2021 | £ | 2,000 | | | 0 | | | 0 | | | 122 | | | 0 | |
| Foreign currency contracts - sell Pound | Cash flow | 02/2022 | £ | 23,790 | | | 0 | | | 0 | | | 662 | | | 266 | |
| Foreign currency contracts - sell Mexican Peso | Cash flow | 02/2021 | $ | 30,000 | | | 7 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | |
| Interest rate swaps | Cash flow | 01/2024 | $ | 225,000 | | | 0 | | | 0 | | | 4,986 | | | 6,641 | |
| Subtotal | | | | | 7 | | | 0 | | | 8,306 | | | 7,433 | |
| | | | | | | | | | | |
| Derivatives not designated under hedge accounting | | | | | | | | | | | |
| Foreign currency contracts - cross-currency debt swaps - Euro | (1) | 04/2022 | € | 6,000 | | | 0 | | | 0 | | | 0 | | | 732 | |
| Foreign currency contracts - cross-currency debt swaps - Pound | (1) | 04/2022 | £ | 4,500 | | | 0 | | | 0 | | | 0 | | | 484 | |
| Subtotal | | | | | 0 | | | 0 | | | 0 | | | 1,216 | |
| Total fair value | | | | | $ | 7 | | | $ | 0 | | | $ | 8,306 | | | $ | 8,649 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | May 31, 2021 |
Derivatives designated as hedging instruments | Hedge
Type | | Final
Settlement Date | | Notional Amount | | Prepaid
Expenses
and Other
Current Assets | | Other Assets | | Accrued
Expenses
and Other
Current Liabilities | | Other
Liabilities, Non- current |
| | | | | | | | | | | | | |
| Forward contracts - sell Euro | Cash flow | | 2/2023 | | € | 43,750 | | | 0 | | | 0 | | | 1,867 | | | 241 | |
| Forward contracts - sell Canadian Dollars | Cash flow | | 2/2023 | | $ | 46,750 | | | 0 | | | 0 | | | 1,857 | | | 251 | |
| Forward contracts - sell Pounds | Cash flow | | 2/2023 | | £ | 38,800 | | | 0 | | | 0 | | | 2,399 | | | 274 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Forward contracts - Sell Australian Dollars | Cash flow | | 11/2021 | | A$ | 4,000 | | | 0 | | | 0 | | | 20 | | | 0 | |
| Interest rate swaps | Cash flow | | 1/2024 | | $ | 225,000 | | | 0 | | | 0 | | | 4,011 | | | 4,936 | |
| Subtotal | | | | | | | 0 | | | 0 | | | 10,154 | | | 5,702 | |
| | | | | | | | | | | | | |
| Derivatives not designated under hedge accounting | | | | | | | | | | | | | |
| Cross-currency debt swaps - Euro | (1) | | 04/2022 | | € | 6,000 | | | 0 | | | 0 | | | 863 | | | 0 | |
| Cross-currency debt swaps - Pounds | (1) | | 04/2022 | | £ | 4,500 | | | 0 | | | 0 | | | 840 | | | 0 | |
| Subtotal | | | | | | | 0 | | | 0 | | | 1,703 | | | 0 | |
| Total fair value | | | | | | | $ | 0 | | | $ | 0 | | | $ | 11,857 | | | $ | 5,702 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | February 29, 2020 |
Derivatives designated as hedging instruments | Hedge Type | Final
Settlement Date | Notional Amount | | Prepaid
Expenses
and Other
Current Assets | | Other Assets | | Accrued
Expenses
and Other
Current Liabilities | | Other
Liabilities, Non- current |
| Zero-cost collar - Euro | Cash flow | 02/2021 | € | 8,000 | | | $ | 74 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Foreign currency contracts - sell Euro | Cash flow | 05/2021 | € | 25,875 | | | 837 | | | 0 | | | 0 | | | 15 | |
| Foreign currency contracts - sell Canadian Dollar | Cash flow | 02/2021 | $ | 14,000 | | | 202 | | | 0 | | | 0 | | | 0 | |
| Zero-cost collar - Pound | Cash flow | 02/2021 | £ | 6,500 | | | 0 | | | 0 | | | 144 | | | 0 | |
| Foreign currency contracts - sell Pound | Cash flow | 05/2021 | £ | 13,000 | | | 435 | | | 23 | | | 0 | | | 0 | |
| Foreign currency contracts - sell Mexican Peso | Cash flow | 05/2020 | $ | 10,000 | | | 12 | | | 0 | | | 0 | | | 0 | |
| Interest rate swaps | Cash flow | 01/2024 | $ | 225,000 | | | 0 | | | 0 | | | 3,489 | | | 7,228 | |
| Subtotal | | | | | 1,560 | | | 23 | | | 3,633 | | | 7,243 | |
| | | | | | | | | | | |
| Derivatives not designated under hedge accounting | | | | | | | | | | | |
| Foreign currency contracts - cross-currency debt swaps - Euro | (1) | 04/2020 | € | 4,400 | | | 473 | | | 0 | | | 0 | | | 0 | |
| Foreign currency contracts - cross-currency debt swaps - Pound | (1) | 04/2020 | £ | 5,000 | | | 27 | | | 0 | | | 0 | | | 0 | |
| Subtotal | | | | | 500 | | | 0 | | | 0 | | | 0 | |
| Total fair value | | | | | $ | 2,060 | | | $ | 23 | | | $ | 3,633 | | | $ | 7,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | February 28, 2021 |
Derivatives designated as hedging instruments | Hedge Type | | Final
Settlement Date | | Notional Amount | | Prepaid
Expenses
and Other
Current Assets | | Other Assets | | Accrued
Expenses
and Other
Current Liabilities | | Other
Liabilities, Non- current |
| | | | | | | | | | | | | |
| Forward contracts - sell Euro | Cash flow | | 2/2022 | | € | 39,000 | | | 0 | | | 0 | | | 1,851 | | | 0 | |
| Forward contracts - sell Canadian Dollars | Cash flow | | 2/2023 | | $ | 34,000 | | | 0 | | | 33 | | | 1,061 | | | 0 | |
| | | | | | | | | | | | | |
| Forward contracts - sell Pounds | Cash flow | | 2/2023 | | £ | 34,500 | | | 0 | | | 0 | | | 2,026 | | | 21 | |
| | | | | | | | | | | | | |
| Forward contracts - sell Australian Dollars | Cash flow | | 11/2021 | | A$ | 4,000 | | | 0 | | | 0 | | | 18 | | | 0 | |
| Interest rate swaps | Cash flow | | 1/2024 | | $ | 225,000 | | | 0 | | | 0 | | | 4,407 | | | 5,534 | |
| Subtotal | | | | | | | 0 | | | 33 | | | 9,363 | | | 5,555 | |
| | | | | | | | | | | | | |
| Derivatives not designated under hedge accounting | | | | | | | | | | | | | |
| Cross-currency debt swaps - Euro | (1) | | 04/2022 | | € | 6,000 | | | 0 | | | 0 | | | 0 | | | 817 | |
| Cross-currency debt swaps - Pounds | (1) | | 04/2022 | | £ | 4,500 | | | 0 | | | 0 | | | 0 | | | 756 | |
| Subtotal | | | | | | | 0 | | | 0 | | | 0 | | | 1,573 | |
| Total fair value | | | | | | | $ | 0 | | | $ | 33 | | | $ | 9,363 | | | $ | 7,128 | |
(1)These are foreign currency contractscross-currency debt swaps, for which we have not elected hedge accounting. We refer to them as “cross-currency debt swaps”. They, in effect,accounting, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements.
The following table summarizes the pre-tax effecteffects of derivative instruments designated as cash flow hedges were as follows for the periods shown:presented:
| | | | Three Months Ended November 30, | | Three Months Ended May 31, |
| | | Gain (Loss)
Recognized in AOCI | | Gain (Loss) Reclassified from
AOCI into Income | | Gain (Loss) Recognized
in Income | | Gain (Loss)
Recognized in AOCI | | Gain (Loss) Reclassified
from AOCI into Income |
| (in thousands) | (in thousands) | 2020 | | 2019 | | Location | | 2020 | | 2019 | | Location | | 2020 | | 2019 | (in thousands) | 2021 | | | Location | | 2021 | |
| Currency contracts - cash flow hedges | $ | 1,550 | | | $ | (2,739) | | | SG&A | | $ | 549 | | | $ | (630) | | | | | $ | 0 | | | $ | 0 | | |
| Foreign currency contracts - cash flow hedges | | Foreign currency contracts - cash flow hedges | $ | (3,191) | | | | Sales revenue, net | | $ | (1,226) | | |
| Interest rate swaps - cash flow hedges | Interest rate swaps - cash flow hedges | 1,539 | | | 2,084 | | | Interest expense | | 0 | | | 0 | | | Interest expense | | (1,289) | | | (162) | | Interest rate swaps - cash flow hedges | (290) | | | | Interest expense | | (1,284) | | |
| Cross-currency debt swaps - principal | 0 | | | 0 | | | | | 0 | | | 0 | | | SG&A | | 23 | | | (389) | | |
| Cross-currency debt swaps - interest | 0 | | | 0 | | | | | 0 | | | 0 | | | Interest Expense | | (2) | | | 73 | | |
| | Total | Total | $ | 3,089 | | | $ | (655) | | | | | $ | 549 | | | $ | (630) | | | | | $ | (1,268) | | | $ | (478) | | Total | $ | (3,481) | | | | | | $ | (2,510) | | |
| | | | Nine Months Ended November 30, | | | Three Months Ended May 31, |
| | | Gain (Loss)
Recognized in AOCI | | Gain (Loss) Reclassified from
AOCI into Income | | Gain (Loss) Recognized
in Income | | | Gain (Loss)
Recognized in AOCI | | Gain (Loss) Reclassified
from AOCI into Income |
| (in thousands) | (in thousands) | 2020 | | 2019 | | Location | | 2020 | | 2019 | | Location | | 2020 | | 2019 | (in thousands) | | 2020 | | Location | | | 2020 |
| Currency contracts - cash flow hedges | $ | (5,653) | | | $ | (3,407) | | | SG&A | | $ | (124) | | | $ | (2,840) | | | | | $ | 0 | | | $ | 0 | | |
| Foreign currency contracts - cash flow hedges | | Foreign currency contracts - cash flow hedges | | $ | 1,604 | | | SG&A | | | $ | 765 | |
| Interest rate swaps - cash flow hedges | Interest rate swaps - cash flow hedges | (910) | | | (7,242) | | | Interest expense | | 0 | | | 0 | | | Interest expense | | (3,222) | | | 69 | | Interest rate swaps - cash flow hedges | | (4,133) | | | Interest expense | | | (726) | |
| Cross-currency debt swaps - principal | 0 | | | 0 | | | | | 0 | | | 0 | | | SG&A | | (1,075) | | | 419 | | |
| Cross-currency debt swaps - interest | 0 | | | 0 | | | | | 0 | | | 0 | | | Interest expense | | 72 | | | 147 | | |
| | Total | Total | $ | (6,563) | | | $ | (10,649) | | | | | $ | (124) | | | $ | (2,840) | | | | | $ | (4,225) | | | $ | 635 | | Total | | $ | (2,529) | | | | | | $ | 39 | |
The pre-tax effects of derivative instruments not designated under hedge accounting were as follows for the periods presented:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, |
| | Gain (Loss)
Recognized in Income |
| (in thousands) | Location | | 2021 | | 2020 |
| Cross-currency debt swaps - principal | SG&A | | (129) | | | (149) | |
| Cross-currency debt swaps - interest | Interest expense | | (2) | | | 74 | |
| Total | | | $ | (131) | | | $ | (75) | |
We expect pre-tax lossesa net loss of $8.3$10.2 million associated with foreign currency contracts and interest rate swaps currently reported in accumulated other comprehensive income,AOCI to be reclassified into income
over the next twelve months. The amount ultimately realized, however, will differ as exchange rates varyand interest rates change and the underlying contracts settle. See Notes 10 and 12 to these condensed consolidated financial statements for more information.
Counterparty Credit Risk
Financial instruments, including foreign currency contracts, and cross-currency debt swaps and interest rate swaps, expose us to counterparty credit risk for non-performance. We manage our exposure to counterparty credit risk by only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. Although our theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, weWe believe that the risk of incurring credit losses is remote.
`
Note 1612 - Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in AOCI by component and related tax effects for the periods shown:presented were as follows:
| | (in thousands) | (in thousands) | | Interest
Rate Swaps | | Foreign
Currency
Contracts | | Total | (in thousands) | Interest
Rate Swaps | | Foreign
Currency
Contracts | | Total |
| Balance at February 29, 2020 | Balance at February 29, 2020 | | $ | (8,199) | | | $ | 1,194 | | | $ | (7,005) | | Balance at February 29, 2020 | $ | (8,199) | | | $ | 1,194 | | | $ | (7,005) | |
| Other comprehensive (loss) income before reclassification | | Other comprehensive (loss) income before reclassification | (4,133) | | | 1,604 | | | (2,529) | |
| Amounts reclassified out of AOCI | | Amounts reclassified out of AOCI | 726 | | | (765) | | | (39) | |
| Tax effects | | Tax effects | 800 | | | (144) | | | 656 | |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | (2,607) | | | 695 | | | (1,912) | |
| Balance at May 31, 2020 | | Balance at May 31, 2020 | $ | (10,806) | | | $ | 1,889 | | | $ | (8,917) | |
| | Balance at February 28, 2021 | | Balance at February 28, 2021 | $ | (7,576) | | | $ | (4,080) | | | $ | (11,656) | |
| Other comprehensive loss before reclassification | Other comprehensive loss before reclassification | | (910) | | | (5,653) | | | (6,563) | | Other comprehensive loss before reclassification | (290) | | | (3,191) | | | (3,481) | |
| Amounts reclassified out of AOCI | Amounts reclassified out of AOCI | | 0 | | | 124 | | | 124 | | Amounts reclassified out of AOCI | 1,284 | | | 1,226 | | | 2,510 | |
| Tax effects | Tax effects | | 214 | | | 945 | | | 1,159 | | Tax effects | (237) | | | 411 | | | 174 | |
| Other comprehensive loss | | (696) | | | (4,584) | | | (5,280) | | |
| Balance at November 30, 2020 | | $ | (8,895) | | | $ | (3,390) | | | $ | (12,285) | | |
| | Balance at February 28, 2019 | | $ | 132 | | | $ | 1,059 | | | $ | 1,191 | | |
| Other comprehensive loss before reclassification | | (7,242) | | | (3,407) | | | (10,649) | | |
| Amounts reclassified out of AOCI | | 0 | | | 2,840 | | | 2,840 | | |
| Tax effects | | 1,680 | | | 53 | | | 1,733 | | |
| Other comprehensive loss | | (5,562) | | | (514) | | | (6,076) | | |
| Balance at November 30, 2019 | | $ | (5,430) | | | $ | 545 | | | $ | (4,885) | | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | 757 | | | (1,554) | | | (797) | |
| Balance at May 31, 2021 | | Balance at May 31, 2021 | $ | (6,819) | | | $ | (5,634) | | | $ | (12,453) | |
See Notes 13, 149, 10 and 1511 to these condensed consolidated financial statements for additional information regarding our hedging activities.cash flow hedges.
Note 1713 - Segment Information
The following tables presentsummarize segment information for the periods shown:presented:
| | | Three Months Ended November 30, 2020 | | Three Months Ended May 31, 2021 |
| (in thousands) | (in thousands) | Housewares | | Health & Home | | Beauty (1) | | Total | (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Sales revenue, net | Sales revenue, net | $ | 222,400 | | | $ | 250,158 | | | $ | 165,179 | | | $ | 637,737 | | Sales revenue, net | $ | 193,644 | | | $ | 204,096 | | | $ | 143,483 | | | $ | 541,223 | |
| Restructuring charges | Restructuring charges | (12) | | | 0 | | | 0 | | | (12) | | Restructuring charges | 0 | | | 0 | | | 6 | | | 6 | |
| Operating income | Operating income | 37,658 | | | 30,478 | | | 32,573 | | | 100,709 | | Operating income | 27,143 | | | 11,249 | | | 26,443 | | | 64,835 | |
| Capital and intangible asset expenditures | Capital and intangible asset expenditures | 1,375 | | | 2,441 | | | 370 | | | 4,186 | | Capital and intangible asset expenditures | 2,987 | | | 748 | | | 271 | | | 4,006 | |
| Depreciation and amortization | Depreciation and amortization | 2,371 | | | 4,106 | | | 3,042 | | | 9,519 | | Depreciation and amortization | 2,548 | | | 2,726 | | | 3,439 | | | 8,713 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, 2019 |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Sales revenue, net | $ | 183,211 | | | $ | 185,810 | | | $ | 105,716 | | | $ | 474,737 | |
| Restructuring charges | 0 | | | 0 | | | 12 | | | 12 | |
| | | | | | | |
| Operating income | 42,272 | | | 24,372 | | | 12,625 | | | 79,269 | |
| Capital and intangible asset expenditures | 2,272 | | | 1,917 | | | 197 | | | 4,386 | |
| Depreciation and amortization | 2,263 | | | 3,740 | | | 2,757 | | | 8,760 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2020 |
| (in thousands) | Housewares | | Health & Home | | Beauty (1) | | Total |
| Sales revenue, net | $ | 564,891 | | | $ | 661,568 | | | $ | 362,965 | | | $ | 1,589,424 | |
| Restructuring charges | 251 | | | 0 | | | 104 | | | 355 | |
| Operating income | 106,294 | | | 95,782 | | | 54,887 | | | 256,963 | |
| Capital and intangible asset expenditures | 6,912 | | | 10,346 | | | 2,165 | | | 19,423 | |
| Depreciation and amortization | 6,743 | | | 12,331 | | | 8,921 | | | 27,995 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2019 |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Sales revenue, net | $ | 496,017 | | | $ | 499,543 | | | $ | 269,507 | | | $ | 1,265,067 | |
| Restructuring charges | 90 | | | 0 | | | 971 | | | 1,061 | |
| | | | | | | |
| Operating income | 109,170 | | | 51,836 | | | 19,990 | | | 180,996 | |
| Capital and intangible asset expenditures | 8,354 | | | 4,115 | | | 778 | | | 13,247 | |
| Depreciation and amortization | 5,292 | | | 12,322 | | | 7,262 | | | 24,876 | |
(1)The three and nine month periods ended November 30, 2020 include three and nine months of operating results for Drybar Products, respectively, which was acquired on January 23, 2020, with no comparable results in the same periods last year. For additional information regarding the Drybar Products acquisition, see Note 7 to the accompanying condensed consolidated financial statements.
We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, restructuring charges, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment, plus shared service and corporate overhead expenses that are allocable to the segment. We do not allocate non-operating income and expense, including interest or income taxes, to operating segments. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, 2020 |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Sales revenue, net | $ | 140,628 | | | $ | 199,956 | | | $ | 80,251 | | | $ | 420,835 | |
| Restructuring charges | 238 | | | 0 | | | 95 | | | 333 | |
| | | | | | | |
| Operating income | 23,233 | | | 31,533 | | | 2,213 | | | 56,979 | |
| Capital and intangible asset expenditures | 2,717 | | | 3,408 | | | 326 | | | 6,451 | |
| Depreciation and amortization | 2,122 | | | 4,052 | | | 2,966 | | | 9,140 | |
Note 1814 - Income Taxes
The period-over-period comparison of our effective tax rate is often impacted byWe reorganized the mix of taxable income in our various tax jurisdictions. Due to our organizationCompany in Bermuda in 1994 and the ownership structuremany of our foreign subsidiaries many of which are not owned directly or indirectly owned by a U.S. parent company, an immaterial amountparent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax
rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results and transfer pricing and tax regulations in the related jurisdictions.
For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions and other items.
ForOn March 11, 2021, the three months ended November 30, 2020, incomeAmerican Rescue Plan Act (the “ARM”) was enacted and signed into law. The ARM is an economic stimulus package in response to the COVID-19 outbreak which contains tax expense asprovisions that did not have a percentage of income before income tax was 14.0% comparedmaterial impact to 10.3% for the same period last year. The year-over-year increase in the effective tax rate is primarily due to an increase in liabilities related to uncertain tax positions.our condensed consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”Act (the “CARES Act”) Act was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.
Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.
For the ninethree months ended November 30, 2020,May 31, 2021, income tax expense as a percentage of income before income tax was 6.5%8.0% compared to an income tax expensebenefit of 9.6%13.0% for the same period last year, primarily due to this benefit.the benefit of the CARES Act in fiscal 2021. Income tax expense for the ninethree months ended November 30, 2020 also includes other discrete benefits to include reductionsMay 31, 2021 is driven by the mix of U.S. BEATtaxable income in our various tax (Base Erosionjurisdictions and Anti-Abuse) and GILTI tax (Global Intangible Low-Tax Income), the recognition of excess tax benefits fromassociated with share-based compensation settlements, and one-time benefits related torecognized in the transition of our Macau entity from offshore to onshore status, partially offset by increasesperiod in liabilities related to uncertain tax positions.
During fiscal 2017, we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. During the time the dispute was ongoing, we believe we accurately reported our taxable income and vigorously protested the assessment through administrative processes with the state. During the quarter, we reached an agreement in principle to settle the $6.0 million assessment in dispute for $0.5 million. The agreement was signed on December 4, 2020.it is settled.
Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We currently havepreviously had an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain
employment and investment thresholds. The Macau Offshore Law and its supplementary regulations that
grant tax incentives to approved offshore institutions will bewas abolished on January 1, 2021. Existing approved offshore institutions such as ours can continuecontinued to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, our Macau subsidiary will transitiontransitioned to onshore status and becomeis now subject to a statutory corporate income tax of approximately 12%. We expect the impact of this change to increase our overall effective tax rate by 1.5 to 2.0 percentage points on an annual basis, beginning with our fiscal 2022. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no0 U.S. tax liability associated with the income generated in Macau.
Note 1915 - Earnings Per Share
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities. Dilutive securities at any given point in time may consist of outstanding options to purchase common stock and issued and contingently issuable unvested RSUs, PSUs, RSAs, PSAsrestricted stock units, performance stock units, restricted stock awards and performance restricted stock awards and other stock based awards. Anti-dilutive securities are not included in the computation of diluted earnings per share under the treasury stock method. See Note 5
method. See Note 9 to these condensed consolidated financial statements for more information regarding stock-based awards.
The following table presents our weighted average basic and diluted shares outstanding for the periods shown:
| | | | Three Months Ended
November 30, | | Nine Months Ended
November 30, | | Three Months Ended May 31, |
| (in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | 2021 | | 2020 |
| Weighted average shares outstanding, basic | Weighted average shares outstanding, basic | 24,965 | | | 25,161 | | | 25,182 | | | 25,099 | | Weighted average shares outstanding, basic | 24,349 | | | 25,254 | |
| Incremental shares from share-based compensation arrangements | Incremental shares from share-based compensation arrangements | 227 | | | 235 | | | 168 | | | 196 | | Incremental shares from share-based compensation arrangements | 287 | | | 143 | |
| Weighted average shares outstanding, diluted | Weighted average shares outstanding, diluted | 25,192 | | | 25,396 | | | 25,350 | | | 25,295 | | Weighted average shares outstanding, diluted | 24,636 | | | 25,397 | |
| | | Anti-dilutive securities | Anti-dilutive securities | 4 | | | 134 | | | 149 | | | 217 | | Anti-dilutive securities | 0 | | | 262 | |
Note 2016 - Subsequent Events
Divestiture of Personal Care Business
On December 22, 2020,June 7, 2021, we entered intocompleted the sale of our Personal Care business, not including the Latin America and Caribbean regions, to HRB Brands LLC, for $44.7 million in cash. The sale also includes an amendedoption that provides HRB Brands LLC the right to purchase the Latin America and extended Trademark License Agreement with Revlon to license Revlon’s trademark for hair care appliances and tools (the “Revlon License”). The Revlon License grants us an exclusive, global, fully paid-up license to use the licensed trademark to manufacture, sell and distribute licensed merchandise in accordance with the terms of the agreement. The Revlon License has an initial term of 40 years, which will automatically renew atCaribbean Personal Care businesses no later than the end of the initial term for 3 consecutive additional 20-year periods unless we give notice of non-renewal.fiscal 2022, subject to meeting certain agreed-upon conditions. The Revlon License amends and restates the existing Revlon trademark licensing agreements entirely, and eliminates ongoing royalties we have historically paid and recognized as expense within SG&A in accordance with such agreements. In exchange for this exclusive global license, we paid a one-time, up-front license fee of $72.5 million, which will be recorded as an intangible asset at cost and amortized on a straight-line basis over a useful life of 40 years, representing the initial term. As a resultcarrying amount of the Revlon License, we are no longer obligated to pay royalties to Revlon,identified assets and thus willliabilities within the disposal group were classified as held for sale as of May 31, 2021. The transaction is not recognize royalty expense after December 22, 2020,reflected in our condensed consolidated financial statements as of and for the effective date of the Revlon License.period ended May 31, 2021. See Note 3 for additional information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) containsshould be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1., “Financial Statements.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations. Actual results may differ materially due to a number of factors, including those discussed in Part II, Item 1A.,“Risk Factors,” and in the section entitled “Information Regarding Forward-Looking Statements” following this MD&A, and in Part I, Item 3 of this report,3., “Quantitative and Qualitative Disclosures aboutAbout Market Risk” and “Information Regarding Forward-Looking Statements” in this report, andas well as in Part II, Item IA., “Risk Factors” in the Company’s most recent annual report on Form 10-K for the fiscal year ended February 29, 202028, 2021 (“Form 10-K”) and its other filings with the Securities and Exchange Commission (the “SEC”). This discussion should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1 of this report. When used in this MD&A, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries. Throughout this MD&A, we refer to our Leadership Brands, which are brands that have number-one and number-two positions in their respective categories and consist of theinclude OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools and Drybar brands.Drybar.
This MD&A, including the tables under the headings “Operating income, operating margin, adjusted operating incomeIncome, Operating Margin, Adjusted Operating Income (non-GAAP), and adjusted operating marginAdjusted Operating Margin (non-GAAP) by segment"Segment” and “Net Income, dilutedDiluted EPS, adjusted incomeAdjusted Income (non-GAAP), and adjusted dilutedAdjusted Diluted EPS (non-GAAP),” respectively, reports operating income, operating margin, net income and diluted earnings per share (“EPS”) without the impact of non-cash asset impairment charges, acquisition-related expenses,EPA compliance costs, restructuring charges, tax reform, amortization of intangible assets, and non-cash share-based compensation for the periods presented, as applicable. These measures may be considered non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The tables reconcile these measures to their corresponding GAAP-based measures presented in our condensed consolidated statements of income. We believe that adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS provide useful information to management and investors regarding financial and business trends relating to our financial condition and results of operations. We believe that these non-GAAP financial measures, in combination with our financial results calculated in accordance with GAAP, provide investors with additional perspective regarding the impact of such charges/charges and benefits on applicable income, margin and earnings per share measures. We also believe that these non-GAAP measures facilitate a more direct comparison of our performance to our competitors. We further believe that including the excluded charges/charges and benefits would not accurately reflect the underlying performance of our continuing operations for the period in which the charges/charges and benefits are incurred, even though such charges/charges and benefits may be incurred and reflected in our GAAP financial results in the near future. The material limitation associated with the use of the non-GAAP financial measures is that the non-GAAP measures do not reflect the full economic impact of our activities. Our adjusted operating income, adjusted operating margin, adjusted income, and adjusted diluted EPS are not prepared in accordance with GAAP, are not an alternative to GAAP financial information and may be calculated differently than non-GAAP financial information disclosed by other companies. Accordingly, undue reliance should not be placed on non-GAAP information. These non-GAAP measures are discussed further and reconciled to their applicable GAAP basedGAAP-based measures contained in this MD&A beginning on page 40.30.
There were no material changes to the key financial measures discussed in our annual report on Form 10-K for the period ending February 29, 2020.10-K.
OVERVIEWOverview
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global consumer products company offering creative products and solutions for our customers through a diversified portfolio of well-recognized and widely-trusted brands. We have built leading market positions through new product innovation, product quality and competitive pricing. We currently operate in three segments consisting of Housewares, Health & Home, and Beauty.
In fiscal 2015, we launched a five-year transformational strategy designed to improve the performance of our business segments and strengthen our shared service capabilities. Fiscal 2019 marked the completion of Phase I of our multi-year transformation strategy, which delivered performance across a wide range of measures. We improved organic sales growth by focusing on our Leadership Brands, made strategic acquisitions, became a more efficient operating company with strong global shared services, upgraded our organization and culture, improved inventory turns and return on invested capital, and returned capital to shareholders.
Fiscal 2020 began Phase II of our transformation, which is designed to drive the next five years of progress. The long-term objectives of Phase II include improved organic sales growth, continued margin expansion, and strategic and effective capital deployment. We expect Phase II will includeincludes continued investment in our Leadership Brands, with a focus on growing them through consumer-centric innovation, expanding them more aggressively outside the United States of America (the “U.S.”), and adding new brands through acquisition. We anticipateare building further shared service capability and operating efficiency, as well as focusing on attracting, retaining, unifying and training the best people. Additionally, we are enhancing and consolidating our environmental, social and governance efforts and accelerating programs related to diversity, equity and inclusion to support our Phase II transformation.
In fiscal 2018, we announced a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance primarily in the Beauty and former Nutritional Supplements segments. Project Refuel includes charges for a reduction-in-force and the elimination of certain contracts. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $9.0$10.5 million to $11.0$12.5 million over the duration of the plan.
On January 23, 2020, we We estimate the plan to be completed during fiscal 2022 and expect to incur total restructuring charges of approximately $10.3 million over the acquisition of Drybar Products LLC (“Drybar Products”), for approximately $255.9 million in cash, subject to certain customary closing adjustments. Drybar is an innovative, trend-setting prestige hair care and styling brand in the multi-billion-dollar beauty industry. As partduration of the transaction, we granted a worldwide licenseplan, of which $9.2 million was incurred through the first quarter of fiscal 2022. See Note 7 to Drybar Holdings LLC, the owner and long-time operator of Drybar blowout salons, to use the Drybar trademark in their continued operation of Drybar salons. The salons will exclusively use, promote, and sell Drybar products globally.accompanying
condensed consolidated financial statements for additional information.
Consistent with our strategy of focusing resources on our Leadership Brands, during the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Beauty segment's mass channel personal care business (“Personal Care”). The net assets to be disposed of include intangible assets, inventory, andcertain net trade receivables, fixed assets and certain accrued sales discounts and allowances relating to our mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. We expect the divestiture to occur within fiscal 2021. Accordingly, we have classified the identified net assets of the disposal group as held for sale.
On March 13, 2020, we entered into an amendment to our Credit Agreement with Bank of America, N.A., as administrative agent, and other lenders (as amended, the “Credit Agreement”). The amendment extended the maturity of the commitment under the Credit Agreement from DecemberJune 7, 2021, we completed the sale of our Personal Care business, not including the Latin America and Caribbean regions, to March 13, 2025. Further,HRB Brands LLC, for $44.7 million in cash. The sale also includes an option that provides HRB Brands LLC the amendment increasedright to purchase the unsecured revolving commitment from $1.0 billionLatin America and Caribbean Personal Care businesses no later than the end of fiscal 2022, subject to $1.25 billion. The amount of the accordion was increased from $200 million to $300 million. The accordion permits the Company to request to increase its borrowing capacity, not to exceed the
$300 million commitment in the aggregate, providedmeeting certain conditions are met, including lender approval. Following the amendment, borrowings under the Credit Agreement bear interest at either the base rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0%, respectively, for base rate and LIBOR borrowings.agreed-upon conditions. See Note 133 and Note 16 to the accompanying condensed consolidated financial statements for additional information.
`
Table of the third quarter, on December 22, 2020, we entered into an amended and extended Trademark License Agreement with Revlon to license Revlon’s trademark for hair care appliances and tools (the “Revlon License”). The Revlon License grants us an exclusive, global, fully paid-up license to use the licensed trademark to manufacture, sell and distribute licensed merchandise in accordance with the terms of the agreement. The Revlon License has an initial term of 40 years, which will automatically renew at the end of the initial term for three consecutive additional 20-year periods unless we give notice of non-renewal. The Revlon License amends and restates the existing Revlon trademark licensing agreements entirely, and eliminates ongoing royalties we have historically paid and recognized as expense within SG&A in accordance with such agreements. In exchange for this exclusive global license, we paid a one-time, up-front license fee of $72.5 million, which will be recorded as an intangible asset at cost and amortized on a straight-line basis over a useful life of 40 years, representing the initial term. As a result of the Revlon License, we are no longer obligated to pay royalties to Revlon, and thus will not recognize royalty expense after December 22, 2020, the effective date of the Revlon License.
Significant Trends Impacting the Business
Potential Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) to be a pandemic. COVID-19 continues to spread throughout the United States and the world, with the continued potential for catastrophic impact. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores, or limited hours of operation, which has resulted inand materially lower store traffic. The economic impact of historic unemployment and consumer uncertainty has also resulted in reduced overall demand for our more discretionary product lines.traffic, primarily during fiscal 2021. Additionally, COVID-19 has also disrupted certain parts of our supply chain,chain. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in certain cases has limitedhigher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill demand. COVID-19 has favorably impactedsome orders on a timely basis. Additionally, the extent of COVID-19’s impact on the demand for certain of our product lines that are more defensive, meet certain healthcare or healthy living needs, or meetin the needs of consumers that are spending more time at home as a resultfuture will depend on future developments, including the duration, spread and intensity of the pandemic. COVID-19 has also favorably impactedpandemic, our online channel in a meaningful way,continued ability to source and distribute our products, as brickwell as any future government actions affecting consumers and mortar shopping options have been limited or considered unsafe by consumers. Although the favorable impactsglobal economy generally, all of COVID-19 outweighedwhich are uncertain and difficult to predict considering the unfavorable impacts for the nine month period ended November 30, 2020, this situation continues to change rapidly and additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today.evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
These futureFuture developments are outside of our control, are highly uncertain and cannot be predicted. If the COVID-19 impact or resultingpotential economic downturn is prolonged, then it can further increase the difficulty of planning for operations. These and other potential impacts of the current public health crisis could therefore materially and adversely affect our business, financial condition, cash flows and results of operations.
During the first quarter of fiscal 2021, as part of a comprehensive approach to preserve our cash flowGlobal Supply Chain and adjust our cost structure to align to lower anticipated revenue related to the business disruption and uncertainty of COVID-19, we implemented a number of temporary precautionary measures. These measures included the following:Cost Inflation Trends
•a graduated salary reduction for all associates, including named executive officers and the other members of the Company’s executive leadership team;
•a reduction in the cash compensation of the Company's Board of Directors;
•suspension of merit increases, promotions and new associate hiring until further notice;
•the furlough of associates in specific areas directly tied to sales volume, with assistance to maintain health insurance coverage, as well as a reduction of external temporary labor and reduced work hours;
•reduction or deferral of marketing expense, while continuing to support brands with strong consumer demand and to keep brands top of mind with the consumer;
•limited reduction of investment in new product development and launches, in anticipation of more normalized economic activity;
•elimination of travel expense in the short term, with a significant reduction planned for the second half of fiscal 2021; and
•reduction of consulting fees and capital expenditures for projects that are not critical.
During the second quarter of fiscal 2021, we reversed a number of these temporary measures including a restoration of all wages, salaries, and director compensation to pre-COVID-19 levels. We also increased levels of investments in marketing activities, new product development and launches and capital expenditures. In the third quarter of fiscal 2021, we continued to increase the amount of these investments, and we expect to continue to further increase our investments in these areas during the fourth quarter of fiscal 2021. These investments are intended to continue progressing our Phase II transformation plan and the longer-term opportunities we see to further grow our business. In addition, during the third quarter of fiscal 2021, we reinstituted merit increases, promotions and new associate hiring.
Due to the evolving COVID-19 pandemic and related consumer demand for certain of our products, trends are emerging that may impact our ability to fulfill some orders on a timely basis or make marketing investments with an acceptable return.
We continue to see very strong demand trends in many of our product categories. In the second quarter of fiscal 2021, demand continued to outpace even recently increased supply capacity with respect to thermometry, air filtration, water filtration and various products within Housewares, which in some cases resulted in out of stocks. Demand continued to outpace our increased supply capacity during the third quarter of fiscal 2021, with respect to thermometry and various products within Housewares, which in some cases resulted in out of stocks. Additionally, surgesSurges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strainedcontinued to strain the U.S. freightglobal supply chain network, which is resultinghas resulted in carrier-imposed capacity restrictions, and carrier delays. The demand surge for the OXO brand, in combination with carrier delays, and longer lead times. Demand for Chinese imports has caused order flowshipment receiving and unloading backlogs at many U.S. ports that have been unable to outpacekeep pace with unprecedented inbound container volume. The situation has been further exacerbated by COVID-19 illness and protocols at many port locations. Due to the backlog and increasing trade imbalance with China, many shipping containers are not being sent back to China, or are being sent to China empty. With continued increases in demand for containers, limited supply and freight vendors bearing the cost of shipping empty containers, the market cost of inbound freight has increased by several multiples compared to calendar year 2020 averages. In addition to increasing cost trends, our third party manufacturing partners are not equipped to hold meaningful amounts of inventory and if shipping container capacity in our distribution center at certain times during the second and third quarters of fiscal 2021. These factors mayremains limited or unavailable, they could pause manufacturing, which could ultimately impact our ability to fulfill some ordersmeet consumer demand on a timely basis. Demand for raw materials, components and semiconductor chips impacted by the supply chain challenges described above have created surges in prices and shortages of these materials may become more significant which could further increase our costs. Further, in the U.S., the surge in demand along with COVID-19 related government stimulus and rising hourly labor wages, are creating labor shortages and higher labor costs. The majority of our hourly labor is employed in our distribution centers and these factors may increase our costs and negatively impact our ability to attract and retain qualified associates.
These trends can also limitEPA Compliance Costs
Some of our abilityproduct lines within our Health & Home segment are subject to make marketing expenditures with an adequate return on investment. In certain categories, where macro-trends like COVID-19product identification, labeling and claim requirements, which are driving demand significantly higher than historical levels or in situations where supply or distribution is capacity constrained, we believe that driving additional demand through incremental marketing activities could compound potential shipment delays or out of stocks. In these situations, currently planned marketing investments designed to drive incremental short-term demand would not be made.monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “EPA”), U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
These trendsWe are currently in discussions with the EPA regarding the compliance of packaging claims on certain of our products in the air and potential impacts could therefore materiallywater filtration categories and adversely affect our business, financial condition, cash flows and resultsa limited subset of operations.
Health & Home segment that are sold in the U.S. The EPA has not raised any product quality, safety or performance issues. We expect these products to be available for distribution with the only changes being modified labeling or different packaging. As a result of these discussions, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we ensure that all labeling is in compliance and we work with the EPA towards an expedient resolution. The EPA has approved modest changes to our labeling claims on our existing water filtration packaging, which we have begun to implement. We resumed shipment of these products and are actively working towards similar agreements regarding our air filtration and humidification packaging in continued collaboration with the EPA. At our request, the EPA issued a Stop Sale, Use or Removal Order on June 29, 2021, which, among other things, allows for the movement of certain of our products among our warehouses and will facilitate rework of the affected air filtration packaging once agreed to with the EPA. We believe this is meaningful progress towards a final resolution with the EPA. The stop shipment will remain in effect until we implement an approved labeling and repackaging plan. We expect that our consolidated and Health & Home segment’s fiscal 2022 net sales revenue, gross profit and operating income will be materially and adversely impacted by the stop shipment. The extent to which net sales revenue will be impacted will primarily depend on the duration of time required for the EPA to act on our proposed solutions and the related implementation schedule. In addition, our net sales revenue could be materially and adversely impacted by customer returns, an increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers.
During the first quarter of fiscal 2022, we recorded a $13.1 million charge to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. The charge was recognized in cost of goods sold and is referred to throughout this Form 10-Q as “EPA compliance costs.” We expect to incur additional compliance costs, which may include costs to relabel or repackage our existing inventory as well as incremental freight and storage costs, among other things. Costs to repackage our existing inventory will be capitalized into inventory; however, many of the other potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Heath & Home segment's gross profit and operating income. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our business, results of operations and financial condition could be adversely and materially impacted by our actions or in ways that we are not able to predict today.
At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
See Note 8 to our condensed consolidated financial statements for additional information and Part II, Item 1A., “Risk Factors” in this Form 10-Q for additional information on our related material risks.
Potential Impact of Tariffs
During fiscal 20192021, 2020 and 2020,2019, the Office of the U.S. Trade Representative (“USTR”) imposed, and in certain cases subsequently reduced or removed, additional tariffs on products imported from China. We purchase a high concentration of our products from unaffiliated manufacturers located in China. This concentration exposes us to risks associated with doing business globally, including changes in tariffs. Any alteration of trade agreements and terms between China and the United States,U.S., including limiting trade with China, imposing additional tariffs on imports from China and potentially imposing other restrictions on exports from China to the United StatesU.S. may result in further and/or higher tariffs or retaliatory trade measures by China. Furthermore, in certain cases, we have been somewhat successful in obtaining tariff exclusions from the USTR on certain products that we import. These exclusions generally expire after a certaindesignated period of time and must be re-approved bytime. In the USTR, otherwisecase that a tariff exclusion is not granted or extended, higher tariffs willwould be assessed on our products upon expiration of the exclusions. All of these factors could have a material adverse effect on our business and results of operations.related products.
Foreign Currency Exchange Rate Fluctuations
Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates from transactions that are denominated in a currency other than our reportingfunctional currency (the U.S. Dollar). Such transactions include sales, certain inventory purchases and operating expenses. The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso.
For the three months ended November 30, 2020,May 31, 2021, changes in foreign currency exchange rates had a favorable year-over-year impact on consolidated U.S. Dollar reported net sales revenue of approximately $1.7$5.5 million, or 0.4%1.3%, compared to an unfavorable impact of $2.3$4.8 million, or 0.5% for the same period last year. For the nine months ended November 30, 2020, changes in foreign currency exchange rates had an unfavorable year-over-year impact on consolidated U.S. dollar reported net sales revenue of approximately $3.2 million, or 0.3%, compared to an unfavorable impact of $6.8 million, or 0.6%1.3% for the same period last year.
Consumer Spending and Changes in Shopping Preferences
Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of the U.S. retail economy. Approximately 80%75% and 77% of our consolidated net sales revenue were from U.S. shipments forduring the three months ended November 30, 2020 and 2019. For both the nine month periods ended November 30,May 31, 2021 and 2020, and 2019, U.S. shipments were approximately 79% of our net sales.respectively.
Our concentration of sales reflects the evolution of consumer shopping preferences to online or multichannel shopping experiences. For the three and nine month periods ended November 30,May 31, 2021 and 2020, our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 24%22% and 25%28%, respectively, of our total consolidated net sales revenue, and grew approximately 34%4% and 33%, respectively, over the same periods last year.in the prior years.
For bothWith the threecontinued growth in online sales across the retail landscape, many brick and nine month periods ended November 30, 2019,mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our netdistribution capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales to retail customers fulfilling end-consumer online orderschannels and online channel sales directly to consumers comprised approximately 24% ofby our total consolidated net sales revenue, and grew approximately 30% and 28%, respectively, over the same periods last year.retail customers.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In the U.S., the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. The 2020-2021 cough/cold/flu season experienced historically low incidence levels due to COVID-19 prevention measures including mask-wearing, remote learning, work from home, and reduced travel, brick and mortar shopping, and group gatherings. For the 2019-2020 season, cough/cold/flu incidence was slightly higher than the
2018-2019 season, which was a below average season.
RESULTS OF OPERATIONS
The following tables providetable provides selected operating data, in U.S. Dollars, as a percentage of net sales
revenue, and as a year-over-year percentage change:change.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | | | | | % of Sales Revenue, net |
| (in thousands) | 2020 (1) | | 2019 | | $ Change | | % Change | | 2020 | | 2019 |
| Sales revenue by segment, net | | | | | | | | | | | |
| Housewares | $ | 222,400 | | | $ | 183,211 | | | $ | 39,189 | | | 21.4 | % | | 34.9 | % | | 38.6 | % |
| Health & Home | 250,158 | | | 185,810 | | | 64,348 | | | 34.6 | % | | 39.2 | % | | 39.1 | % |
| Beauty | 165,179 | | | 105,716 | | | 59,463 | | | 56.2 | % | | 25.9 | % | | 22.3 | % |
| Total sales revenue, net | 637,737 | | | 474,737 | | | 163,000 | | | 34.3 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 350,410 | | | 264,764 | | | 85,646 | | | 32.3 | % | | 54.9 | % | | 55.8 | % |
| Gross profit | 287,327 | | | 209,973 | | | 77,354 | | | 36.8 | % | | 45.1 | % | | 44.2 | % |
| Selling, general and administrative expense (“SG&A”) | 186,630 | | | 130,692 | | | 55,938 | | | 42.8 | % | | 29.3 | % | | 27.5 | % |
| | | | | | | | | | | |
| Restructuring charges | (12) | | | 12 | | | (24) | | | * | | — | % | | — | % |
| Operating income | 100,709 | | | 79,269 | | | 21,440 | | | 27.0 | % | | 15.8 | % | | 16.7 | % |
| Non-operating income, net | 93 | | | 92 | | | 1 | | | 1.1 | % | | — | % | | — | % |
| Interest expense | (2,926) | | | (2,767) | | | (159) | | | 5.7 | % | | (0.5) | % | | (0.6) | % |
| Income before income tax | 97,876 | | | 76,594 | | | 21,282 | | | 27.8 | % | | 15.3 | % | | 16.1 | % |
| Income tax expense | 13,721 | | | 7,895 | | | 5,826 | | | 73.8 | % | | 2.2 | % | | 1.7 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | $ | 84,155 | | | $ | 68,699 | | | $ | 15,456 | | | 22.5 | % | | 13.2 | % | | 14.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, | | | | | | % of Sales Revenue, net |
| (in thousands) | 2020 (1) | | 2019 | | $ Change | | % Change | | 2020 | | 2019 |
| Sales revenue by segment, net | | | | | | | | | | | |
| Housewares | $ | 564,891 | | | $ | 496,017 | | | $ | 68,874 | | | 13.9 | % | | 35.6 | % | | 39.2 | % |
| Health & Home | 661,568 | | | 499,543 | | | 162,025 | | | 32.4 | % | | 41.6 | % | | 39.5 | % |
| Beauty | 362,965 | | | 269,507 | | | 93,458 | | | 34.7 | % | | 22.8 | % | | 21.3 | % |
| Total sales revenue, net | 1,589,424 | | | 1,265,067 | | | 324,357 | | | 25.6 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 892,460 | | | 723,216 | | | 169,244 | | | 23.4 | % | | 56.1 | % | | 57.2 | % |
| Gross profit | 696,964 | | | 541,851 | | | 155,113 | | | 28.6 | % | | 43.9 | % | | 42.8 | % |
| SG&A | 439,646 | | | 359,794 | | | 79,852 | | | 22.2 | % | | 27.7 | % | | 28.4 | % |
| | | | | | | | | | | |
| Restructuring charges | 355 | | | 1,061 | | | (706) | | | (66.5) | % | | — | % | | 0.1 | % |
| Operating income | 256,963 | | | 180,996 | | | 75,967 | | | 42.0 | % | | 16.2 | % | | 14.3 | % |
| Non-operating income, net | 440 | | | 313 | | | 127 | | | 40.6 | % | | — | % | | — | % |
| Interest expense | (9,568) | | | (9,291) | | | (277) | | | 3.0 | % | | (0.6) | % | | (0.7) | % |
| Income before income tax | 247,835 | | | 172,018 | | | 75,817 | | | 44.1 | % | | 15.6 | % | | 13.6 | % |
| Income tax expense | 16,061 | | | 16,530 | | | (469) | | | (2.8) | % | | 1.0 | % | | 1.3 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | $ | 231,774 | | | $ | 155,488 | | | $ | 76,286 | | | 49.1 | % | | 14.6 | % | | 12.3 | % |
(1)The three and nine month periods ended November 30, 2020 include three and nine months of operating results for Drybar Products, respectively, which was acquired on January 23, 2020, with no comparable results in the same periods last year. For additional information regarding the Drybar Products acquisition, see Note 7 to the accompanying condensed consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | % of Sales Revenue, net |
| (in thousands) | 2021 | | 2020 | | $ Change | | % Change | | 2021 | | 2020 |
| Sales revenue by segment, net | | | | | | | | | | | |
| Housewares | $ | 193,644 | | | $ | 140,628 | | | $ | 53,016 | | | 37.7 | % | | 35.8 | % | | 33.4 | % |
| Health & Home | 204,096 | | | 199,956 | | | 4,140 | | | 2.1 | % | | 37.7 | % | | 47.5 | % |
| Beauty | 143,483 | | | 80,251 | | | 63,232 | | | 78.8 | % | | 26.5 | % | | 19.1 | % |
| Total sales revenue, net | 541,223 | | | 420,835 | | | 120,388 | | | 28.6 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 320,631 | | | 241,534 | | | 79,097 | | | 32.7 | % | | 59.2 | % | | 57.4 | % |
| Gross profit | 220,592 | | | 179,301 | | | 41,291 | | | 23.0 | % | | 40.8 | % | | 42.6 | % |
| Selling, general and administrative expense (“SG&A”) | 155,751 | | | 121,989 | | | 33,762 | | | 27.7 | % | | 28.8 | % | | 29.0 | % |
| | | | | | | | | | | |
| Restructuring charges | 6 | | | 333 | | | (327) | | | (98.2) | % | | — | % | | 0.1 | % |
| Operating income | 64,835 | | | 56,979 | | | 7,856 | | | 13.8 | % | | 12.0 | % | | 13.5 | % |
| Non-operating income, net | 102 | | | 236 | | | (134) | | | (56.8) | % | | — | % | | 0.1 | % |
| Interest expense | 2,995 | | | 3,846 | | | (851) | | | (22.1) | % | | 0.6 | % | | 0.9 | % |
| Income before income tax | 61,942 | | | 53,369 | | | 8,573 | | | 16.1 | % | | 11.4 | % | | 12.7 | % |
| Income tax expense (benefit) | 4,970 | | | (6,917) | | | 11,887 | | | * | | 0.9 | % | | (1.6) | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | $ | 56,972 | | | $ | 60,286 | | | $ | (3,314) | | | (5.5) | % | | 10.5 | % | | 14.3 | % |
* Calculation is not meaningful.
ThirdFirst Quarter Fiscal 20212022 Financial Results
•Consolidated net sales revenue increased 34.3%28.6%, or $163.0$120.4 million, to $637.7$541.2 million for the three months ended November 30, 2020,May 31, 2021, compared to $474.7$420.8 million for the same period last year.
•Consolidated operating income increased 27.0%13.8%, or $21.4$7.9 million, to $100.7$64.8 million for the three months ended November 30, 2020,May 31, 2021, compared to $79.3$57.0 million for the same period last year. Consolidated operating margin decreased 0.91.5 percentage points to 15.8%12.0% of consolidated net sales revenue for the three months ended November 30, 2020,May 31, 2021, compared to 16.7%13.5% for the same period last year.
•Consolidated adjusted operating income increased 24.0%33.6%, or $21.6$23.9 million, to $111.9$95.0 million for the three months ended November 30, 2020,May 31, 2021, compared to $90.3$71.1 million for the same period last year. Consolidated adjusted operating margin decreased 1.4increased 0.6 percentage points to 17.6%17.5% of consolidated net sales revenue for the three months ended November 30, 2020,May 31, 2021, compared to 19.0%16.9% for the same period last year.
•Net income increased 22.5%decreased 5.5%, or $15.5$3.3 million, to $84.2$57.0 million for the three months ended November 30, 2020,May 31, 2021, compared to $68.7$60.3 million for the same period last year. Diluted EPS increased 23.2%decreased 2.5% to $3.34$2.31 for the three months ended November 30, 2020,May 31, 2021, compared to $2.71$2.37 for the same period last year.
•Adjusted income increased 19.8%33.7%, or $15.7$21.7 million, to $94.8$85.8 million for the three months ended November 30, 2020,May 31, 2021, compared to $79.1$64.2 million for the same period last year. Adjusted diluted EPS increased 20.5%37.5% to $3.76$3.48 for the three months ended November 30, 2020,May 31, 2021, compared to $3.12 for the same period last year.
Year-To-Date Fiscal 2021 Financial Results
•Consolidated net sales revenue increased 25.6%, or $324.4 million, to $1,589.4 million for the nine months ended November 30, 2020, compared to $1,265.1 million for the same period last year.
•Consolidated operating income increased 42.0%, or $76.0 million, to $257.0 million for the nine months ended November 30, 2020, compared to $181.0 million for the same period last year. Consolidated operating margin increased 1.9 percentage points to 16.2% of consolidated net sales revenue for the nine months ended November 30, 2020, compared to 14.3% for the same period last year.
•Consolidated adjusted operating income increased 35.3%, or $76.1 million, to $291.5 million for the nine months ended November 30, 2020, compared to $215.4 million for the same period last year. Consolidated adjusted operating margin increased 1.3 percentage points to 18.3% of consolidated net sales revenue for the nine months ended November 30, 2020, compared to 17.0% for the same period last year.
•Net income increased 49.1%, or $76.3 million, to $231.8 million for the nine months ended November 30, 2020, compared to $155.5 million for the same period last year. Diluted EPS increased 48.6% to $9.14 for the nine months ended November 30, 2020, compared to $6.15 for the same period last year.
•Adjusted income increased 35.8%, or $67.1 million, to $254.9 million for the nine months ended November 30, 2020, compared to $187.8 million for the same period last year. Adjusted diluted EPS increased 35.4% to $10.05 for the nine months ended November 30, 2020, compared to $7.42$2.53 for the same period last year.
Consolidated and Segment Net Sales Revenue
The following tables summarizetable summarizes the impact that Organic business and foreign currency and acquisitions had on our net sales revenue by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2020 sales revenue, net | $ | 183,211 | | | $ | 185,810 | | | $ | 105,716 | | | $ | 474,737 | |
| Organic business (1) | 38,836 | | | 62,887 | | | 42,072 | | | 143,795 | |
| Impact of foreign currency | 353 | | | 1,461 | | | (110) | | | 1,704 | |
| Acquisition (2) | — | | | — | | | 17,501 | | | 17,501 | |
| Change in sales revenue, net | 39,189 | | | 64,348 | | | 59,463 | | | 163,000 | |
| Fiscal 2021 sales revenue, net | $ | 222,400 | | | $ | 250,158 | | | $ | 165,179 | | | $ | 637,737 | |
| | | | | | | |
| Total net sales revenue growth (decline) | 21.4 | % | | 34.6 | % | | 56.2 | % | | 34.3 | % |
| Organic business | 21.2 | % | | 33.8 | % | | 39.8 | % | | 30.3 | % |
| Impact of foreign currency | 0.2 | % | | 0.8 | % | | (0.1) | % | | 0.4 | % |
| Acquisition | — | % | | — | % | | 16.6 | % | | 3.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2020 sales revenue, net | $ | 496,017 | | | $ | 499,543 | | | $ | 269,507 | | | $ | 1,265,067 | |
| Organic business (1) | 68,803 | | | 162,138 | | | 60,946 | | | 291,887 | |
| Impact of foreign currency | 71 | | | (113) | | | (3,121) | | | (3,163) | |
| Acquisition (2) | — | | | — | | | 35,633 | | | 35,633 | |
| Change in sales revenue, net | 68,874 | | | 162,025 | | | 93,458 | | | 324,357 | |
| Fiscal 2021 sales revenue, net | $ | 564,891 | | | $ | 661,568 | | | $ | 362,965 | | | $ | 1,589,424 | |
| | | | | | | |
| Total net sales revenue growth (decline) | 13.9 | % | | 32.4 | % | | 34.7 | % | | 25.6 | % |
| Organic business | 13.9 | % | | 32.5 | % | | 22.6 | % | | 23.1 | % |
| Impact of foreign currency | — | % | | — | % | | (1.2) | % | | (0.3) | % |
| Acquisition | — | % | | — | % | | 13.2 | % | | 2.8 | % |
(1)Previously referred to as “Core” business, as described below.
(2)The three and nine month periods ended November 30, 2020 include three and nine months of net sales revenue for Drybar Products, respectively, which was acquired on January 23, 2020, with no comparable results in the same periods last year. For additional information on the Drybar Products acquisition, see Note 7 to the accompanying condensed consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2021 sales revenue, net | $ | 140,628 | | | $ | 199,956 | | | $ | 80,251 | | | $ | 420,835 | |
| Organic business | 52,127 | | | 1,203 | | | 61,552 | | | 114,882 | |
| Impact of foreign currency | 889 | | | 2,937 | | | 1,680 | | | 5,506 | |
| | | | | | | |
| Change in sales revenue, net | 53,016 | | | 4,140 | | | 63,232 | | | 120,388 | |
| Fiscal 2022 sales revenue, net | $ | 193,644 | | | $ | 204,096 | | | $ | 143,483 | | | $ | 541,223 | |
| | | | | | | |
| Total net sales revenue growth | 37.7 | % | | 2.1 | % | | 78.8 | % | | 28.6 | % |
| Organic business | 37.1 | % | | 0.6 | % | | 76.7 | % | | 27.3 | % |
| Impact of foreign currency | 0.6 | % | | 1.5 | % | | 2.1 | % | | 1.3 | % |
| | | | | | | |
In the above tables,table, Organic business refers to our net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand iswas acquired, excluding the impact that foreign currency re-measurementremeasurement had on reported net sales.sales revenue. Net sales revenue from internally developed brands or product lines is considered Organic business activity.
We previously referred to Organic business sales asdefine Core business sales. In connection with this change, we now define Core as strategic business that we expect to be an ongoing part of our operations, and Non-Core
business as business or net assets (including net assets held for sale) that we expect to divest within a year of its designation as Non-Core. During the fourth quarter of fiscal 2020, we
committed to a plan to divest certain assets within our Personal Care business. As a result, sales from our Personal Care business are included in Non-Core business for all periods presented.
The following tables summarizetable summarizes the impact that Core business and Non-Core (Personal Care) business had on our net sales revenue by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2020 sales revenue, net | $ | 183,211 | | | $ | 185,810 | | | $ | 105,716 | | | $ | 474,737 | |
| Core business (1) | 39,189 | | | 64,348 | | | 63,487 | | | 167,024 | |
| Non-Core business (Personal Care) | — | | | — | | | (4,024) | | | (4,024) | |
| Change in sales revenue, net | 39,189 | | | 64,348 | | | 59,463 | | | 163,000 | |
| Fiscal 2021 sales revenue, net | $ | 222,400 | | | $ | 250,158 | | | $ | 165,179 | | | $ | 637,737 | |
| | | | | | | |
| Total net sales revenue growth (decline) | 21.4 | % | | 34.6 | % | | 56.2 | % | | 34.3 | % |
| Core business | 21.4 | % | | 34.6 | % | | 60.1 | % | | 35.2 | % |
| Non-Core business (Personal Care) | — | % | | — | % | | (3.8) | % | | (0.8) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2020 sales revenue, net | $ | 496,017 | | | $ | 499,543 | | | $ | 269,507 | | | $ | 1,265,067 | |
| Core business (1) | 68,874 | | | 162,025 | | | 102,642 | | | 333,541 | |
| Non-Core business (Personal Care) | — | | | — | | | (9,184) | | | (9,184) | |
| Change in sales revenue, net | 68,874 | | | 162,025 | | | 93,458 | | | 324,357 | |
| Fiscal 2021 sales revenue, net | $ | 564,891 | | | $ | 661,568 | | | $ | 362,965 | | | $ | 1,589,424 | |
| | | | | | | |
| Total net sales revenue growth (decline) | 13.9 | % | | 32.4 | % | | 34.7 | % | | 25.6 | % |
| Core business | 13.9 | % | | 32.4 | % | | 38.1 | % | | 26.4 | % |
| Non-Core business (Personal Care) | — | % | | — | % | | (3.4) | % | | (0.7) | % |
(1)The three and nine month periods ended November 30, 2020 include three and nine months of net sales revenue for Drybar Products, respectively, which was acquired on January 23, 2020, with no comparable results for the same period last year. For additional information on the Drybar Products acquisition, see Note 7 to the accompanying condensed consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, |
| (in thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Fiscal 2021 sales revenue, net | $ | 140,628 | | | $ | 199,956 | | | $ | 80,251 | | | $ | 420,835 | |
| Core business | 53,016 | | | 4,140 | | | 64,429 | | | 121,585 | |
| Non-Core business (Personal Care) | — | | | — | | | (1,197) | | | (1,197) | |
| Change in sales revenue, net | 53,016 | | | 4,140 | | | 63,232 | | | 120,388 | |
| Fiscal 2022 sales revenue, net | $ | 193,644 | | | $ | 204,096 | | | $ | 143,483 | | | $ | 541,223 | |
| | | | | | | |
| Total net sales revenue growth (decline) | 37.7 | % | | 2.1 | % | | 78.8 | % | | 28.6 | % |
| Core business | 37.7 | % | | 2.1 | % | | 80.3 | % | | 28.9 | % |
| Non-Core business (Personal Care) | — | % | | — | % | | (1.5) | % | | (0.3) | % |
Leadership Brand and Other Net Sales Revenue
The following tables summarizetable summarizes our Leadership Brand and other net sales revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, |
| (in thousands) | 2020 | | 2019 | | $ Change | | % Change |
| Leadership Brand sales revenue, net (1) | $ | 508,210 | | | $ | 379,604 | | | $ | 128,606 | | | 33.9 | % |
| All other sales revenue, net | 129,527 | | | 95,133 | | | 34,394 | | | 36.2 | % |
| Total sales revenue, net | $ | 637,737 | | | $ | 474,737 | | | $ | 163,000 | | | 34.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| (in thousands) | 2020 | | 2019 | | $ Change | | % Change |
| Leadership Brand sales revenue, net (1) | $ | 1,288,614 | | | $ | 1,012,346 | | | $ | 276,268 | | | 27.3 | % |
| All other sales revenue, net | 300,810 | | | 252,721 | | | 48,089 | | | 19.0 | % |
| Total sales revenue, net | $ | 1,589,424 | | | $ | 1,265,067 | | | $ | 324,357 | | | 25.6 | % |
(1)The three and nine month periods ended November 30, 2020 include three and nine months of net sales revenue for Drybar Products, respectively, which was acquired on January 23, 2020, with no comparable results for the same period last year. For additional information on the Drybar Products acquisition, see Note 7 to the accompanying condensed consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, |
| (in thousands) | 2021 | | 2020 | | $ Change | | % Change |
| Leadership Brand sales revenue, net | $ | 429,056 | | | $ | 349,030 | | | $ | 80,026 | | | 22.9 | % |
| All other sales revenue, net | 112,167 | | | 71,805 | | | 40,362 | | | 56.2 | % |
| Total sales revenue, net | $ | 541,223 | | | $ | 420,835 | | | $ | 120,388 | | | 28.6 | % |
Consolidated Net Sales Revenue
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Consolidated net sales revenue increased $163.0$120.4 million, or 34.3%28.6%, to $637.7$541.2 million, compared to $474.7$420.8 million. The growthGrowth was driven by an Organic business increase of $143.8$114.9 million, or 30.3%27.3%, primarily reflecting:due to:
•growth inhigher consolidated brick and mortar sales in our Beauty and Housewares segments due to the favorable comparative impact of COVID-19 related store closures and reduced store traffic in the prior year period;
•an increase in consolidated international sales;
•higher sales in the club and closeout channels;
•growth in consolidated online sales; and
•an increasethe favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to the impact of the late-February winter storm in consolidated international sales.the U.S. (“Winter Storm Uri”).
The Drybar Products acquisition also contributed $17.5 million, or 3.7% to consolidated net sales revenue growth.
These factors were partially offset by reduced store traffic at certain retail brick and mortar stores, a soft back to school season due to COVID-19 related school closures and a net sales revenue decline in Non-Core business.
Net sales revenue from our Leadership Brands was $508.2 million, compared to $379.6 million for the same period last year, representing growth of 33.9%.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Consolidated net sales revenue increased $324.4 million, or 25.6%, to $1,589.4 million, compared to $1,265.1 million. The growth was drivenalso favorably impacted by an Organic business increase of $291.9 million, or 23.1%, primarily reflecting:
•growth in consolidated online sales;
•an increase in consolidated international sales; and
•an increase in consolidated brick and mortar sales.
The Drybar Products acquisition also contributed $35.6 million, or 2.8% to consolidated net sales revenue growth.
These factors were partially offset by:
•the impact of COVID-19 related store closures, during the first and second quarters of fiscal 2021, and the related reduction in store traffic at certain retail customers;
•a soft back to school season due to COVID-19 related school closures;
•a net sales revenue decline in Non-Core business; and
•the unfavorable impact from net foreign currency fluctuations of approximately $3.2
$5.5 million, or 0.3%1.3%.
Net sales revenue from our Leadership Brands was $1,288.6$429.1 million, compared to $1,012.3$349.0 million for the same period last year, representing growth of 27.3%22.9%.
Segment Net Sales Revenue
Housewares
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Net sales revenue increased $39.2$53.0 million, or 21.4%37.7%, to $222.4$193.6 million, compared to $183.2$140.6 million. Growth was driven by an Organic business increase of $38.8$52.1 million, or 21.2%37.1%, primarily due to:
•higher demand for OXO brand products as consumers spent more time at home cooking, cleaning, organizing and pantry loadingan increase in response to COVID-19, which resulted in increases in both brick and mortar and online sales for both OXO and Hydro Flask brands due to the OXO brand;favorable comparative impact of COVID-19 related store closures and reduced store traffic in the prior year period;
•growth in international sales.sales;
•higher sales in the club and closeout channels; and
•the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri.
These factors were partially offset by:
•by a decrease in online sales due to the COVID-19 relatedunfavorable comparative impact of reduced store traffic at certain retail brick and mortar stores;
•a soft back-to-school seasonshift towards online shopping in the prior year period due to COVID-19 and increased competitive activity primarily impacting the Hydro Flask brand; and
•lower closeout channel sales.related store closures.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Net sales revenue increased $68.9was also favorably impacted by net foreign currency fluctuations of approximately
$0.9 million, or 13.9%, to $564.9 million, compared to $496.0 million. Growth was driven by an Organic business increase of $68.8 million, or 13.9%, primarily due to:
•higher demand for OXO brand products as consumers spent more time at home cooking, cleaning, organizing and pantry loading in response to COVID-19, which resulted in increases in both online and brick and mortar sales for the OXO brand;
•higher sales in the club channel;
•growth in international sales; and
•new product introductions.
These factors were partially offset by:
•the COVID-19 related impact of certain retail brick and mortar store closures and reduced store traffic on the Hydro Flask and OXO brands;
•a soft back-to-school season due to COVID-19 and increased competitive activity primarily impacting the Hydro Flask brand; and
•lower closeout channel sales.0.6%.
Health & Home
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Net sales revenue increased $64.3$4.1 million, or 34.6%2.1%, to $250.2$204.1 million, compared to $185.8$200.0 million. Growth was driven by an Organic business increase of $1.2 million, or 0.6%, primarily due to:
•an increase in sales of air purifiers;
•growth in international sales; and
•the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri.
These factors were partially offset by stronger COVID-19 driven demand for healthcare and healthy living products in the comparative prior period.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately
$2.9 million, or 1.5%.
Beauty
Comparison of First Quarter Fiscal 2022 to First Quarter Fiscal 2021
Net sales revenue increased $63.2 million, or 78.8%, to $143.5 million, compared to $80.3 million. The increase was driven by an Organic business increase of $62.9$61.6 million, or 33.8%, primarily due to strong consumer demand for healthcare and healthy living products in domestic and international markets, primarily in thermometry and air purification, in both brick and mortar and online channels, mainly attributable to COVID-19.
These factors were partially offset by declines in non-strategic categories.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Net sales revenue increased $162.0 million, or 32.4%, to $661.6 million, compared to $499.5 million. The increase was primarily driven by an Organic business increase of $162.1 million, or 32.5%, primarily due to strong consumer demand for healthcare and healthy living products in domestic and international
markets, in both brick and mortar and online channels, mainly attributable to COVID-19, and air purifier demand further driven by greater wildfire activity on the west coast of the United States.
These factors were partially offset by declines in non-strategic categories.
Beauty
Comparison of Third Quarter Fiscal 2021 to Third Quarter Fiscal 2020
Net sales revenue increased $59.5 million, or 56.2%, to $165.2 million, compared to $105.7 million. The increase was driven by an Organic business increase of $42.1 million, or 39.8%, as well as the net sales revenue contribution of $17.5 million, or 16.6% growth, from the acquisition of Drybar Products.76.7%. The Organic business increase primarily reflects:
•growthan increase in the appliance category in both online and brick and mortar channels driven bysales due to the strengthfavorable comparative impact of COVID-19 related store closures and reduced store traffic in the One-Step family of products;prior year period;
•a shiftgrowth in the volumizer franchise due to greater and more aggressive early season retail holiday promotions during the third quarter;
•continued high consumer demand, expanded distribution primarily in the club channel;channel, new product introductions, and the favorable comparative impact of constrained supply levels in the prior year period;
•an increase in international sales.
These factors were partially offset by reduced store traffic at certain retail brick and mortar stores due to COVID-19 and a net sales revenue decline in Non-Core business.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Net sales revenue increased $93.5 million, or 34.7%, to $363.0 million, compared to $269.5 million. The increase was driven by an Organic business increase of $60.9 million, or 22.6%, as well as the net sales revenue contribution of $35.6 million, or 13.2% growth, from the acquisition of Drybar Products. The Organic business increase primarily reflects:
•growth in the appliance category driven by strength of the One-Step family of products;
•a shift to greater and more aggressive early season retail holiday promotions during the third quarter;
•expanded distribution, primarily in the club channel; andsales;
•an increase in international sales.online channel sales;
These factors were partially offset by:
•a net sales revenue decline in Non-Core business;higher international sales; and
•the closurefavorable impact of key domestic customers, lower brick and mortar store traffic, and lower overall discretionary demand primarily inorders that were not able to be shipped at the firstend of the fourth quarter of fiscal 2021 due to high unemployment and consumer uncertainty as a result of COVID-19; andWinter Storm Uri.
•
These factors were partially offthe unfavorable impact ofset by a decline in Non-Core business.
Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $3.1
$1.7 million, or 1.2%2.1%.
Consolidated Gross Profit Margin
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Consolidated gross profit margin increased 0.9decreased 1.8 percentage points to 45.1%40.8%, compared to 44.2%42.6%. The increasedecrease in consolidated gross profit margin was primarily due to:
•a favorable product mix withinhigher inbound freight expense due to rising freight costs and container supply shortages;
•EPA compliance costs in the Health & Home and the Organic Beauty business;
•the favorable impactsegment of the Drybar Products acquisition;$13.1 million; and
•a less favorable channel mix withinin the Housewares segment.
These factors were partially offset by higher inbound freight expense and an unfavorablea more favorable product mix in the HousewaresBeauty segment.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Consolidated gross profit margin increased 1.1 percentage points to 43.9%, compared to 42.8%. The increase in consolidated gross profit margin was primarily due to:
•a favorable product mix within Health & Home and the Organic Beauty business;
•the favorable impact of the Drybar Products acquisition; and
•a favorable channel mix within the Housewares segment.
These factors were partially offset by an unfavorable product mix in the Housewares segment and the unfavorable comparative impact of tariff exclusion refunds received in the prior year period.
Consolidated SG&A
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Consolidated SG&A ratio increaseddecreased 1.80.2 percentage points to 29.3%28.8%, compared to 27.5%29.0%. The increasedecrease in the consolidated SG&A ratio was primarily due to:
•increased marketing expense;favorable operating leverage;
•increased freight and distribution expense;reduced royalty expense as a result of the amendment of the Revlon trademark license;
•higher royaltylower amortization expense;
•increased legal and other professional fees; and
•highera decrease in bad debt expense.
These factors were partially offset by:
•the impact thatof higher overall net sales revenue had on net operating leverage;
•travel expense reductionspersonnel and advertising expenses due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19; and
•the favorable comparative impact of acquisition-related expenses for the purchase of Drybar Products incurred in the prior year period.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Consolidated SG&A ratio decreased 0.7 percentage points to 27.7%, compared to 28.4%. The decrease in the consolidated SG&A ratio was primarily due to:
•the impact that higher overall net sales revenue had on net operating leverage;
•lower marketing and personnel expenses as a percentage of sales due to COVID-19 cost reduction initiatives that were in place during the first half of fiscal 2021; and
•travel expense reductions due to COVID-19.
These factors were partially offset by:
•increased freight and distribution expense;
•increased legal and other professional fees;
•increased customer chargeback activity;
•higher performance-based annual and long-term incentive compensation expense; and
•higher bad debt expense.expenses.
Restructuring Charges
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
An insignificantWe incurred an immaterial amount of pre-tax restructuring costs were recordedunder Project Refuel for the three month periodsperiod ended November 30, 2020 and 2019.May 31, 2021, compared to $0.3 million for the same period last year.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
During the nine months ended November 30, 2020 and 2019, we incurred $0.4 million and $1.1 million, respectively, of pre-tax restructuring charges related primarily to employee severance and termination benefits and contract termination costs.
Operating income, operating margin, adjusted operating incomeIncome, Operating Margin, Adjusted Operating Income (non-GAAP), and adjusted operating marginAdjusted Operating Margin (non-GAAP) by segmentSegment
In order to provide a better understanding of the comparative impact of certain items on our operating income, the tables that follow report the comparative before-taxpre-tax impact of non-cash asset impairment charges, acquisition-related expenses,EPA compliance costs, restructuring charges, amortization of intangible assets, and non-cash share-based compensation, as applicable, on operating income and operating margin for each segment and in total for the periods coveredpresented below. Adjusted operating income and adjusted operating margin may be considered non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. For additional information regarding management’s decision to present this non-GAAP financial information, see the introduction to this Item 2,2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2020 |
| (In thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Operating income, as reported (GAAP) | $ | 37,658 | | | 16.9 | % | | $ | 30,478 | | | 12.2 | % | | $ | 32,573 | | | 19.7 | % | | $ | 100,709 | | | 15.8 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Restructuring charges | (12) | | | — | % | | — | | | — | % | | — | | | — | % | | (12) | | | — | % |
| Subtotal | 37,646 | | | 16.9 | % | | 30,478 | | | 12.2 | % | | 32,573 | | | 19.7 | % | | 100,697 | | | 15.8 | % |
| Amortization of intangible assets | 523 | | | 0.2 | % | | 2,454 | | | 1.0 | % | | 1,524 | | | 1.0 | % | | 4,501 | | | 0.7 | % |
| Non-cash share-based compensation | 2,712 | | | 1.2 | % | | 2,359 | | | 0.9 | % | | 1,668 | | | 1.0 | % | | 6,739 | | | 1.1 | % |
| Adjusted operating income (non-GAAP) | $ | 40,881 | | | 18.4 | % | | $ | 35,291 | | | 14.1 | % | | $ | 35,765 | | | 21.7 | % | | $ | 111,937 | | | 17.6 | % |
| | | | Three Months Ended November 30, 2019 | | Three Months Ended May 31, 2021 |
| (In thousands) | (In thousands) | Housewares | | Health & Home | | Beauty | | Total | (In thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Operating income, as reported (GAAP) | Operating income, as reported (GAAP) | $ | 42,272 | | | 23.1 | % | | $ | 24,372 | | | 13.1 | % | | $ | 12,625 | | | 11.9 | % | | $ | 79,269 | | | 16.7 | % | Operating income, as reported (GAAP) | $ | 27,143 | | | 14.0 | % | | $ | 11,249 | | | 5.5 | % | | $ | 26,443 | | ` | 18.4 | % | | $ | 64,835 | | | 12.0 | % |
| | Acquisition-related expenses | — | | | — | % | | — | | | — | % | | 1,475 | | | 1.4 | % | | 1,475 | | | 0.3 | % | |
| EPA compliance costs | | EPA compliance costs | — | | | — | % | | 13,112 | | | 6.4 | % | | — | | | — | % | | 13,112 | | | 2.4 | % |
| Restructuring charges | Restructuring charges | — | | | — | % | | — | | | — | % | | 12 | | | — | % | | 12 | | | — | % | Restructuring charges | — | | | — | % | | — | | | — | % | | 6 | | | — | % | | 6 | | | — | % |
| Subtotal | Subtotal | 42,272 | | | 23.1 | % | | 24,372 | | | 13.1 | % | | 14,112 | | | 13.3 | % | | 80,756 | | | 17.0 | % | Subtotal | 27,143 | | | 14.0 | % | | 24,361 | | | 11.9 | % | | 26,449 | | | 18.4 | % | | 77,953 | | | 14.4 | % |
| Amortization of intangible assets | Amortization of intangible assets | 815 | | | 0.4 | % | | 2,492 | | | 1.3 | % | | 1,483 | | | 1.4 | % | | 4,790 | | | 1.0 | % | Amortization of intangible assets | 518 | | | 0.3 | % | | 567 | | | 0.3 | % | | 1,898 | | | 1.3 | % | | 2,983 | | | 0.6 | % |
| Non-cash share-based compensation | Non-cash share-based compensation | 1,510 | | | 0.8 | % | | 1,946 | | | 1.0 | % | | 1,302 | | | 1.2 | % | | 4,758 | | | 1.0 | % | Non-cash share-based compensation | 5,551 | | | 2.9 | % | | 4,880 | | | 2.4 | % | | 3,589 | | | 2.5 | % | | 14,020 | | | 2.6 | % |
| Adjusted operating income (non-GAAP) | Adjusted operating income (non-GAAP) | $ | 44,597 | | | 24.3 | % | | $ | 28,810 | | | 15.5 | % | | $ | 16,897 | | | 16.0 | % | | $ | 90,304 | | | 19.0 | % | Adjusted operating income (non-GAAP) | $ | 33,212 | | | 17.2 | % | | $ | 29,808 | | | 14.6 | % | | $ | 31,936 | | | 22.3 | % | | $ | 94,956 | | | 17.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2020 |
| (In thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Operating income, as reported (GAAP) | $ | 106,294 | | | 18.8 | % | | $ | 95,782 | | | 14.5 | % | | $ | 54,887 | | | 15.1 | % | | $ | 256,963 | | | 16.2 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Restructuring charges | 251 | | | — | % | | — | | | — | % | | 104 | | | — | % | | 355 | | | — | % |
| Subtotal | 106,545 | | | 18.9 | % | | 95,782 | | | 14.5 | % | | 54,991 | | | 15.2 | % | | 257,318 | | | 16.2 | % |
| Amortization of intangible assets | 1,541 | | | 0.3 | % | | 7,415 | | | 1.1 | % | | 4,571 | | | 1.3 | % | | 13,527 | | | 0.9 | % |
| Non-cash share-based compensation | 8,024 | | | 1.4 | % | | 7,166 | | | 1.1 | % | | 5,464 | | | 1.5 | % | | 20,654 | | | 1.3 | % |
| Adjusted operating income (non-GAAP) | $ | 116,110 | | | 20.6 | % | | $ | 110,363 | | | 16.7 | % | | $ | 65,026 | | | 17.9 | % | | $ | 291,499 | | | 18.3 | % |
| | | | Nine Months Ended November 30, 2019 | | Three Months Ended May 31, 2020 |
| (In thousands) | (In thousands) | Housewares | | Health & Home | | Beauty | | Total | (In thousands) | Housewares | | Health & Home | | Beauty | | Total |
| Operating income, as reported (GAAP) | Operating income, as reported (GAAP) | $ | 109,170 | | | 22.0 | % | | $ | 51,836 | | | 10.4 | % | | $ | 19,990 | | | 7.4 | % | | $ | 180,996 | | | 14.3 | % | Operating income, as reported (GAAP) | $ | 23,233 | | | 16.5 | % | | $ | 31,533 | | | 15.8 | % | | $ | 2,213 | | | 2.8 | % | | $ | 56,979 | | | 13.5 | % |
| | Acquisition-related expenses | — | | | — | % | | — | | | — | % | | 1,475 | | | 0.5 | % | | 1,475 | | | 0.1 | % | |
| | Restructuring charges | Restructuring charges | 90 | | | — | % | | — | | | — | % | | 971 | | | 0.4 | % | | 1,061 | | | 0.1 | % | Restructuring charges | 238 | | | 0.2 | % | | — | | | — | % | | 95 | | | 0.1 | % | | 333 | | | 0.1 | % |
| Subtotal | Subtotal | 109,260 | | | 22.0 | % | | 51,836 | | | 10.4 | % | | 22,436 | | | 8.3 | % | | 183,532 | | | 14.5 | % | Subtotal | 23,471 | | | 16.7 | % | | 31,533 | | | 15.8 | % | | 2,308 | | | 2.9 | % | | 57,312 | | | 13.6 | % |
| Amortization of intangible assets | Amortization of intangible assets | 1,512 | | | 0.3 | % | | 8,088 | | | 1.6 | % | | 3,529 | | | 1.3 | % | | 13,129 | | | 1.0 | % | Amortization of intangible assets | 498 | | | 0.4 | % | | 2,452 | | | 1.2 | % | | 1,524 | | | 1.9 | % | | 4,474 | | | 1.1 | % |
| Non-cash share-based compensation | Non-cash share-based compensation | 5,853 | | | 1.2 | % | | 7,839 | | | 1.6 | % | | 5,051 | | | 1.9 | % | | 18,743 | | | 1.5 | % | Non-cash share-based compensation | 3,421 | | | 2.4 | % | | 3,314 | | | 1.7 | % | | 2,556 | | | 3.2 | % | | 9,291 | | | 2.2 | % |
| Adjusted operating income (non-GAAP) | Adjusted operating income (non-GAAP) | $ | 116,625 | | | 23.5 | % | | $ | 67,763 | | | 13.6 | % | | $ | 31,016 | | | 11.5 | % | | $ | 215,404 | | | 17.0 | % | Adjusted operating income (non-GAAP) | $ | 27,390 | | | 19.5 | % | | $ | 37,299 | | | 18.7 | % | | $ | 6,388 | | | 8.0 | % | | $ | 71,077 | | | 16.9 | % |
Consolidated Operating Income
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Consolidated operating income was $100.7$64.8 million, or 15.8%12.0% of net sales revenue, compared to $79.3$57.0 million, or 16.7%13.5% of net sales revenue. The decrease in consolidated operating margin was primarily driven by the following factors:due to:
•increased marketing expense;higher inbound freight expense due to rising freight costs and container supply shortages;
•increased freight and distribution expense;EPA compliance costs in the Health & Home segment of $13.1 million;
•an unfavorable producta less favorable channel mix in the Housewares segment;
•higher royalty expense;
•increased legalpersonnel and other professional fees;advertising expenses due to cost reduction initiatives in the prior year period related to the uncertainty of COVID-19; and
•higher bad debt expense.distribution expenses.
These factors were partially offset by:
•a more favorable product mix in the Beauty segment;
•favorable impact that higher overall net sales revenue had on operating leverage;
•reduced royalty expense as a favorable product mix within Health & Home andresult of the Organic Beauty business;
•a favorable channel mix withinamendment of the Housewares segment;
•travel expense reductions due to COVID-19; and
•the favorable comparative impact of acquisition-related expenses for the purchase of Drybar Products incurred in the prior year period.
Consolidated adjusted operating income increased 24.0% to $111.9 million, or 17.6% of net sales revenue, compared to $90.3 million, or 19.0% of net sales revenue.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Consolidated operating income was $257.0 million, or 16.2% of net sales revenue, compared to $181.0 million, or 14.3% of net sales revenue. The increase in consolidated operating margin was primarily driven by the following factors:
•the favorable impact that higher overall net sales revenue had on operating leverage;
•a favorable product mix within Health & Home and the Organic Beauty business;
•a favorable channel mix within the Housewares segment;Revlon trademark license;
•lower marketing and personnel expenses as a percentage of sales due to COVID-19 cost reduction initiatives that were in place during the first half of fiscal 2021;
•travel expense reductions due to COVID-19; and
•the favorable comparative impact of acquisition-related expenses for the purchase of Drybar Products incurred in the prior year period.
These factors were partially offset by:
•an unfavorable product mix in the Housewares segment;
•the unfavorable comparative impact of tariff exclusion refunds received in the prior year period;
•increased freight and distribution expense;
•increased customer chargeback activity;
•higher performance-based annual and long-term incentive compensationamortization expense; and
•highera decrease in bad debt expense.
Consolidated adjusted operating income increased 35.3%33.6% to $291.5$95.0 million, or 18.3%17.5% of net sales revenue, compared to $215.4$71.1 million, or 17.0%16.9% of net sales revenue.
Housewares
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Operating income was $37.7$27.1 million, or 16.9%14.0% of segment net sales revenue, compared to $42.3$23.2 million, or 23.1%16.5% of segment net sales revenue. The 6.22.5 percentage point decrease in segment operating margin was primarily due to:
•a less favorable productchannel mix;
•increasedhigher inbound freight expense due to rising freight costs and distribution expense to support strong demand;
•increased marketing expense;container supply shortages;
•higher royaltydistribution costs;
•an increase in marketing expense; and
•increased legal and other professional fees.higher personnel expense.
These factors were partially offset by:
•theby lower bad debt expense and favorable impact that higher overall net sales revenue had on operating leverage;
•a more favorable channel mix; and
•travel expense reductions due to COVID-19.leverage.
Adjusted operating income decreased 8.3%increased 21.3% to $40.9$33.2 million, or 18.4%17.2% of segment net sales revenue, compared to $44.6$27.4 million, or 24.3%19.5% of segment net sales revenue.
Health & Home
Comparison of First Nine Months ofQuarter Fiscal 20212022 to First Nine Months ofQuarter Fiscal 20202021
Operating income was $106.3$11.2 million, or 18.8%5.5% of segment net sales revenue, compared to $109.2$31.5 million, or 22.0%15.8% of segment net sales revenue. The 3.210.3 percentage point decrease in segment operating margin was primarily due to:
•a less favorable product mix;
•higher freight and distribution expense to support strong demand;EPA compliance costs of $13.1 million;
•increasedhigher inbound freight expense due to rising freight costs and container supply shortages;
•higher distribution costs;
•an increase in marketing expense; and
•increased customer chargeback activity.higher personnel expenses.
These factors were partially offset by:
•lower product liability claim costs;
•reduced amortization expense;
•a decrease in royalty expense; and
•the favorable impact that higher overall net sales revenue had on operating leverage;
•a more favorable channel mix;
•lower personnel expense as a percentage of sales due to COVID-19 cost reduction initiatives that were in place during the first half of fiscal 2021; and
•travel expense reductions due to COVID-19.foreign currency fluctuations.
Adjusted operating income decreased 0.4%20.1% to $116.1$29.8 million, or 20.6%14.6% of segment net sales revenue, compared to $116.6$37.3 million, or 23.5% of segment net sales revenue.
Health & Home
Comparison of Third Quarter Fiscal 2021 to Third Quarter Fiscal 2020
Operating income was $30.5 million, or 12.2% of segment net sales revenue, compared to $24.4 million, or 13.1% of segment net sales revenue. The 0.9 percentage point decrease in segment operating margin was primarily due to:
•increased marketing expense;
•higher performance-based annual incentive compensation expense;
•higher royalty expense; and
•the unfavorable impact of foreign currency exchange and forward contract settlements year-over-year.
These factors were partially offset by:
•the favorable impact that higher overall net sales revenue had on operating leverage; and
•the impact of a more favorable product mix.
Adjusted operating income increased 22.5% to $35.3 million, or 14.1% of segment net sales revenue, compared to $28.8 million, or 15.5% of segment net sales revenue.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Operating income was $95.8 million, or 14.5% of segment net sales revenue, compared to $51.8 million, or 10.4% of segment net sales revenue. The 4.1 percentage point increase in segment operating margin was primarily due to the favorable impact that higher overall net sales revenue had on operating leverage, lower personnel and marketing expenses as a percentage of sales due to COVID-19 cost reduction initiatives in place during the first half of fiscal 2021, and the impact of a more favorable product mix.
These factors were partially offset by:
•the unfavorable comparative impact of tariff exclusion refunds received in the prior year period;
•higher performance-based annual incentive compensation expense;
•increased customer chargeback activity;
•higher royalty expense; and
•higher freight and distribution expense to support increased retail customer shipments.
Adjusted operating income increased 62.9% to $110.4 million, or 16.7% of segment net sales revenue, compared to $67.8 million, or 13.6%18.7% of segment net sales revenue.
Beauty
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Operating income was $32.6$26.4 million, or 19.7%18.4% of segment net sales revenue, compared to $12.6$2.2 million, or 11.9%2.8% of segment net sales revenue. The 7.815.6 percentage point increase in segment operating margin was primarily due to:
•the favorable impact that higher overall net sales revenue had on operating leverage;
•the margin impact of a more favorable product mix;
•reduced royalty expense as a result of the amendment of the Revlon trademark license;
•lower inventory obsolescence costs;
•the favorable comparative impact of acquisition-related expenses for the purchase of Drybar Products incurred in the prior year period;foreign currency fluctuations; and
•travel expense reductions due to COVID-19.a decrease in bad debt expense.
These factors were partially offset by:
•higher personnelinbound freight expense related to the acquisition of Drybar Products;
•increased marketing expense;
•higher performance-based annual incentive compensation expense;
•higher bad debt expense; and
•higher legal and other professional fees.
Adjusted operating income increased 111.7% to $35.8 million, or 21.7% of segment net sales revenue, compared to $16.9 million, or 16.0% of segment net sales revenue.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Operating income was $54.9 million, or 15.1% of segment net sales revenue, compared to $20.0 million, or 7.4% of segment net sales revenue. The 7.7 percentage point increase in segment operating margin was primarily due to:
•the favorable impact that higher overall net sales revenue had on operating leverage;
•the margin impact of a more favorable product mix;
•the favorable comparative impact of acquisition-related expenses related to the purchase of Drybar Products incurred in the prior year period;
•lower personnel expense as a percentage of sales due to COVID-19 cost reduction initiatives that were in place during the first half of fiscal 2021;rising freight costs and
•travel expense reductions due to COVID-19.
These factors were partially offset by:
•higher personnel expense related to the acquisition of Drybar Products;
•higher performance-based annual incentive compensation expense;
•higher legal and other professional fees; container supply shortages;
•increased marketing expense; and
•higher bad debtincreased personnel expense.
Adjusted operating income increased 109.7%$25.5 million to $65.0$31.9 million, or 17.9%22.3% of segment net sales revenue, compared to $31.0$6.4 million, or 11.5%8.0% of segment net sales revenue.
Interest Expense
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Interest expense was $2.9$3.0 million, compared to $2.8$3.8 million. The increasedecrease in interest expense was primarily due to lower average interest rates, partially offset by higher average levels of debt outstanding compared to the same period last year, partially offset by lower average interest rates.year.
`
Interest expense was $9.6 million, compared to $9.3 million. The increase in interest expense was primarily due to higher average levels of debt outstanding compared to the same period last year, partially offset by lower average interest rates.
Income Tax Expense
The period-over-period comparison of our effective tax rate is often impacted by the mix of taxable income in our various tax jurisdictions. Due to our organization in Bermuda and the ownership structure of our foreign subsidiaries, many of which are not owned directly or indirectly by a U.S. parent company, an immaterial amount of our foreign income is subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by our foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate.
ForOn March 11, 2021, the three months ended November 30, 2020, incomeAmerican Rescue Plan Act (the “ARM”) was enacted and signed into law. The ARM is an economic stimulus package in response to the COVID-19 outbreak which contains tax expense asprovisions that did not have a percentage of income before income tax was 14.0% comparedmaterial impact to 10.3% for the same period last year. The year-over-year increase in the effective tax rate is primarily due to an increase in liabilities related to uncertain tax positions.our condensed consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”Act (the “CARES Act”) Act was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included
technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.
Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.
For the ninethree months ended November 30, 2020,May 31, 2021, income tax expense as a percentage of income before income tax was 6.5%8.0% compared to an income tax expensebenefit of 9.6%13.0% for the same period last year, primarily due to this benefit.the benefit of the CARES Act in fiscal 2021. Income tax expense for the ninethree months ended November 30, 2020 also includes other discrete benefits to include reductionsMay 31, 2021 is driven by the mix of U.S. BEATtaxable income in our various tax (Base Erosionjurisdictions and Anti-Abuse) and GILTI tax (Global Intangible Low-Tax Income), the recognition of excess tax benefits fromassociated with share-based compensation settlements, and one-time benefits related torecognized in the transition of our Macau entity from offshore to onshore status, partially offset by increasesperiod in liabilities related to uncertain tax positions.which it is settled.
During fiscal 2017, we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. During the time the dispute was ongoing, we believe we accurately reported our taxable income and vigorously protested the assessment through administrative processes with the state. During the quarter, we reached an agreement in principle to settle the $6.0 million assessment in dispute for $0.5 million. The agreement was signed on December 4, 2020.
Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured.This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell.We currently havepreviously had an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain
employment and investment thresholds. The Macau Offshore Law and its supplementary regulations that
grant tax incentives to approved offshore institutions will bewas abolished on January 1, 2021. Existing approved offshore institutions such as ours can continuecontinued to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, our Macau subsidiary will transitiontransitioned to onshore status and becomeis now subject to a statutory corporate income tax of approximately 12%. We expect the impact of this change to increase our overall effective tax rate by 1.5 to 2.0 percentage points on an annual basis, beginning with our fiscal 2022. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.
Net Income, dilutedDiluted EPS, adjusted incomeAdjusted Income (non-GAAP), and adjusted dilutedAdjusted Diluted EPS (non-GAAP)
In order to provide a better understanding of the impact of certain items on our net income and diluted EPS, the analysistables that follows reportsfollow report the comparative after-tax impact of non-cash asset impairment charges, acquisition-related expenses,EPA compliance costs, restructuring charges, tax reform, amortization of intangible assets, and non-cash share-based compensation, as applicable, on net income and diluted EPS for the periods coveredpresented below. For additional information regarding management’s decision to present this non-GAAP financial information, see the introduction to this Item 2,2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| | | | Three Months Ended November 30, 2020 | | Three Months Ended May 31, 2021 |
| | | Income | | Diluted EPS | | Income | | Diluted EPS |
| (in thousands, except per share data) | (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax | (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax |
| As reported (GAAP) | As reported (GAAP) | $ | 97,876 | | | $ | 13,721 | | | $ | 84,155 | | | $ | 3.89 | | | $ | 0.55 | | | $ | 3.34 | | As reported (GAAP) | $ | 61,942 | | | $ | 4,970 | | | $ | 56,972 | | | $ | 2.51 | | | $ | 0.20 | | | $ | 2.31 | |
| | EPA compliance costs | | EPA compliance costs | 13,112 | | | 197 | | | 12,915 | | | 0.53 | | | 0.01 | | | 0.52 | |
| Restructuring charges | Restructuring charges | (12) | | | — | | | (12) | | | — | | | — | | | — | | Restructuring charges | 6 | | | — | | | 6 | | | — | | | — | | | — | |
| | Subtotal | Subtotal | 97,864 | | | 13,721 | | | 84,143 | | | 3.89 | | | 0.55 | | | 3.34 | | Subtotal | 75,060 | | | 5,167 | | | 69,893 | | | 3.05 | | | 0.21 | | | 2.84 | |
| Amortization of intangible assets | Amortization of intangible assets | 4,501 | | | 204 | | | 4,297 | | | 0.18 | | | 0.01 | | | 0.17 | | Amortization of intangible assets | 2,983 | | | 208 | | | 2,775 | | | 0.12 | | | 0.01 | | | 0.11 | |
| Non-cash share-based compensation | Non-cash share-based compensation | 6,739 | | | 403 | | | 6,336 | | | 0.27 | | | 0.02 | | | 0.25 | | Non-cash share-based compensation | 14,020 | | | 859 | | | 13,161 | | | 0.57 | | | 0.03 | | | 0.53 | |
| Adjusted (non-GAAP) | Adjusted (non-GAAP) | $ | 109,104 | | | $ | 14,328 | | | $ | 94,776 | | | $ | 4.33 | | | $ | 0.57 | | | $ | 3.76 | | Adjusted (non-GAAP) | $ | 92,063 | | | $ | 6,234 | | | $ | 85,829 | | | $ | 3.74 | | | $ | 0.25 | | | $ | 3.48 | |
| | Weighted average shares of common stock used in computing diluted EPS | Weighted average shares of common stock used in computing diluted EPS | 25,192 | | Weighted average shares of common stock used in computing diluted EPS | 24,636 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2019 |
| | Income | | Diluted EPS |
| (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax |
| As reported (GAAP) | $ | 76,594 | | | $ | 7,895 | | | $ | 68,699 | | | $ | 3.02 | | | $ | 0.31 | | | $ | 2.71 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Acquisition-related expenses | 1,475 | | | 22 | | | 1,453 | | | 0.06 | | | — | | | 0.06 | |
| Restructuring charges | 12 | | | — | | | 12 | | | — | | | — | | | — | |
| Subtotal | 78,081 | | | 7,917 | | | 70,164 | | | 3.07 | | | 0.31 | | | 2.76 | |
| Amortization of intangible assets | 4,790 | | | 252 | | | 4,538 | | | 0.19 | | | 0.01 | | | 0.18 | |
| Non-cash share-based compensation | 4,758 | | | 343 | | | 4,415 | | | 0.19 | | | 0.01 | | | 0.17 | |
| Adjusted (non-GAAP) | $ | 87,629 | | | $ | 8,512 | | | $ | 79,117 | | | $ | 3.45 | | | $ | 0.34 | | | $ | 3.12 | |
| | | | | | | | | | | |
| Weighted average shares of common stock used in computing diluted EPS | | 25,396 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2020 |
| | Income | | Diluted EPS |
| (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax |
| As reported (GAAP) | $ | 247,835 | | | $ | 16,061 | | | $ | 231,774 | | | $ | 9.78 | | | $ | 0.63 | | | $ | 9.14 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Restructuring charges | 355 | | | 2 | | | 353 | | | 0.01 | | | — | | | 0.01 | |
| Tax Reform | — | | | 9,357 | | | (9,357) | | | — | | | 0.37 | | | (0.37) | |
| Subtotal | 248,190 | | | 25,420 | | | 222,770 | | | 9.79 | | | 1.00 | | | 8.79 | |
| Amortization of intangible assets | 13,527 | | | 651 | | | 12,876 | | | 0.53 | | | 0.03 | | | 0.51 | |
| Non-cash share-based compensation | 20,654 | | | 1,406 | | | 19,248 | | | 0.82 | | | 0.06 | | | 0.76 | |
| Adjusted (non-GAAP) | $ | 282,371 | | | $ | 27,477 | | | $ | 254,894 | | | $ | 11.14 | | | $ | 1.08 | | | $ | 10.05 | |
|
| Weighted average shares of common stock used in computing diluted EPS | 25,350 | |
|
| | | | Nine Months Ended November 30, 2019 | | Three Months Ended May 31, 2020 |
| | | Income | | Diluted EPS | | Income | | Diluted EPS |
| (in thousands, except per share data) | (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax | (in thousands, except per share data) | Before Tax | | Tax | | Net of Tax | | Before Tax | | Tax | | Net of Tax |
| As reported (GAAP) | As reported (GAAP) | $ | 172,018 | | | $ | 16,530 | | | $ | 155,488 | | | $ | 6.80 | | | $ | 0.65 | | | $ | 6.15 | | As reported (GAAP) | $ | 53,369 | | | $ | (6,917) | | | $ | 60,286 | | | $ | 2.10 | | | $ | (0.27) | | | $ | 2.37 | |
| | Acquisition-related expenses | 1,475 | | | 22 | | | 1,453 | | | 0.06 | | | — | | | 0.06 | | |
| | Restructuring charges | Restructuring charges | 1,061 | | | 68 | | | 993 | | | 0.04 | | | — | | | 0.04 | | Restructuring charges | 333 | | | 2 | | | 331 | | | 0.01 | | | — | | | 0.01 | |
| Tax reform | | Tax reform | — | | | 9,357 | | | (9,357) | | | — | | | 0.37 | | | (0.37) | |
| Subtotal | Subtotal | 174,554 | | | 16,620 | | | 157,934 | | | 6.90 | | | 0.66 | | | 6.24 | | Subtotal | 53,702 | | | 2,442 | | | 51,260 | | | 2.11 | | | 0.10 | | | 2.02 | |
| Amortization of intangible assets | Amortization of intangible assets | 13,129 | | | 621 | | | 12,508 | | | 0.52 | | | 0.02 | | | 0.49 | | Amortization of intangible assets | 4,474 | | | 241 | | | 4,233 | | | 0.18 | | | 0.01 | | | 0.17 | |
| Non-cash share-based compensation | Non-cash share-based compensation | 18,743 | | | 1,434 | | | 17,309 | | | 0.74 | | | 0.06 | | | 0.68 | | Non-cash share-based compensation | 9,291 | | | 606 | | | 8,685 | | | 0.37 | | | 0.02 | | | 0.34 | |
| Adjusted (non-GAAP) | Adjusted (non-GAAP) | $ | 206,426 | | | $ | 18,675 | | | $ | 187,751 | | | $ | 8.16 | | | $ | 0.74 | | | $ | 7.42 | | Adjusted (non-GAAP) | $ | 67,467 | | | $ | 3,289 | | | $ | 64,178 | | | $ | 2.66 | | | $ | 0.13 | | | $ | 2.53 | |
| | Weighted average shares of common stock used in computing diluted EPS | Weighted average shares of common stock used in computing diluted EPS | 25,295 | | Weighted average shares of common stock used in computing diluted EPS | | 25,397 | |
Comparison of ThirdFirst Quarter Fiscal 20212022 to ThirdFirst Quarter Fiscal 20202021
Net Income was $84.2$57.0 million, compared to $68.7$60.3 million. Diluted EPS was $3.34,$2.31, compared to $2.71.$2.37. Diluted EPS increaseddecreased primarily due to lower operating income in the Health & Home segment and the comparative impact from the Tax reform benefit recognized in the prior year period, partially offset by higher operating income in the Beauty and Health & Home segments. This was partially offset byHousewares segments, lower operating income in the Housewares segmentinterest expense and higher income tax expense.lower weighted average diluted shares outstanding.
Adjusted income increased $15.7$21.7 million, or 19.8%33.7%, to $94.8$85.8 million, compared to $79.1 million the same period last year. Adjusted diluted EPS increased 20.5% to $3.76, compared to $3.12.
Comparison of First Nine Months of Fiscal 2021 to First Nine Months of Fiscal 2020
Net Income was $231.8 million, compared to $155.5 million. Diluted EPS was $9.14, compared to $6.15. Diluted EPS increased primarily due to higher operating income in the Health & Home and Beauty segments and lower income tax expense. This was partially offset by lower operating income in the Housewares segment and higher interest expense.
Adjusted income increased $67.1 million, or 35.8%, to $254.9 million, compared to $187.8$64.2 million. Adjusted diluted EPS increased 35.4%37.5% to $10.05,$3.48, compared to $7.42.$2.53.
Financial Condition, Liquidity and Capital Resources
Selected measures of our liquidity and capital resources are shown for the periods below:
| | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2020 | | 2019 |
| Accounts Receivable Turnover (Days) (1) | 70.0 | | 68.9 |
| Inventory Turnover (Times) (1) | 3.6 | | 2.9 |
Working Capital (in thousands) | $ | 491,563 | | $ | 411,340 |
| Current Ratio | 1.8:1 | | 2.3:1 |
| Ending Debt to Ending Equity Ratio | 36.4% | | 21.0% |
| Return on Average Equity (1) | 18.9% | | 18.2% |
| | | | | | | | | | | |
| | Three Months Ended May 31, |
| | 2021 | | 2020 |
| Accounts receivable turnover (days) (1) | 67.4 | | 67.5 |
| Inventory turnover (times) (1) | 3.0 | | 3.2 |
Working capital (in thousands) | $ | 484,339 | | $ | 391,107 |
| Current ratio | 1.8:1 | | 2.1:1 |
| Ending debt to ending equity ratio | 42.5% | | 26.6% |
| Return on average equity (1) | 20.3% | | 15.2% |
(1)Accounts receivable turnover, inventory turnover and return on average equity computations use 12 month trailing net sales revenue, cost of goods sold 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.
We principally rely principally on our cash flow from operations and borrowings under our credit facilityCredit Agreement (as defined below) to finance our operations, acquisitions and capital expenditures. We believe our cash flow from operations and availability under our credit facility are sufficient to meet our working capital and capital expenditure needs.
Operating Activities
Operating activities provided net cash of $249.7 million for the nine months ended November 30, 2020, compared to $101.4 million for the same period last year. The increase was primarily driven by an increase in net income and increased cash from accounts payable and accrued expenses. These factors were partially offset by increased cash used for receivables and inventory.
Investing Activities
During the nine months ended November 30, 2020, we made investments in capital and intangible asset expenditures, of $19.4 million, compared to $13.2 million for the same period last year. The increase is primarily for molds, productionacquisitions and distribution equipment, information technology equipment, and software.
Financing Activities
Financing activities used $98.1 millionshare repurchases. Historically, our principal uses of cash duringto fund our operations have included operating expenses, primarily SG&A, and working capital, predominantly for inventory purchases and the nine months ended November 30, 2020, comparedextension of credit to $80.4our retail customers. We have been able to typically generate positive cash flow from operations sufficient to fund our operating activities. In the past, we have utilized a combination of available cash and existing, or additional, sources of financing to fund strategic acquisitions, share repurchases and capital investments. We had $37.4 million for the same period last year. The increase in cash used is primarily due to open market repurchases of common stock partially offset by an increase in proceeds from our line of credit.
Credit and Other Debt Agreements
Credit Agreement
cash equivalents at May 31, 2021. As of February 29, 2020, we had a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provided for an unsecured total revolving commitment of $1.0 billion. Borrowings accrued interest under one of two alternative methods (based upon a base rate or LIBOR) as described in the Credit Agreement. With each borrowing against our credit line, we could elect the interest rate method based on our funding needs at the time. We also incurred loan commitment and letter of credit fees under the Credit Agreement.
On March 13, 2020, we entered into an amendment to the Credit Agreement. The amendment extended the maturity of the commitment under the Credit Agreement from December 7,May 31, 2021, to March 13, 2025. Further, the amendment increased the unsecured revolving commitment from $1.0 billion to $1.25 billion. The accordion was amended to increase it from $200 million to $300 million and to include the ability to use it for term loan commitments. The accordion permits the Company to request to increase its borrowing capacity, not to exceed the $300 million commitment in the aggregate, provided certain conditions are met, including lender approval. Any increase to term loan commitments and revolving loan commitments must be made on terms identical to the revolving loans under the Credit Agreement and must have a maturity date of no earlier than March 13, 2025. Following the amendment, borrowings under the Credit Agreement bear interest at either the base rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0%, respectively, for base rate and LIBOR borrowings. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. We are able to repay amounts borrowed at any time without penalty.
As of November 30, 2020, the outstanding revolving loan principal balance was $426.0 million (excluding prepaid financing fees) and the balance of outstanding letters of credit was $19.2 million. For the three and nine month periods ended November 30, 2020, borrowings under the Credit Agreement incurred interest expense at rates ranging from 1.14% to 3.25% and 1.14% to 4.75%, respectively. As of November 30, 2020, the amount available for borrowings under the Credit Agreement was $804.8 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of November 30, 2020, these covenants did not limitcash and cash equivalents held by our ability to incur $804.8foreign subsidiaries was $26.5 million, of additional debt underwhich an immaterial amount was held in foreign countries where the Credit Agreement.
Other Debt Agreements
As of November 30, 2020, we have an aggregate principal balance of $18.6 million (excluding prepaid financing fees) under a loan agreement (the “MBFC Loan”) with the Mississippi Business Finance Corporation (the “MBFC”), which was enteredfunds may not be readily convertible into in connection with the issuance by MBFC of taxable industrial development revenue bonds (the “Bonds”). The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. Since March 2018, the MBFC Loan can be called by the holder at any time. The remaining loan balance is payable as follows: $1.9 million annually on March 1, 2021 and 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
On May 14, 2020, Helen of Troy Limited and certain of its subsidiaries entered into the Sixth Amendment to Guaranty Agreement (the “Amended Guaranty”) in favor of Bank of America, N.A. The Amended Guaranty amends the Guaranty Agreement (as amended, the “Guaranty Agreement”), dated March 1, 2013, made by the Company and certain of its subsidiaries in favor of Bank of America, N.A. and other lenders. Certain of the representations and warranties, and covenants in the Guaranty Agreement were amended by the Amended Guaranty to include or modify certain baskets, exceptions and other customary provisions.
The Bonds were issued under a Trust Indenture, dated as of March 1, 2013 (as supplemented, the “Indenture”), by and between MBFC and U.S. Bank National Association, as trustee (the “Trustee”). On May 14, 2020, MBFC and U.S. Bank National Association, as Trustee, entered into the Fifth Supplemental Trust Indenture, effective May 14, 2020 (the “Fifth Supplemental Indenture”), with the consent of Kaz USA, Inc. (“Kaz USA”) and Bank of America, N.A., the purchaser of the Bonds. The Base Rate (as defined in the Indenture) and Eurodollar Rate (as defined in the Indenture) were each amended. As amended by the Fifth Supplemental Indenture, the Bonds and the related loans to Kaz USA will bear interest at a Base Rate or Eurodollar Rate plus a margin based on the Net Leverage Ratio (as defined in
the Fifth Supplemental Indenture). The Fifth Supplemental Indenture amended the pricing grid for the Eurodollar and Base Rate margins.
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain key financial covenants, defined in the table below. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on our properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt agreements. The commitments of the lenders to make loans to us under the Credit Agreement are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the Credit Agreement.
The table below provides the formulas currently in effect for certain key financial covenants as defined under our debt agreements:
| | | | | |
Applicable Financial Covenant | Credit Agreement and MBFC Loan |
Minimum Interest Coverage Ratio | EBIT (1)÷Interest Expense (1)
|
Minimum Required: 3.00 to 1.00 |
Maximum Leverage Ratio
| Total Current and Long Term Debt (2) ÷
|
EBITDA (1) + Pro Forma Effect of Transactions |
Maximum Currently Allowed: 3.50 to 1.00 (3) |
Key Definitions:
EBIT: Earnings + Interest Expense + Taxes + Non-Cash
Charges (4) + Certain Allowed Addbacks (4) - Certain Non-Cash Income (4)
EBITDA: EBIT + Depreciation and Amortization Expense
Pro Forma Effect of Transactions: For any acquisition, pre-acquisition EBITDA of the acquired business is included so that the
EBITDA of the acquired business included in the computation equals its twelve month trailing total. In addition, the amount of certain pro forma run-rate cost savings for acquisitions or dispositions may be added to EBIT and EBITDA.
Notes:
(1)Computed using totals for the latest reported four consecutive fiscal quarters
(2)Computed using the ending balances as of the latest reported fiscal quarter.
(3)In the event a qualified acquisition is consummated, the maximum leverage ratio is 4.25 to 1.00 for the first fiscal quarter after the qualified acquisition and then steps down until the maximum leverage ratio is 3.75 to 1.00 at the end of the fifth fiscal quarter after the qualified acquisition is consummated.
(4)As described in the Credit Agreement and Guaranty Agreement.
Contractual Obligations
As of November 30, 2020, there have been no material changes from the information provided in our latest annual report on Form 10-K. Additional information regarding contractual obligations can be found in Notes 12, 13, 14 and 15 to the accompanying condensed consolidated financial statements.
Off-Balance Sheet Arrangements
currencies. We have no existing activities involving special purpose entities or off-balance sheet financing.
Current and Future Capital Needs
Based on our current financial condition and current operations, we believe that cash flowflows from operations and available financing sources will continue to provide sufficient capital resources to fund our foreseeable short- and long-term liquidity requirements. We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet.
On March 24, 2020, we borrowed approximately $200 million under the Credit Agreement as part of a comprehensive precautionary approach to increase our cash and cash equivalent position and maximize our financial flexibility in light of the volatility in the global markets resulting from the COVID-19 outbreak. We subsequently repaid the majority of this amount during May 2020. Due to the continued uncertainty of COVID-19, we have maintained cash and cash equivalent balances in excess of our operating needs and higher than historical levels.
We continue to evaluate acquisition opportunities on a regular basis. We may finance acquisition activity with available cash, the issuance of shares of common stock, additional debt, or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition. We may also elect to repurchase additional shares of common stock under our Board of DirectorsDirectors' authorization, subject to limitations contained in our debt agreements and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. We may finance share repurchases with available cash, additional debt or other sources of financing. For additional information, see Part II, Item 5,5. “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” in our latest annual report on Form 10-K and Part II, Item 2,2., “Unregistered Sales of Equity Securities and Use of Proceeds”Proceeds" in this report.
Operating Activities
Operating activities used net cash of $63.4 million for the three months ended May 31, 2021, compared to net cash provided of $92.8 million for the same period last year. The decrease in cash provided by operating activities was primarily driven by an increase in cash used for working capital, incentive
compensation payments and tax withholding settlements, partially offset by an increase in accrued income taxes.
Investing Activities
During the three months ended May 31, 2021, we made investments in capital and intangible asset expenditures of $4.0 million, compared to $6.5 million for the same period last year. Capital and intangible asset expenditures during both periods were primarily for tools, molds, and other production equipment and computer, software, furniture and other equipment.
Financing Activities
Financing activities provided cash of $59.6 million during the three months ended May 31, 2021, compared to used cash of $22.3 million for the same period last year. The increase in cash provided by financing activities is primarily due to a net increase in proceeds from our line of credit partially offset by open market repurchases of common stock.
Credit and Other Debt Agreements
Credit Agreement
We have a credit agreement (the "Credit Agreement") with Bank of America, N.A., as administrative agent, and other lenders that provides for an unsecured total revolving commitment of $1.25 billion. As of November 30, 2020,May 31, 2021, the outstanding revolving loan principal balance was $498.0 million (excluding prepaid financing fees), the balance of outstanding letters of credit was $19.2 million and the amount available for borrowings was $732.8 million. Covenants in the Credit Agreement limit the amount of cash and cash equivalents held bytotal indebtedness we can incur. As of May 31, 2021, these covenants did not limit our foreign subsidiaries was $30.2 million.ability to incur $732.8 million of additional debt under the Credit Agreement.
Other Debt Agreements
As of May 31, 2021, we have an aggregate principal balance of $16.7 million (excluding prepaid financing fees) under an unsecured loan agreement with the Mississippi Business Finance Corporation.
As of May 31, 2021, there have been no material changes to the information provided in our Form 10-K.
New Accounting Guidance
For information on recently adopted and issued accounting pronouncements, see Note 2 to the accompanying condensed consolidated financial statements.
Information Regarding Forward-Looking Statements
Certain written and oral statements 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 Securities and Exchange Commission (the “SEC”),SEC, in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “would”, “should”, “seeks”, “estimates”, “project”, “predict”, “potential”, “currently”, “continue”, “intends”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that may 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 our current expectations and various assumptions. We believe there is a reasonable basis
for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution 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 and that are otherwise described from time to time
in our SEC reports as filed. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.
Such risks are not limited to, but may include:
•our ability to successfully manage the demand, supply and operational challenges associated with the actual or perceived effects of COVID-19 and any similar future public health crisis, pandemic or epidemic;
•our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;
•the costs of complying with the business demandsactions taken by large customers that may adversely affect our gross profit and requirements of large sophisticated customers;operating results;
•our dependence on the strength of retail economies and vulnerabilities to any prolonged economic downturn, including from the effects of COVID-19;
•our relationships with key customers and licensors;
•our dependence on sales to several large customers and the risks associated with any loss of, or substantial decline in, sales to top customers;
•expectations regarding recent pendingacquisitions and any future acquisitions or divestitures, including our ability to realize anticipated cost savings,related synergies and other benefits along with our ability to effectively integrate acquired businesses or separatedisaggregate divested businesses;
•circumstances which may contributeour reliance on our Chief Executive Officer and a limited number of other key senior officers to future impairment of goodwill, intangible or other long-lived assets;operate our business;
•obsolescence or interruptions in the retentionoperation of our central global Enterprise Resource Planning systems and recruitment of key personnel;
•the costs, complexity and challenges of upgrading and managing our globalother peripheral information systems;
•the risks associated withoccurrence of cyber incidents or failure by us or our third-party service providers to maintain cybersecurity and information security breaches;the integrity of confidential internal or customer data;
•our dependence on third-party manufacturers, most of which are located in the Asia Pacific market, and any inability to obtain products from such manufacturers;
•the risks associated with global legal developments regarding privacy and data security could result in changes to our business practices, penalties, increased cost of operations, or otherwise harm our business;
•risks associated with foreign currency exchange rate fluctuations;
•the risks associated with accounting for tax positions, tax audits and related disputes with taxing authorities;
•the risks of potential changes in laws in the U.S. or abroad, including tax laws, regulations or treaties, employment and health insurance laws and regulations, laws relating to environmental policy, personal data, financial regulation, transportation policy and infrastructure policy along with the costs and complexities of compliance with such laws;
•our ability to continue to avoid classification as a controlled foreign corporation;
•the risks of new legislation enacted in Bermuda and Barbados in response to the European Union’s review of harmful tax competition;
•risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors;
•our dependence on foreign sources of supply and foreign manufacturing, and associated operational risks including, but not limited to, long lead times, consistent local labor availability and capacity, and timely availability of sufficient shipping carrier capacity;
•the impact of changing costs of raw materials, labor and energy on cost of goods sold and certain operating expenses;
•the risks associated with significant tariffs or other restrictions on imports from China or any retaliatory trade measures taken by China;
•the risks associated with the geographic concentration and peak season capacity of certain U.S. distribution facilities;
•facilities which increase our projections of product demand, sales and net income are highly subjective in nature and future sales and net incomerisk to disruptions that could varyaffect the our ability to deliver products in a material amount from such projections;timely manner;
•the risks associated with the use of licensed trademarks licensed from andor to third parties;
•our ability to develop and introduce a continuing stream of innovative new products to meet changing consumer preferences;
•the risks associated with trade barriers, exchange controls, expropriations, and other risks associated with U.S.domestic and foreign operations;
•the risks associated with significant changes in or our compliance with regulations, interpretations or product certification requirements;
•the risks associated with our discussions with the EPA on the development and implementation of compliance plans related to certain of our products within the Health & Home segment;
•the risks associated with global legal developments regarding privacy and data security that could result in changes to our liquiditybusiness practices, penalties, increased cost of operations, or otherwise harm our business;
•the risks associated with accounting for tax positions and the resolution of tax disputes;
•the risks of potential changes in laws and regulations, including environmental, health and safety and tax laws, and the costs and complexities of compliance with such laws;
•our ability to continue to avoid classification as a resultControlled Foreign Corporation;
•the risks associated with legislation enacted in Bermuda and Barbados in response to capital market conditions andthe European Union’s review of harmful tax competition;
•the risks of significant tariffs or other constraintsrestrictions being placed on imports from China or events that impose constraints on our cash resources and ability to operate our business;Mexico or any retaliatory trade measures taken by China or Mexico;
•the risks associated with product recalls, product liability and other claims and related litigation against us;
•associated financial risks including but not limited to, significant impairment of our goodwill, indefinite-lived and definite-lived intangible assets or other long-lived assets;
•the risks associated with foreign currency exchange rate fluctuations;
•increased costs of raw materials, energy and transportation;
•projections of product demand, sales and net income, which are highly subjective in nature, and from which future sales and net income could vary in a material amount; and
•the risks to our liquidity or cost of capital which may be materially adversely affected by constraints or changes in regulations or product certifications.the capital and credit markets and limitations under our financing arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K for the fiscal year ended February 29, 2020.10-K. Additional information regarding our risk management activities can be found in Notes 13, 149, 10 and 1511 to the accompanying unaudited condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), maintains disclosure controls and procedures as defined in RulesRule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange(the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended November 30, 2020.May 31, 2021. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of November 30, 2020,May 31, 2021, the end of the period covered by this quarterly report on Form 10-Q.
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 as defined in Rule 13a-15(f) ofunder the Exchange Act that occurred during our fiscal quarter ended November 30, 2020,May 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.liquidity, except as described below.
EPA Regulatory Matter
We are currently in discussions with the EPA regarding the compliance of Contentspackaging claims on certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Health & Home segment that are sold in the U.S. The EPA has not raised any product quality, safety or performance issues. We expect these products to be available for distribution with the only changes being modified labeling or different packaging. As a result of these discussions, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we ensure that all labeling is in compliance and we work with the EPA towards an expedient resolution. The EPA has approved modest changes to our labeling claims on our existing water filtration packaging, which we have begun to implement. We resumed shipment of these products and are actively working towards similar agreements regarding our air filtration and humidification packaging in continued collaboration with the EPA. At our request, the EPA issued a Stop Sale, Use or Removal Order on June 29, 2021, which, among other things, allows for the movement of certain of our products among our warehouses and will facilitate rework of the affected air filtration packaging once agreed to with the EPA. We believe this is meaningful progress towards a final resolution with the EPA. The stop shipment will remain in effect until we implement an approved labeling and repackaging plan. We expect that our consolidated and Health & Home segment’s fiscal 2022 net sales revenue, gross profit and operating income will be materially and adversely impacted by the stop shipment. The extent to which net sales revenue will be impacted will primarily depend on the duration of time required for the EPA to act on our proposed solutions and the related implementation schedule. At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed.
See Note 8 to our condensed consolidated financial statements, Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “EPA Compliance Costs” and Part II, Item 1A., “Risk Factors” in this Form 10-Q for additional information.
ITEM 1A. RISK FACTORS
The ownership of our common stock involves a number of risks and uncertainties. When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. “Risk Factors” of our annual report on Form 10-K for the fiscal year ended February 29, 2020.28, 2021 (“Form 10-K”). Since the filing of our annual report on Form 10-K, there have been no material changes in our risk factors from those disclosed therein.therein except as follows.
Significant changes in or our compliance with regulations, interpretations or product certification requirements could adversely impact our operations.
As a global company, we are subject to U.S. and foreign regulations, including environmental, health and safety laws, and industry-specific product certifications. Many of the products we sell are subject to product safety laws and regulations in various jurisdictions. These laws and regulations specify the maximum allowable levels of certain materials that may be contained in our products, provide statutory prohibitions against misbranded and adulterated products, establish ingredients and manufacturing
procedures for certain products, specify product safety testing requirements, and set product identification, labeling and claim requirements. For example, thermometers distributed by our Health & Home segment must comply with various regulations governing the production and distribution of medical devices.
Additionally, some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as the U.S. Environmental Protection Agency (the “EPA”), U.S. Customs and Border Protection, the U.S. Food and Drug Administration, and the U.S. Consumer Product Safety Commission.
We are currently in discussions with the EPA regarding the compliance of packaging claims of certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Health & Home segment that are sold in the U.S. The EPA has not raised any product quality, safety or performance issues. As a result of these discussions, on May 27, 2021, we voluntarily implemented a temporary stop shipment action across this line of products in the U.S. while we ensure that all labeling is in compliance and we work with the EPA towards an expedient resolution. The EPA has approved modest changes to our labeling claims on our existing water filtration packaging, which we have begun to implement. We resumed shipment of these products and are actively working towards similar agreements regarding our air filtration and humidification packaging in continued collaboration with the EPA. At our request, the EPA issued a Stop Sale, Use or Removal Order on June 29, 2021.The stop shipment will remain in effect until we implement an approved labeling and repackaging plan. We expect that our consolidated and Health & Home segment’s fiscal 2022 net sales revenue, gross profit and operating income will be materially and adversely impacted by the stop shipment. The extent to which net sales revenue will be impacted will primarily depend on the duration of time required for the EPA to approve our proposed solutions and the related implementation schedule. In addition, our net sales revenue could be materially and adversely impacted by customer returns, increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers. There can also be no assurance that fines or penalties will not be imposed by the EPA.
During the first quarter of fiscal 2022, we recorded a $13.1 million charge to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. We expect to incur additional compliance costs, which may include costs to relabel or repackage our existing inventory as well as incremental freight and storage costs, among other things. Costs to repackage our existing inventory will be capitalized into inventory; however, many of the other potential incremental EPA compliance costs will be expensed as incurred. The consequences of the compliance requirements and other matters pertaining to our discussions with the EPA are inherently uncertain. Accordingly, additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. As a result, our business, results of operations and financial condition could be adversely and materially impacted by these actions or in ways that we are not able to predict today. For additional information refer to Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “EPA Compliance Costs” in this Form 10-Q.
The ongoing compliance efforts with the EPA related to our Health & Home products, as well as significant new regulations, material changes to existing regulations, or greater oversight, enforcement or changes in interpretation of existing regulations, could further delay or interrupt distribution of our products in the U.S. and other countries, result in fines or penalties or cause our costs of compliance to increase. Additionally, we cannot guarantee that our products will receive regulatory approval in all countries. Similarly, some of our Beauty segment’s customers require that our Beauty appliances comply with various safety certifications, including UL certifications. Significant new certification requirements or changes to existing certification requirements could further delay or interrupt distribution of our products, or make them more costly to produce.
We are not able to predict the nature of potential changes to, or enforcement of laws, regulations, product certification requirements, repeals or interpretations. Nor are we able to predict the impact that any of these changes would have on our business in the future. Further, if we were found to be noncompliant with applicable laws and regulations in these or other areas, we could be subject to governmental or regulatory actions, including fines, import detentions, injunctions, product withdrawals or recalls or asset seizures, any of which could have a material adverse effect on our business, results of operations and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In May 2019, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The authorization is effective until May 2022 and replaced our former repurchase authorization, of which approximately $107.4 million was outstanding at the time the new authorization was approved. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. See Note 106 to the accompanying condensed consolidated financial statements for additional information.
Our current equity-based compensation plans include provisions that allow for the "net exercise"“net exercise” of share settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option or other share-based award holders areequity holder can be settled by having the holder tender back to us a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares. The following table summarizes our share repurchase activity for the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plans
or Programs | | Maximum Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
(in thousands) (2) |
| September 1 to September 30, 2020 | 5,710 | | | $ | 194.97 | | | 5,710 | | | $ | 381,706 | |
| October 1 to October 31, 2020 | 746,276 | | | 201.07 | | | 746,276 | | | 231,651 | |
| November 1 to November 30, 2020 | 214,958 | | | 193.68 | | | 214,958 | | | 190,019 | |
| Total | 966,944 | | | $ | 199.39 | | | 966,944 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plans
or Programs | | Maximum Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
(in thousands) (2) |
| March 1 to March 31, 2021 | 12,766 | | | $ | 219.88 | | | 12,766 | | | $ | 186,878 | |
| April 1 to April 30, 2021 | 55,930 | | | 212.32 | | | 55,930 | | | 175,003 | |
| May 1 to May 31, 2021 | 433,790 | | | 219.91 | | | 433,790 | | | 79,611 | |
| Total | 502,486 | | | $ | 219.06 | | | 502,486 | | | |
(1)The number of shares above includes shares of common stock acquired from employees who tendered shares to: (i) satisfy the tax withholding on equity awards as part of our long-term incentive plans or (ii) satisfy the exercise price on stock option exercises. For the three months ended November 30, 2020, 6,115May 31, 2021, 65,644 shares were acquired at a weighted average per share price of $195.26.$222.26.
(2)Reflects the remaining dollar value of shares that could be purchased under our current stock repurchase authorization through the expiration or termination of the plan. For additional information, see Note 106 to the accompanying condensed consolidated financial statements.
n
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ITEM 6. | | EXHIBITS |
| | | (a) | | Exhibits |
| | | | | | |
| | | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | |
| | | | | 101 | | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended November 30, 2020,May 31, 2021, formatted in Inline eXtensible Business Reporting Language ("iXBRL"(“iXBRL”): (i) Condensed Consolidated Balance Sheet,Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders' Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to the Condensed Consolidated Financial Statements. |
| | | | | 104 | | Cover Page, Interactive Data File formatted in iXBRL and contained in Exhibit 101. |
| | | | | | |
| | | | | * Filed herewith. |
| | | | |
| | | | | ** Furnished herewith. |
| | | | | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | HELEN OF TROY LIMITED |
| | (Registrant) |
| | |
| Date: | January 8,July 9, 2021 | /s/ Julien R. Mininberg |
| | Julien R. Mininberg |
| | Chief Executive Officer,
Director and Principal Executive Officer |
| | |
| Date: | January 8,July 9, 2021 | /s/ Brian L. Grass |
| | Brian L. Grass |
| | Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
