UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-14669
HELEN OF TROY LIMITED
(Exact name of the registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization)
Clarenden House
Church Street
Hamilton, Bermuda
(Address of principal executive offices)
1 Helen of Troy Plaza
El Paso, Texas
(Registrant’s United States Mailing Address )
74-2692550
(I.R.S. Employer
Identification No.)
79912
(Zip Code)
Registrant's telephone number, including area code: (915) 225-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $.10 par value per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 31, 2006, based upon
the closing price of the common stock as reported by The NASDAQ Global Select Market on such date, was $473,524,960.
As of May 7, 2007 there were 30,295,406 shares of Common Shares, $.10 par value per share, outstanding.
Certain information required for Part III of this annual report will be set forth in and incorporated herein by reference into Part III of this report from
the Company’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders.
DOCUMENTS INCORPORATED BY REFERENCE
Index to Exhibits - Page 102
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
Item 6.
Item 7.
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Compensation
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Shareholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
3
13
20
21
22
24
25
27
29
51
53
96
96
97
98
98
98
98
98
99
101
1
In this report and accompanying consolidated financial statements and notes thereto, unless the context suggests
otherwise or otherwise indicated, references to "the Company," "our Company," "Helen of Troy," "we," "us" or "our" refer
to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. dollars.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries of our Company may constitute
"forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. This includes
statements made in this report, in other filings with the Securities and Exchange Commission (“SEC”), in press releases,
and in certain other oral and written presentations. Generally, the words "anticipates", "believes", "expects", "plans",
"may", "will", "should", "seeks", "estimates", “project”, "predict", "potential", "continue", "intends", and other similar
words identify forward-looking statements. All statements that address operating results, events or developments that we
expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and
statements expressing general expectations about future operating results, are forward-looking statements and are based
upon 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 under "Item 1A. Risk Factors" and that are otherwise
described from time to time in our SEC reports filed after this report. As described later in this report, such risks,
uncertainties and other important factors include, among others:
• departure of key personnel;
•
•
the costs, complexity and challenges of managing the availability of our global information systems;
the risks associated with a breach of our computer security systems;
• our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;
•
requirements to accurately project product demand and the timing of orders received from customers;
• our relationship with key customers;
•
the actions of large sophisticated customers may adversely effect our gross profit and results of operations;
• our dependence on foreign sources of supply and foreign manufacturing;
•
•
the impact of high costs of raw materials and energy on cost of sales and certain operating expenses;
future acquisitions and integration of acquired businesses;
• our use of debt to fund acquisitions and capital expenditures;
• our disagreements with taxing authorities, and future ability to continue to integrate our operations with tax
strategies that allow us to maintain our effective tax rates;
• our relationship with key licensors; and
•
securities class action, and other business related litigation.
We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information,
future events, or otherwise.
2
ITEM 1. BUSINESS
GENERAL
PART I
We are a global designer, developer, importer and distributor of an expanding portfolio of brand-name consumer
products. We have two active segments: Personal Care and Housewares. Our Personal Care products include hair dryers,
straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air brushes, home hair clippers and trimmers,
paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling
products, men’s fragrances, men’s deodorants, foot powder, body powder, and skin care products. Our Housewares
segment reports the operations of OXO International (“OXO”) whose products include kitchen tools, cutlery, bar and
wine accessories, household cleaning tools, tea kettles, trash cans, storage and organization products, hand tools,
gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting products. We use outside
manufacturers to produce our goods. Both our Personal Care and Housewares segments sell their products primarily
through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply
retailers and wholesalers.
In each of our segments, we strive to be first to market with a broad line of competitively priced innovative
products. We believe this strategy is one of our most important growth drivers. Our goal is to provide consumers with
unique features, better functionality and higher performance at competitive price points. This strategy has allowed us to
sustain, and in many categories to strengthen our market position in many of our product lines. As we extend our product
lines and enter new product categories, we intend to expand our business in our existing customer base while attracting
new customers.
As part of our overarching objective to grow our business and increase shareholder value, we have established
five core initiatives. These initiatives and their key elements are outlined below:
• Maximize high growth potential branded products. We seek to maximize high growth potential products
by selectively investing in consumer marketing propositions that we believe offer the best opportunities to
capture market share and increase growth. Ten key brands currently account for approximately 90 percent of
our annual net sales volume across various product lines. When a brand fails to achieve a desired market
potential, we evaluate whether to continue to invest in brand maintenance or exit the brand and/or selectively
replace it with revenue streams from similar, more effectively performing branded products.
• Accelerate our new product pipeline. We strive to reduce the time required to develop and introduce new
products to meet changing consumer preferences and take advantage of opportunities sooner. A majority of
our products are produced in China, where long production lead times are normal. We continuously work
with our manufacturing resources to simplify and shorten the length of our supply chain.
• Leverage innovation. We constantly seek ways to foster our culture of innovation and new product
development. We intend to enhance and extend our existing product categories and develop new allied
product categories to grow our business. We believe that new innovative products permit us to generate
higher per unit sales prices and margins for both us and the customers we serve and increase the value of our
brand base.
• Broaden our growth opportunities. We plan to continue to seek opportunities to acquire brands and
product categories through aggressive external development and acquisitions. We prefer to own the brands
we sell. When this is not possible, we look for licensed brands that have developed substantial brand equity
in product categories that are a synergistic fit with ours. For example, our recent licensing of Bed Head®
provides an opportunity to deliver professional quality appliances and accessories styled and packaged for
introduction to a younger market through selective retail distribution channels. Toni&Guy® provides an
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opportunity to deliver professional quality appliances and accessories targeted toward the more sophisticated
retail buyer who appreciates European styling.
• Reduce cost and increase productivity. We seek to control our expenses and strengthen operating margins
by eliminating unnecessary spending, co-innovating with our manufacturers to eliminate costs, leveraging
technology, and making other tools and productivity drivers a key focus of our Company.
We present financial information for each of our operating segments in Note (13) of the consolidated financial
statements. The matters discussed in this Item 1. “Business,” pertain to all existing operating segments, unless otherwise
specified.
We sell certain of our products under licenses from third parties. Our licensed trademarks, among others, include:
• Vidal Sassoon®, licensed from The Procter & Gamble Company;
• Revlon® licensed from Revlon Consumer Products Corporation;
• Dr. Scholl's®, licensed from Schering-Plough HealthCare Products, Inc.;
• Scholl® (in areas other than North America), licensed from SSL International, PLC;
• Sunbeam®, Health at Home® and Health o meter® licensed from Sunbeam Products, Inc.;
• Sea Breeze®, licensed from Shiseido Company Ltd.;
• Vitapointe®, licensed from Sara Lee Household and Body Care UK Limited;
• Toni&Guy®, licensed from Mascolo Limited in areas outside the Western Hemisphere, and in the Western
Hemisphere MBL/Toni&Guy Products, L.P.; and
• Bed Head® by TIGI licensed from MBL/TIGI Products, L.P.
We own and actively market under a number of trademarks, including:
• OXO®
• Good Grips®
• SoftWorks®
• Touchables®
• OXO Steel®
• Candela®
• Brut®
• Brut Revolution®
• Vitalis®
• Final Net®
• Ammens®
• SkinMilk®
• Condition® 3-in-1
• TimeBlock®
• Epil-Stop®
• Salon Tools™
• Studio Tools®
• Hot Things®
• Dazey®
• Caruso®
• Karina®
• Visage Náturel®
• DCNL®
• Nandi®
• Isobel®
• Carel®
• Amber Waves®
We also market hair and beauty care products under the following trademarks to the professional beauty salon
industry:
• Helen of Troy®
• Hot Tools®
• HotSpa®
• Salon Edition®
• Tourmaline Tools®
• Fusion Tools™
• Gallery Series®
• Wigo®
We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy
Limited in Bermuda in 1994.
4
PRODUCTS
We market and sell a full line of personal care products and an expanding line of housewares products that we
acquire, design and/or develop. The following table lists the primary products we sell and some of the brand names that
appear on those products.
PRODUCT
CATEGORY
Appliances
and
Accessories
Grooming,
Skin Care,
and Hair
Care
Products
Housewares
PRODUCTS
BRAND NAMES
Hand-held dryers
Curling irons, straightening irons, hot air
brushes, and brush irons
Hairsetters
Paraffin baths, facial brushes, facial
saunas, and other skin care appliances
Manicure/pedicure systems
Foot baths
Foot massagers, hydro massagers, cushion
massagers, body massagers, and memory
foam products
Hair clippers and trimmers, exfoliators,
and shavers
Hard and soft-bonnet hair dryers
Hair styling implements, brushes, combs,
hand-held mirrors, lighted mirrors, utility
implements and decorative hair
accessories
Liquid hair styling products
Liquid skin care products
Medicated skin care products
Fragrances, deodorants, and
antiperspirants
Hair depilatory products
Kitchen tools, cutlery, bar and wine
accessories, kitchen mitts and trivets, and
barbeque tools
Tea kettles
Household cleaning tools and trash cans
Storage and organization products
Hand and garden tools
Rechargeable lighting products
Vidal Sassoon®, Revlon®, Bed Head®, Toni&Guy®,
Sunbeam®, Helen of Troy®, Salon Edition®, Hot Tools®,
Studio Tools®, Fusion Tools™, Tourmaline Tools®, Salon
Tools™, Amber Waves®, Gallery Series® and Wigo®
Vidal Sassoon®, Revlon®, Bed Head®, Toni&Guy®,
Sunbeam®, Helen of Troy®, Salon Edition®, Hot Tools®,
Studio Tools®, Fusion Tools™, Tourmaline Tools®, Salon
Tools™, Amber Waves®,Gallery Series® and Wigo®
Vidal Sassoon®, Revlon®, Sunbeam® and Caruso®
Revlon®, Hotspa®, Health at Home®, Dr. Scholl's® and
Visage Náturel®
Revlon®, Dr. Scholl's® and Scholl®
Dr. Scholl's®, Scholl®, Revlon®, Sunbeam®, Carel® and
HotSpa®
Dr. Scholl's®, Health o meter®, Carel® and Hotspa®
Vidal Sassoon®, Revlon®, Toni&Guy® and Hot Tools®
Dazey®, Carel®, and Hot Tools®
Vidal Sassoon®, Revlon®, Karina®, Isobel®, DCNL®,
Nandi®, Amber Waves® and Hot Things®
Vitalis®, Final Net®, Condition® 3-in-1, Ammens® and
Vitapointe®
Sea Breeze®, TimeBlock® and SkinMilk®
Ammens®
Brut®, Brut Revolution®, and Ammens®
Epil-Stop®
OXO®, Good Grips®, OXO Steel®, SoftWorks® and
Touchables®
OXO®, Good Grips® and Softworks®
OXO®, OXO Steel®, Good Grips®, SoftWorks® and
Touchables®
OXO®, OXO Steel®, Good Grips®, SoftWorks® and
Touchables®
OXO®, Good Grips® and SoftWorks®
OXO®, Candela®
5
We continue to develop new products, respond to market innovations and enhance existing products with the
objective of improving our position in the personal care and housewares markets. Overall, in fiscal 2007 we introduced
389 new products across all our categories versus 474 and 426 new products introduced in fiscal 2006 and 2005,
respectively. Currently, 365 additional products are in our product development pipeline for fiscal 2008. The following
summarizes key product introductions we launched in fiscal 2007:
Appliances and Accessories: This has been a very busy and productive year for our appliances and accessories groups at
Helen of Troy. We have seen stronger sales to retail consumers for professional grade products with higher price points.
The trend also has been towards quieter, lighter weight, yet rugged appliances. Recent developments and innovations in
the appliance and accessories line include:
• We have introduced our Amber Waves® line of hair care appliances and coordinated brushes, combs and
accessories under the Revlon® brand of products. The line is targeted at the ethnic market where hair structure
and texture demands multiple maintenance products, rigorous styling and heavy reliance on chemical hair
treatments. Early indications on the line are good with several successful placements with key retailers.
• We internally developed our new Fusion Tools™ line of tourmaline gemstone styling appliances for our
professional beauty supply customers .
•
•
•
In March 2006, we secured the rights from Mascolo Limited to introduce a line of hair care appliances under the
Toni&Guy® brand name in Western Europe and certain Asian markets. Toni&Guy® is an international chain of
hundreds of hair salons throughout Europe that has expanded operations into certain key urban markets in the
United States. We believe our association with Toni&Guy® will continue to create new sales opportunities for
our appliance products in Europe. We began shipments of Toni&Guy® hair care appliances late in the second
quarter of fiscal 2007 and it quickly became our number four appliance brand in Europe.
In December 2006, we entered into a license with MBL/TIGI Products, L.P. for the Bed Head® by TIGI
trademark to market hair care appliances and accessories in the Western Hemisphere. We are currently working
closely with the licensor to put together a collection of hair care appliances, brushes, combs and accessories for
the brand. In its liquid lines, Bed Head® is well known for its brightly colored packaging and products with
unusual names. Our Bed Head® hair care appliances will also use bright colors, and fiber optic and LED lights as
part of their design appeal. Initial marketing will begin in the United States, followed by the remainder of the
Western Hemisphere, with shipments to begin during fiscal 2008.
In December 2006, we also entered into a license with MBL/Toni&Guy Products, L.P., for the Toni&Guy®
trademark to market hair care appliances and accessories in the Western Hemisphere.
Men’s Grooming, Skin Care and Hair Care: We launched the Brut Revolution® fragrance line, an updated twist on our
classic men’s fragrance. Our intent was to create a modern fragrance that would appeal to younger men and command a
higher retail price point. We also began our roll out of a revised formulation of Epil-Stop® depilatory products combined
with a neutralizing after wash. We also continued to extend our SkinMilk® line of skin care products. This included such
new products as: Soft Shimmer Lotion, a body lotion infused with light reflectors; SkinMilk® Body Polish, an exfoliating
body scrub for shower use; Smoothies fruit scented shower gels; and SkinMilk® Hand Cream with SPF 15 protection.
Housewares: We continue to grow OXO® brand categories. OXO® products are based on the principles of Universal
Design - a philosophy of making products that are easy to use for the widest possible spectrum of users. This year, we
developed our Good Grips® POP modular line of food storage containers which should first ship during the second
quarter of fiscal 2008. These containers are airtight, stackable and space-efficient. We also acquired all product rights
including trademarks and patents to the Candela® line of portable, cordless, rechargeable table and counter-top ambience
lighting products. The lights use long-lasting glow rechargeable LED lights, which are brighter, safer, cleaner, more
durable and easier to use than candles. We plan to expand this line to include nightlights and other indoor-outdoor festive
lighting for all types of entertaining. We continue to extend our current kitchen accessories with such products as a new
line of kitchen turntables, sink mats, stainless steel LiquiSeal™ thermal travel mugs, scratch resistant thermoset plastic
trash cans and stainless steel trash cans.
6
You can learn more about our currently marketed products at www.hotus.com. Information contained on the
Company’s website is not included as a part of, or incorporated by reference into, this report.
SALES AND MARKETING
We now market our products in 69 countries throughout the world. Sales within the United States comprised
approximately 81, 83 and 82 percent of total net sales in fiscal 2007, 2006, and 2005, respectively. Our North American
and international operations sell their products through mass merchandisers, drug chains, warehouse clubs, catalogs,
grocery stores, specialty stores, beauty supply retailers and wholesalers, distributors, and direct to consumers. We
collaborate extensively with our retail customers and in many instances produce specific versions of our product lines
with exclusive designs and packaging for their stores, which are appropriately priced for their respective customer bases.
We market products through a combination of outside sales representatives and our own internal sales staff,
supported by our internal marketing, category management, engineering, creative services and customer service staff.
These groups work closely together to develop pricing and distribution strategies and to design packaging and develop
product line extensions and new products.
Regional sales and business unit managers work with our inside and outside sales representatives. The sales
managers are organized by product group and geographic area and, in some cases, key customers. The regional managers
are responsible for customer relations management, pricing and distribution strategies, and sales generation.
The companies from whom we license many of our brand names promote those names extensively. The Revlon®,
Vidal Sassoon®, Dr. Scholl's® and Sunbeam® trademarks are widely recognized because of advertising and the sale of a
variety of products. We believe we benefit from the name recognition associated with a number of our licensed
trademarks and seek to further improve the name recognition and perceived quality of all trademarks under which we sell
products through our own advertising and product development efforts. We also promote our products through television
advertising and through print media, including consumer and trade magazines and various industry trade shows.
We also use selective sports and entertainment venues to enhance our brand recognition and equity. In fiscal
2004, Helen of Troy became the title sponsor of the Sun Bowl game, one of the longest running invitational post-season
college football games in the United States with a history that spans over 70 years. The “Vitalis® Sun Bowl” was the
official name for the December 2004 and 2005 games. In fiscal 2007, we extended our agreement through the 2009
football season and changed the official name beginning with the December 2006 game to the “Brut® Sun Bowl.” CBS
Sports broadcasts the "Brut® Sun Bowl" game to nationwide audiences. In January 2005, we also entered into a three-
year sponsorship agreement with Don Schumacher Racing, the National Hot Rod Association (NHRA), and Just
Marketing, Inc. to showcase our Brut® products and extend the awareness of our products to target customers. We
sponsor the Brut Racing team which is a funny car drag racing team that competes in the NHRA POWERade Drag Racing
series.
MANUFACTURING AND DISTRIBUTION
We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples' Republic of China, to
manufacture a significant portion of our products in the appliance, accessories and housewares product categories. Most
of our grooming, skin care and hair care products are currently manufactured in North America. For a discussion
regarding our dependency on third party manufacturers, see Item 1A., "Risk Factors". For fiscal 2007, 2006 and 2005,
goods manufactured by vendors in the Far East comprised approximately 83, 86 and 84 percent, respectively, of the dollar
value of all segments’ inventory purchases.
Many of our key Far East manufacturers have been doing business with us since we went into business. In some
instances, we are now working with the second generation of entrepreneurs from the same families. We believe these
relationships give us a stable and sustainable advantage over many companies in our consumer’s product categories.
7
Manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own,
in manufacturing those products. Both our business segments employ numerous technical and quality control persons to
assure high product quality. Most of our products manufactured outside the countries in which they are sold are subject to
import duties, which increases the amount we pay to obtain such products.
Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within
relatively short time frames. Consequently, our policy is to maintain several months of supply of inventory in order to
meet our customers’ needs and, accordingly, we order products substantially in advance of the anticipated time of their
sale to our customers. While we do not have any long-term formal arrangements with any of our suppliers, in most
instances we place purchase orders for products several months in advance of receipt of orders from our customers. Our
relationships and arrangements with most of our manufacturers allow for some flexibility in modifying the quantity,
composition and delivery dates of orders. Most purchase orders are in United States dollars.
In total, we occupy approximately 1,895,000 square feet of distribution space in various locations to support our
operations. At the end of February 2007, we completed the consolidation of our domestic appliance, housewares, men’s
grooming, skin care and hair care inventories into a single 1,200,000 square foot Southaven, Mississippi distribution
center. Products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the
United States and Canada. The products are then shipped by truck or rail service to distribution centers in El Paso, Texas,
Southaven, Mississippi, and Toronto, Canada, or directly to customers. We ship substantially all products to North
American customers from these distribution centers by ground transportation services. Products sold outside the United
States and Canada are shipped from manufacturers primarily in the Far East, to distribution centers in the Netherlands, the
United Kingdom, Mexico, Brazil, Peru, Venezuela or directly to customers. We ship products stored at the distribution
centers in the Netherlands, the United Kingdom, Mexico, Brazil, Peru and Venezuela to distributors or retailers.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
The Personal Care segment depends significantly upon the continued use of trademarks licensed under various
agreements. The Vidal Sassoon®, Revlon®, Sunbeam®, Health o meter® and Dr. Scholl's® trademarks are of particular
importance to this segment’s business. New product introductions under licensed trademarks require approval from the
respective licensors. The licensors also must approve the product packaging. Many of the license agreements require the
Company to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising
expenditures. During fiscal 2007, we were in compliance with all terms of these licensing agreements. The duration of
the license agreements for the Revlon®, Vidal Sassoon®, Sunbeam®, and Dr. Scholl's® trademarks, including the
renewal terms, are 56, 26, 13 and 12 years, respectively. If we decide to renew these agreements upon expiration of their
current terms, we will be required to pay prescribed renewal fees at the time of that election. The discussion below covers
the primary product categories that Helen of Troy currently sells under our key license agreements. The product
categories discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these or other
license agreements.
Revlon®: Under agreements with Revlon Consumer Products Corporation, we are licensed to sell worldwide,
except in Western Europe, hair dryers, curling irons, straightening irons, brush irons, hairsetters, brushes, combs, mirrors,
functional hair accessories, personal spa products, hair clippers and trimmers, and battery-operated and electric women's
shavers bearing the Revlon® trademark.
Vidal Sassoon®: Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell
certain products bearing this trademark worldwide, except in Asia. Products sold under the terms of this license include
hair dryers, curling irons, straightening irons, styling irons, hairsetters, hot air brushes, hair clippers and trimmers, mirrors,
brushes, combs, and hair care accessories.
Dr. Scholl's® and Scholl®: We are licensed to sell foot baths, foot massagers, hydro massagers, cushion
massagers, body massagers, paraffin baths, and support pillows bearing the Dr. Scholl's® trademark in the United States
and Canada under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the same
products under the Scholl® trademark in other areas of the world through an agreement with SSL International, PLC.
8
Sunbeam®, Health at Home® and Health o meter®: Under an agreement with Sunbeam Products, Inc., we
are licensed to sell hair clippers and trimmers, hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure
kits, hair brushes and combs, hair rollers, hair accessories, paraffin baths, foot massagers, back massagers, body
massagers, memory foam products, and spa products bearing these trademarks in the United States, Canada, Mexico,
Central America, South America, and the Caribbean.
Sea Breeze®: We license the right to sell products in the United States, Canada, and the Caribbean under this
trademark pursuant to a perpetual royalty free license from Shiseido Company Ltd. We currently sell a line of liquid skin
care products under this name in the United States and Canada.
Toni&Guy® and Bed Head®: Under an agreement with Mascolo Limited, we are licensed to sell hair care
appliance products under the Toni&Guy® trademark in Western Europe and portions of Asia. The license agreement is
for five years, and may be extended an additional two years upon proper notice.
In December 2006, we also entered into two separate licensing arrangements: one with MBL/TIGI Products, L.P.
for the use of the Bed Head® by TIGI trademark, and another with MBL/Toni&Guy Products L.P. for the use of the
Toni&Guy® trademark. Both licenses grant us the right to use the trademarks to market personal care products in the
Western Hemisphere. Each license agreement is for five years, and may be extended for five additional three-year terms
upon proper notice. We plan to introduce a line of hair care appliance products under the Bed Head® by TIGI and
Toni&Guy® brand names that eventually will include hair dryers, hair styling irons and straighteners, hot air brushes, hair
setters, combs, brushes and hair care accessories, as well as a variety of other personal care products.
Helen of Troy has filed or obtained licenses for over 350 design and utility patents in the United States and
several foreign countries. Most of these patents cover product designs in our Housewares segment. We believe the loss
of the protection afforded by any one of these patents would not have a material adverse effect on our business as a whole.
We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the
information that we believe provides us with a competitive advantage. We believe our principal trademarks have high
levels of brand name recognition among retailers and consumers throughout North America, Latin America, Europe and
Asia. In addition, we believe our brands have an established reputation for quality, reliability and value. We monitor and
protect our brands against infringement as we deem appropriate, however, our ability to enforce patents, copyrights,
licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability
of various intellectual property rights in various countries.
CUSTOMERS
Sales to Wal-Mart Stores, Inc., and its affiliate, SAM'S Club, accounted for approximately 21, 22 and 25 percent
of our net sales in fiscal 2007, 2006, and 2005, respectively. Sales to Target Corporation accounted for approximately 9,
10 and 8 percent of our net sales in fiscal 2007, 2006, and 2005, respectively. No other customers accounted for ten
percent or more of net sales during those fiscal years. Sales to our top five customers accounted for approximately 45, 46
and 44 percent in fiscal 2007, 2006, and 2005, respectively.
ORDER BACKLOG
When placing orders, our retail and wholesale customers usually request that we ship the related products within a
short time frame. As such, there usually is no significant backlog of orders in any of our distribution channels.
As a result of the transition of our Housewares segment to new computer systems and a new distribution center at
the end of fiscal 2006, we experienced delays in distribution order processing and shipments. These delays were the result
of both software issues and adapting to the new equipment, new employees, and the operation of the new distribution
center. These delays caused a backlog of orders within the Housewares segment, and, in some cases, order cancellations.
We believe that the impact was immaterial in the fourth quarter of fiscal 2006; however we estimate that the negative
impact of these issues on the segment’s net sales for the first quarter of fiscal 2007 ranged between $4.5 to $5
million. Throughout the first quarter of fiscal 2007, we worked to resolve the technical and operational issues that were
9
causing the delays, and address the issues with affected customers. We believe the strength of our customer relationships
were not affected by these delays over the long term. By the end of the first quarter of fiscal 2007, we had addressed the
most significant issues and the new distribution center began to attain its originally planned operational throughput. In
June 2006, we had caught up on our backlog.
We originally had planned to move the balance of our domestic Personal Care segment appliance inventory into
the new distribution center by the end of the first quarter of fiscal 2007. However, due to the issues we experienced with
our Housewares segment, we decided to delay the transition until operations in the new distribution center had stabilized,
and we were past our peak shipping season. We moved our appliance inventories to the new distribution center beginning
in December 2006. The move was finished and we were operating completely out of the new distribution center by the
end of fiscal 2007. In this move, we experienced some minor transitional issues, but none of the magnitude or impact as
those we experienced with the Housewares segment. Accordingly, in our Personal Care segment, there was no significant
backlog of orders in any of our distribution channels as of the end of fiscal 2007.
COMPETITIVE CONDITIONS
The markets in which we sell our products are very competitive and highly mature. The rapid growth of large
mass merchandisers, together with changes in consumer shopping patterns, have contributed to a significant consolidation
of the consumer products retail industry and the formation of dominant multi-category retailers with strong negotiating
power. Current trends among retailers include fostering high levels of competition among suppliers, the requirement to
maintain or reduce prices and deliver products under shorter lead times. Another current trend, is for retailers to import
generic products directly from foreign sources and to source and sell products under their own private label brands that
compete with our Company’s products. We believe that we have certain key competitive advantages, such as well
recognized brands, engineering expertise and innovation, sourcing and supply chain know-how, and productive co-
development relationships with our Far East manufacturers, built over 30 years of working together. We believe these
advantages allow us to bring our retailers a value proposition in our products that can significantly out-perform private
label. Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality,
performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches.
In the Personal Care segment, our primary competitors include Conair Corporation, Farouk Systems, Inc. (Chi),
T3 Micro, Inc., International Consulting Associates, Inc. (InfraShine), Spectrum Brands, Inc., Goody Products, Inc., a
division of Newell Rubbermaid, Inc., Homedics-USA, Inc., Chattem, Inc., Alliance Boots plc (J&J Boots), KAO Brands
Company, The Procter & Gamble Company, L′Oréal, Unilever, and Alberto-Culver Company. In the Housewares
segment, the competition is highly fragmented. Our primary competitors in that segment include KitchenAid (Lifetime
Brands, Inc.), Zyliss AG, Copco (Wilton Industries, Inc.), Simple Human, Casabella and Interdesign, Inc. Some of these
competitors have significantly greater financial and other resources than we do.
SEASONALITY
Our business is somewhat seasonal. Net sales in the third fiscal quarter accounted for approximately 34, 34, and
35 percent of fiscal 2007, 2006 and 2005 net sales, respectively. Our lowest net sales usually occur in our first fiscal
quarter, which accounted for approximately 21, 22 and 18 percent of fiscal 2007, 2006 and 2005 net sales, respectively.
As a result of the seasonality of sales, our working capital needs fluctuate during the year.
10
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Our operations are subject to national, state, local and provincial jurisdictions’ environmental and health and
safety laws and regulations, including those that impose workplace standards and regulate the discharge of pollutants into
the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and
disposal of materials and substances including solid and hazardous wastes. We believe that we are in material compliance
with these laws and regulations. Further, the cost of maintaining compliance has not had a material adverse effect on our
business, consolidated results of operations and consolidated financial condition, nor do we expect it to do so in the
foreseeable future. Due to the nature of our operations and the frequently changing nature of environmental compliance
standards and technology, we cannot predict with any certainty that future material capital or operating expenditures will
not be required in order to comply with applicable environmental laws and regulations.
In July 2006, RoHS (Restriction of Hazardous Substances), a new European Directive became effective. RoHS
requires that electrical and electronic equipment sold in the European Union does not contain lead, cadmium, mercury,
hexavalent chromium, polybrominated biphenyls (PBBs), and polybrominated diphenyl ethers (PBDEs) above specified
legal thresholds. We are in the process of becoming RoHS certified and expect to have this initiative completed during
the third quarter of fiscal 2008.
Our electrical products must meet the safety standards imposed in various national, state, local, and provincial
jurisdictions. In the US, we maintain our own testing facilities that have been certified by various recognized public and
private testing standards setting groups including Underwriters Laboratories, Inc. and Electronic Testing Laboratories.
We recently completed our CB Scheme certification, also known as the Scheme of the International Electrotechnical
Commission System for Conformity Testing and Certification of Electrical Equipment (IECEE). The scheme facilitates
the international exchange and acceptance of product-safety test results among participating Certification Bodies for
national approval or certification in one or more countries, normally without the need for additional testing. Currently, 43
countries participate in the CB Scheme, which provides significant advantages including reduction of product certification
and compliance costs and reduced certification lead-times.
Certain of our skin care products are regulated by the United States Food and Drug Administration (“FDA”).
Among other things, the FDA enforces statutory prohibitions against misbranded and adulterated products, establishes
ingredients and manufacturing procedures for certain products, establishes standards of identity for certain products,
determines the safety of products and establishes labeling standards and requirements. In addition, various states regulate
these products by enforcing federal and state standards of identity for selected products, limiting the volatility and types of
aerosol agents that can be used, grading products, inspecting production facilities and imposing their own labeling
requirements.
In our Housewares segment, where applicable, our products are designed to comply with NSF, Inc. and ANSI
(American National Standards Institute) standards for product quality, materials composition and safety.
EMPLOYEES
As of fiscal year end 2007, we employed 901 full-time employees in the United States, Canada, Macao, China,
Europe, Brazil, Peru, Venezuela, Chile and Mexico of which 140 are marketing and sales employees, 251 are distribution
employees, 49 are engineering and development employees, and 461 are administrative personnel. We also use temporary,
part time and seasonal employees as needed. None of the Company's employees are covered by a collective bargaining
agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with
our employees.
GEOGRAPHIC INFORMATION
Note (13) to the consolidated financial statements contains geographic information concerning our net sales and
long-lived assets.
11
AVAILABLE INFORMATION
We maintain our main Internet site at the following address: http://www.hotus.com. The information contained on
this website is not included as a part of, or incorporated by reference into, this report. We make available on or through
our main website’s Investor Relations page under the heading “SEC Filings” certain reports and amendments to those
reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K, amendments to these reports and the reports required under Section 16 of the Securities
Exchange Act of transactions in Company shares by directors and officers. Also, on the Investor Relations page, under
the heading “Corporate Governance”, are the Company’s Code of Ethics, Corporate Governance Guidelines and the
Charters of the Committees of the Board of Directors. We make this information available on our website free of charge
as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
12
ITEM 1A. RISK FACTORS
The ownership of our common shares involves a number of risks and uncertainties. When evaluating us and our
business before making a decision regarding investment in our securities, potential investors should carefully consider the
risk factors and uncertainties described below, together with other information contained in this report. If any of the
events or circumstances described below or elsewhere in this report actually occur, our business, financial condition or
results of operations could be materially adversely affected. The risks listed below are not the only risks that we face.
Additional risks that we do not yet know of or that we currently think are not significant may also impact our business
operations.
We rely on our chief executive officer and a small number of other key senior managers to operate our business. The
loss of any of these individuals could have a material adverse effect on our business.
We do not have a large group of senior managers in our business. The loss of any of these individuals could
have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable
to hire or relocate and integrate suitable replacements. Further, in order to continue to grow our business, we will need to
expand our senior management team. We may be unable to attract or retain these persons. This could hinder our ability
to grow our business and could disrupt our operations or otherwise have a material adverse effect on our business.
We rely on our central Global Enterprise Resource Planning Systems and other peripheral information systems.
Interruptions in the operation of our computerized systems or other information technologies could have a material
adverse effect on our operations and profitability.
We conduct most of our businesses under one integrated Global Enterprise Resource Planning System, which we
implemented in September 2004. Therefore, our operations are dependent on this system, which includes our order
management system and our computerized warehouse management system. Any failures or disruptions in these systems
could cause considerable disruptions to our business and may have a material adverse effect on our business, financial
condition and results of operations.
We transitioned a portion of our our Personal Care and Housewares segments to our Global Enterprise Resource
Planning System prior to the end of fiscal 2006. During fiscal 2007, we implemented several significant functionality
enhancements related to both the Housewares segment’s and Personal Care segment’s information systems. We plan to
continue the transition of our Mexican and other key Latin American operations to our global information system over the
balance of fiscal 2008 and possibly, fiscal 2009. We also intend to continue to closely monitor our systems and make
adjustments to improve their effectiveness. Complications resulting from process adjustments could potentially cause
considerable disruptions to our business. Application program bugs, system conflict crashes, user error, data integrity
issues, customer data conflicts and integration issues with certain remaining legacy systems all pose significant risks. We
expect that these efforts and other implementations and functional software enhancements could require significant
internal resources and may result in higher than anticipated implementation costs and reallocation of human resources,
which could further negatively impact our business.
To support new technologies, we intend to continue to build and support a larger and more complex information
technology infrastructure. Increased computing capacity, power requirements, back-up capacities, broadband network
infrastructure and increased security needs are all potential areas for disruption or failure. We continue to rely on outside
vendors to assist us with implementation and enhancements and will continue to rely on certain vendors to assist us in
maintaining some of our infrastructure. Should any of these vendors fail to perform as expected, it could adversely effect
our service levels and threaten our ability to conduct business. We also continue to transition certain of these third party
services to our in-house staff. This transition process poses risks, however, and failure to effect a smooth transition could
cause additional business disruptions.
13
Natural disasters or other extraordinary events may disrupt our information systems and other infrastructure, and
our data recovery processes may not be sufficient to protect against loss. Any interruption or loss of data in our
information or logistical systems could materially impact our ability to procure our products from our factories and
suppliers, transport them to our distribution facilities, and store and deliver them to our customers on time and in the
correct amounts. These and other factors described above could have a material adverse effect on our business, financial
condition and results of operations.
A breach of our computer security systems, and unauthorized intrusion could subject us to fraudulent use of sensitive
information and/or damage to critical data and systems. Such activity could subject us to litigation and various other
claims and have material adverse effect on our financial condition, results of operations and the reputation of our
business.
Information systems require constant updates to their security policies and hardware systems to reduce the risk of
unauthorized access, malicious destruction of data, or information theft. We believe we have taken steps designed to
strengthen the security of our computer systems and protocols and have instituted an ongoing program to continue to do
so. Nevertheless, there can be no assurance that we will not suffer a data compromise. We rely on commercially available
systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential
information. Improper activities by third parties, advances in computer and software capabilities and encryption
technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or
breach of our computer systems.
Any such compromises or breach could cause interruptions in our operations and might require us to spend
significant management time and money investigating the event and dealing with local and federal law enforcement. In
addition, we could become the subject of litigation and various claims from our customers, employees, suppliers, service
providers and shareholders. Regardless of the merits and ultimate outcome of these matters, litigation and proceedings of
this type are expensive to respond to and defend, and we could devote substantial resources and time to responding to and
defending them. The ultimate resolution of any such litigation, claims and investigations could cause damage to our
reputation and have a material adverse effect on our financial condition and results of operations.
Our ability to deliver products to our customers in a timely manner and to satisfy our customers’ fulfillment standards
are subject to several factors, some of which are beyond our control.
Retailers place great emphasis on timely delivery of our products for specific selling seasons, especially during
our third fiscal quarter, and on the fulfillment of consumer demand throughout the year. We cannot control all of the
various factors that might effect product delivery to retailers. Vendor production delays, difficulties encountered in
shipping from overseas as well as customs clearance are on-going risks of our business. We also rely upon third-party
carriers for our product shipments from our distribution facilities to customers, and we rely on the shipping arrangements
our suppliers have made in the case of products shipped directly to retailers from the suppliers. Accordingly, we are
subject to risks, including labor disputes, inclement weather, natural disasters, possible acts of terrorism, availability of
shipping containers and increased security restrictions, associated with such carriers’ ability to provide delivery services
to meet our shipping needs. Failure to deliver products in a timely and effective manner to retailers could damage our
reputation and brands and result in loss of customers or reduced orders.
To make our distribution operations more efficient, we have recently consolidated many of our distribution,
receiving and storage functions into our Southaven, Mississippi distribution center. We can make no assurances that
anticipated cost savings and efficiencies relating to our distribution consolidation will be achieved or that we will not have
further integration or implementation issues or delays. Any disruption in our distribution process could adversely effect
our business and operating results.
14
Our projections of sales and earnings are highly subjective and our future sales and earnings could vary in a material
amount from our projections.
Most of our major customers purchase our products electronically through electronic data interchange and expect
us to promptly deliver products from our existing inventories to the customers’ retail stores or distribution centers. This
method of ordering products allows our customers to immediately respond to changes in demands of their retail
customers. From time to time, we provide projections to our shareholders and the investment community of our future
sales and earnings. Since we do not require long-term purchase commitments from our major customers and the customer
order and ship process is very short, it is difficult for us to accurately predict the amount of our sales and related earnings.
Our projections are based on management’s best estimate of sales using historical sales data and other information
deemed relevant. These projections are highly subjective since sales to our customers can fluctuate substantially based on
the demands of their retail customers and due to other risks described in this report. Additionally, changes in retailer
inventory management strategies could make inventory management more difficult. Because our ability to forecast sales
is highly subjective, there is a risk that our future sales and earnings could vary materially from our projections.
Our sales are dependent on sales to several large customers and the loss of, or substantial decline in sales to a top
customer could have a material adverse effect on our revenues and profitability.
A few customers account for a substantial percentage of our sales. Our financial condition and results of
operations could suffer if we lost all or a portion of the sales to these customers. In particular, sales to Wal-Mart Stores,
Inc., and its affiliate, SAM'S Club, and sales to Target Corporation accounted for approximately 21 percent and 9 percent,
respectively, of our net sales in fiscal 2007. While only one customer accounted for ten percent or more of net sales in
fiscal 2007, our top 5 customers accounted for approximately 45 percent of fiscal 2007 net sales. We expect customer
concentrations will continue to account for a significant portion of our sales. Although we have long-standing
relationships with our major customers, no contracts require these customers to buy from us, or to purchase a minimum
amount of our products. A substantial decrease in sales to any of our major customers could have a material adverse
effect on our financial condition and results of operations.
With the growing trend towards retail trade consolidation, we are increasingly dependent upon key customers
whose bargaining strength is growing. We may be negatively affected by changes in the policies of our customers, such as
on-hand inventory reductions, limitations on access to shelf space, use of private label brands, price demands and other
conditions, which could negatively impact our financial condition and results of operations.
A significant deterioration in the financial condition of our major customers could have a material adverse effect
on our sales and profitability. We regularly monitor and evaluate the credit status of our customers and attempt to adjust
sales terms as appropriate. Despite these efforts, a bankruptcy filing by a key customer could have a material adverse
effect on our business, financial condition and results of operations.
Large sophisticated customers may take actions that adversely effect our gross profit and results of operations.
In recent years, we have observed a consumer trend away from traditional grocery and drug store channels and
toward mass merchandisers, which include super centers and club stores. This trend has resulted in the increased size and
influence of these mass merchandisers. As these mass merchandisers grow larger and become more sophisticated, they
may demand lower pricing, special packaging, or impose other requirements on product suppliers. These business
demands may relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. If we do not
effectively respond to the demands of these mass merchandisers, they could decrease their purchases from us. A
reduction in the demand of our products by these mass merchandisers could have a material adverse effect on our
business, financial condition and operating results.
15
We are dependent on third party manufacturers, most of which are located in the Far East, and any inability to obtain
products from such manufacturers could have a material adverse effect on our business, financial condition and
results of operations.
All of our products are manufactured by unaffiliated companies, most of which are in the Far East. Risks
associated with such foreign manufacturing include: changing international political relations; changes in laws, labor
availability, including tax laws, regulations and treaties; changes in labor laws, regulations, and policies; changes in
customs duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest;
an extended and complex transportation cycle; and the availability and cost of raw materials and merchandise. To date,
these factors have not significantly affected our production in the Far East. However, any change that impairs our ability
to obtain products from such manufacturers, or to obtain products at marketable rates, could have a material adverse effect
on our business, financial condition and results of operations.
We have relationships with over 200 third-party manufacturers. During fiscal 2007, the top two manufacturers
fulfilled approximately 19 percent of our product requirements. Over the same period, our top five suppliers fulfilled
approximately 37 percent of our product requirements.
With most of our manufacturers located in the Far East, our production lead times are relatively long. Therefore,
we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand
accurately, we may encounter difficulties in filling customer orders or in liquidating excess inventories. We may also find
that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our
business by increasing the amount of inventory and the cost of storing inventory. Any of these results could have a
material adverse effect on our business, financial condition and results of operations.
High costs of raw materials and energy may result in increased cost of sales and certain operating expenses and
adversely effect our results of operations and cash flow.
Significant variations in the costs and availability of raw materials and energy may negatively effect our results of
operations. Our vendors purchase significant amounts of metals and plastics to manufacture our products. They also
purchase significant amounts of electricity to supply the energy required in their production processes. The rising cost of
fuel may also increase our transportation costs. The cost of these raw materials and energy, in the aggregate, represents a
significant portion of our cost of sales and certain operating expenses. Our results of operations have been and could in
the future be adversely affected by increases in these costs. While we have been successful, in some cases, in
implementing price increases or passing on cost increases by moving customers to newer product models with
enhancements that justify higher prices, we can make no assurances that these efforts will be successful in the future or
materially offset the cost increases we may incur.
Acquisitions may be more costly or less profitable than anticipated and may adversely effect the price of our common
shares.
We are constantly looking for opportunities to make complementary strategic business and/or brand acquisitions.
These acquisitions, if not favorably received by consumers, shareholders, analysts, and others in the investment
community, could have a material adverse effect on the price of our common shares. In addition, any acquisitions,
including our recent acquisition of Belson Products involve numerous risks, including:
• difficulties in the assimilation of the operations, technologies, products and personnel associated with the
acquisitions,
• difficulties in integrating distribution channels,
•
the diversion of management's attention from other business concerns,
16
• difficulties in transitioning and preserving customer, contractor, supplier and other important third party
relationships,
•
•
risks of entering markets in which we have no or limited experience, and
the potential loss of key employees associated with the acquisitions.
Any difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition
and operating results.
We have incurred debt to fund acquisitions and capital expenditures, which could have an adverse impact on our
business and profitability.
As a result of our debt obligations, we are now operating under substantially more leverage and higher interest
costs. This increase in debt has added new constraints on our ability to operate our business, including but not limited to:
• our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes, or other purposes;
•
•
an increased portion of our cash flow from operations will be required to service our debt, which will reduce the
funds available to us for our operations;
a significant portion of our debt is fixed or effectively fixed through the use of interest rate swaps and these rates
may produce higher interest expense than would be available with floating rate debt, in the event of decreases in
market interest rates;
• our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry
conditions;
• our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and
conditions in the industries in which we operate; and
• our debt agreements contain financial and restrictive covenants, and our failure to comply with them could result
in an event of default, which if not cured or waived, could have a material adverse effect on us. Significant
restrictive covenants include limitations on, among other things, our ability under certain circumstances to:
• incur additional debt, including guarantees;
• incur certain types of liens;
• sell or otherwise dispose of assets;
• engage in mergers, acquisitions or consolidations;
• enter into substantial new lines of business; and
• enter into certain types of transactions with our affiliates.
17
Our disagreements with taxing authorities, tax compliance and the impact of changes in tax law could have an adverse
impact on our business.
As further discussed under Item 3. “Legal Proceedings,” and Note (8) to the accompanying consolidated financial
statements, we are involved in various tax audits and related disputes over tax issues with the Inland Revenue Department
(the “IRD”) in Hong Kong and the United States Internal Revenue Service (the “IRS”). We believe that we have
complied with all applicable reporting and tax payment obligations and disagree with the taxing authorities’ positions on
these various issues. We are vigorously defending our tax positions through all available administrative and judicial
avenues.
Although the final resolution of these disputes is uncertain and involves unsettled areas of the law, based on
currently available information, we have established reserves for our best estimate of the probable tax liability for these
matters. While the resolution of the issues may result in tax liabilities that are significantly higher or lower than the
reserves established for these matters, management currently believes that any resolution will not have a material effect on
our consolidated financial position or liquidity. However, an unfavorable resolution on any matter could have a material
effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax
is due or paid.
The future impact of tax legislation, regulations or treaties, including any future legislation in the United States or
abroad that would effect the companies or subsidiaries that comprise our consolidated group is always uncertain. Our
ability to respond to such changes so that we maintain favorable tax treatment, the cost and complexity of such
compliance, and its impact on our ability to effectively operate in jurisdictions always presents a risk.
Favorable tax treatment of our non-U.S. earnings is dependent on our ability to avoid classification as a Controlled
Foreign Corporation. Changes in the composition of our shareholdings could have an impact on our classification. If
our classification were to change, it could have a material adverse effect on the largest U.S. shareholders and, in turn
on the Company’s business.
A non-U.S. corporation, such as ours, will constitute a "controlled foreign corporation" or "CFC" for U.S. federal
income tax purposes if its largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own
more than 50 percent of the shares outstanding. Although we believe that we and our non-U.S. subsidiaries currently are
not CFCs, the U.S. Internal Revenue Service or a court may not concur with our conclusions. If the IRS or a court
determined that we were a CFC, then each of our U.S. shareholders who own (directly, indirectly, or constructively) 10
percent or more of the total combined voting power of all classes of our stock on the last day of our taxable year would be
required to include in gross income for U.S. federal income tax purposes its pro rata share of our "subpart F income" (and
the subpart F income of any our subsidiaries determined to be a CFC) for the period during which we (and our non-U.S.
subsidiaries) were a CFC. In addition, gain on the sale of our shares realized by such a shareholder may be treated as
ordinary income to the extent of the shareholder's proportionate share of our and our CFC subsidiaries' undistributed
earnings and profits accumulated during the shareholder's holding period of the shares while we are a CFC.
We materially rely on licensed trademarks, the loss of which could have a material adverse effect on our revenues and
profitability.
We are materially dependent on our licensed trademarks as a substantial portion of our sales revenue comes from
selling products under licensed trademarks. As a result, we are materially dependent upon the continued use of such
trademarks, particularly the Vidal Sassoon® and Revlon® trademarks. Actions taken by licensors and other third parties
could diminish greatly the value of any of our licensed trademarks. If we were unable to sell products under these licensed
trademarks or the value of the trademarks were diminished by the licensor due to their continuing long-term financial
capability to perform under the terms of the agreements or other reasons, or due to the actions of third parties, the effect
on our business, financial condition and results of operations could be both negative and material.
18
We have recently become involved in securities class action litigation which could have a material adverse effect on
our business, consolidated financial position, results of operations and cash flows.
As further discussed under Item 3. “Legal Proceedings,” and Note (10) to the accompanying consolidated
financial statements, class action lawsuits have been filed and consolidated into one action against our Company, Gerald
J. Rubin, our Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson, our Chief Financial
Officer, on behalf of purchasers of our publicly traded securities. The plaintiffs alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder, on the grounds that the Company and the two officers
engaged in a scheme to defraud our shareholders through the issuance of positive earnings guidance intended to
artificially inflate our share price so that Mr. Rubin could sell almost 400,000 of our common shares at an inflated price.
The plaintiffs are seeking unspecified damages, interest, fees, costs, an accounting of any alleged insider trading proceeds,
and injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the
defendants’ alleged insider trading proceeds. The class period in the consolidated action is October 12, 2004 through
October 10, 2005.
We intend to defend the foregoing lawsuit vigorously, but, because the lawsuit is still in the preliminary stages,
we cannot predict the outcome and are not currently able to evaluate the likelihood of success or the range of potential
loss, if any, that might be incurred in connection with the action. There is a risk that such litigation could result in
substantial costs and divert management’s attention and resources from its business, which could adversely effect our
business. We carry insurance that provides an aggregate coverage of $20 million after a self-insured retention of $500
thousand for the period during which the claims were filed, but cannot evaluate at this time whether such coverage will be
adequate to cover losses, if any, arising out of the lawsuit. If the Company were to lose on any issues connected with the
lawsuit or if the lawsuit is not settled on favorable terms, the judgment or settlement may have a material adverse effect
on the Company's consolidated financial position, results of operations and cash flows.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
20
ITEM 2. PROPERTIES
PLANT AND FACILITIES
The Company owns, leases, or otherwise utilizes through third-party management service agreements, a total of
31 facilities, which include selling, procurement, administrative and distribution facilities worldwide. All facilities
operated by the Company are adequate for the purpose for which they are intended. Information regarding the location,
use, segment, ownership and approximate size of the facilities and undeveloped land as of February 28, 2007 is provided
below:
Location
Type and Use
Business Segment
Owned or
Leased
El Paso, Texas, USA
El Paso, Texas, USA
Land & Building - Corporate Headquarters
Personal Care & Housewares
Land & Building - Distribution Center
Personal Care
Southaven, Mississippi, USA
Land & Building - Distribution Center
Personal Care & Housewares
Brampton, Ontario, Canada
Third-Party Managed Distribution Center
Personal Care
Danbury, Connecticut, USA
Bentonville, Arkansas, USA
Office Space
Office Space
Minneapolis, Minnesota, USA
Office Space
New York, New York, USA
Office Space *
New York, New York, USA
Office Space **
Chambersburg, Pennsylvania, USA Office Space - Customer Service Facility
Personal Care
Personal Care
Personal Care
Housewares
Housewares
Housewares
Lancashire, England
El Paso, Texas, USA
Third-Party Managed Distribution Center
Housewares
Land (3 Parcels) - Held for Future Expansion
None
Etobicoke, Ontario, Canada
Office Space
Personal Care
Sheffield, England
Worksop, England
Land & Building - European Headquarters
Personal Care
Third-Party Managed Distribution Center
Personal Care
Boulgne-Billancourt, France
Office Space
Personal Care
Nr Amsterdam, Netherlands
Third-Party Managed Distribution Center
Personal Care
Mexico City, Mexico
Office Space
Personal Care
Tlanepantla, Mexico #1
Third-Party Managed Distribution Center
Personal Care - Appliances
Tlanepantla, Mexico #2
Third-Party Managed Distribution Center
Personal Care - Liquids & Powders
Sao Paulo, Brazil
Vitoria, Brazil
Lima, Perú
Lima, Perú
Caracas, Venezuela
Caracas, Venezuela
Santiago, Chile
Tokyo, Japan
Hong Kong
Zhu Kuan, Macau, China
Shenzhen, China
Shenzhen, China
Shenzhen, China
Office Space
Personal Care
Third-Party Managed Distribution Center
Personal Care
Office Space
Personal Care
Third-Party Managed Distribution Center
Personal Care
Office Space
Personal Care
Third-Party Managed Distribution Center
Personal Care
Office Space
Office Space
Office Space
Office Space
Office Space
Office Space
Office Space
Personal Care
Housewares
Personal Care & Housewares
Personal Care & Housewares
Personal Care & Housewares
Personal Care & Housewares
Personal Care & Housewares
* Facility will be vacated due to the expiration of the lease in December 2007.
** New headquarters for Housewares Segment to be occupied on or after July 2007.
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Approximate
Square
Footage
135,000
408,000
1,200,000
50,000
16,000
5,000
1,000
9,900
25,000
3,200
13,500
28 Acres
2,900
10,000
85,000
2,100
85,000
3,900
20,000
20,000
1,600
5,400
900
6,500
1,100
200
130
800
10,100
11,600
2,500
1,600
4,100
21
ITEM 3. LEGAL PROCEEDINGS
Hong Kong Income Taxes – On May 10, 2006, the IRD and the Company reached a settlement regarding tax
liabilities for the fiscal years 1995 through 1997. This agreement was subsequently approved by the IRD’s Board of
Review. For those tax years, we agreed to an assessment of approximately $4,019 including estimated penalties and
interest. Our consolidated financial statements at May 31, 2006 and February 28, 2006 included adequate provisions for
this liability. As a result of this tax settlement, in the first quarter of fiscal 2007, we reversed $192 of tax provision
previously established and recorded $279 of associated interest. During the second quarter of fiscal 2007, the liability was
paid with $3,282 of tax reserve certificates and the balance in cash.
For the fiscal years 1998 through 2003, the IRD has assessed a total of $25,461 (U.S.) in tax on certain profits of
our foreign subsidiaries. Hong Kong is seeking to levy taxes on income earned from certain activities previously
conducted in Hong Kong. Negotiations with the IRD regarding these issues and their settlement are ongoing, and it is
unclear at this time when they will be resolved.
In connection with the IRD's tax assessment for the fiscal years 1998 through 2003, we have purchased tax
reserve certificates in Hong Kong totaling $25,144. Tax reserve certificates represent the prepayment by a taxpayer of
potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax
reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are
subject to the risks associated with foreign currency fluctuations.
If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the resulting
assessment could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. Although the final resolution of the
proposed adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we
have provided for our best estimate of the total probable tax liability for this matter. While the resolution of the issue may
result in tax liabilities that are significantly higher or lower than the reserves established for this matter, management
currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity.
However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in
the quarter in which an adjustment is recorded or the tax is due or paid.
United States Income Taxes - The IRS has completed its audits of the U.S. consolidated federal tax returns for
fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed adjustments to taxes
of $13,424 for the three years under audit. We have resolved the various tax issues and reached an agreement on
additional tax in the amount of $3,568. The resulting tax liability had already been provided for in our tax reserves and
prior to the current fiscal year we had decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and
2002, accordingly. This additional tax liability and associated interest of $914 were settled in the fourth quarter of fiscal
2006.
The IRS is auditing our U.S. consolidated federal tax returns for fiscal years 2003 and 2004 and has provided
notice of proposed adjustments of $5,953 to taxes for the years under audit. The Company is vigorously contesting these
adjustments. Although the ultimate outcome of the dispute with the IRS cannot be predicted with certainty, management
is of the opinion that adequate provisions for taxes in those years have been made in our consolidated financial statements.
The IRS recently began an examination of the U.S. consolidated federal tax return for fiscal year 2005. The audit
is in the preliminary stages and, to date, no adjustments have been proposed.
Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one action
against our Company, Gerald J. Rubin, our Chairman of the Board, President and Chief Executive Officer, and Thomas J.
Benson, our Chief Financial Officer, on behalf of purchasers of our publicly traded securities. The plaintiffs alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder, on the grounds that the
Company and the two officers engaged in a scheme to defraud our shareholders through the issuance of positive earnings
guidance intended to artificially inflate our share price so that Mr. Rubin could sell almost 400,000 of our common shares
at an inflated price. The plaintiffs are seeking unspecified damages, interest, fees, costs, an accounting of any alleged
22
insider trading proceeds, and injunctive relief, including an accounting of and the imposition of a constructive trust and/or
asset freeze on the defendants’ alleged insider trading proceeds. The class period in the consolidated action is October 12,
2004 through October 10, 2005.
We intend to defend the foregoing lawsuit vigorously, but, because the lawsuit is still in the preliminary stages,
we cannot predict the outcome and are not currently able to evaluate the likelihood of success or the range of potential
loss, if any, that might be incurred in connection with the action. There is a risk that such litigation could result in
substantial costs and divert management’s attention and resources from its business, which could adversely effect our
business. We carry insurance that provides an aggregate coverage of $20 million after a self-insured retention of $500
thousand for the period during which the claims were filed, but cannot evaluate at this time whether such coverage will be
adequate to cover losses, if any, arising out of the lawsuit.
On May 15, 2006, we filed a motion to dismiss the aforementioned lawsuit citing numerous deficiencies with the
claims asserted in the lawsuit. On June 29, 2006, the plaintiffs filed with the court their opposition to our motion to
dismiss. On July 17, 2006, we filed a reply rebutting the plaintiffs’ June 29th opposition. On March 20, 2007, the court
heard the plaintiffs’ and our arguments regarding our motion to dismiss. As of the date this report was filed, the matter
was before the court for its consideration. If we were to lose on any issues connected with the lawsuit or if the lawsuit is
not settled on favorable terms, the judgment or settlement may have a material adverse effect on our consolidated
financial position, results of operations and cash flows.
Other Matters - We are involved in various other legal claims and proceedings in the normal course of operations.
In the opinion of management, the outcome of these matters will not have a material adverse effect on our consolidated
financial position, results of operations, or liquidity.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON SHARES
Our common shares are listed on the NASDAQ Global Select Market (“NASDAQ”) [symbol: HELE]. The
following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the common shares
as reported on the NASDAQ. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
FIS CAL 2007
Firs t quarter
Second quarter
Third quarter
Fourth quarter
FIS CAL 2006
Firs t quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
21.95
19.44
25.29
25.50
$
18.71
16.18
16.98
21.75
$
29.75
26.19
23.01
20.23
$
21.52
20.82
15.55
15.80
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Our common shares with a par value of $0.10 per share are our only class of equity security outstanding at
February 28, 2007. As of May 7, 2007, there were approximately 313 holders of record of the Company's common shares.
Shares held in "nominee" or "street" name at each bank nominee or brokerage house are included in the number of
shareholders of record as a single shareholder.
CASH DIVIDENDS
Our current policy is to retain earnings to provide funds for the operation and expansion of our business and for
potential acquisitions. We have not paid any cash dividends on our common shares since inception. Our current intention
is to pay no cash dividends in fiscal 2008. Any change in dividend policy will depend upon future conditions, including
earnings and financial condition, general business conditions, any applicable contractual limitations, and other factors
deemed relevant by our Board of Directors.
ISSUER PURCHASES OF EQUITY SECURITIES
During the quarter ended August 31, 2003, our Board of Directors approved a resolution authorizing the purchase,
in open market or through private transactions, of up to 3,000,000 of our common shares over a period extending through
May 31, 2006. On April 25, 2006, our Board of Directors approved a resolution to extend the existing plan for three more
years, through May 31, 2009.
We did not repurchase any common shares during fiscal 2007 or 2006. In fiscal 2005, we repurchased 757,710
shares at a total cost of $25,039, or an average price per share of $33.05. An additional 1,436,164 shares remain
authorized for purchase under this plan.
25
PERFORMANCE GRAPH
The graph below compares the cumulative total return of our Company to the NASDAQ Market Index and a peer
group index, assuming $100 invested March 1, 2002. The Peer Group Index is the Dow Jones Industry Group -
Cosmetics. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of the
possible future performance of our common shares.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
FOR HELEN OF TROY LIMITED, NASDAQ MARKET INDEX,
AND PEER GROUP INDEX
$250
$200
$150
$100
$50
$0
2002
2003
2004
2005
2006
2007
HELEN OF TROY LIMITED
DOW JONES GROUP INDEX
NASDAQ MARKET INDEX
HELEN OF TROY LIMITED
DOW JONES GROUP INDEX
NASDAQ MARKET INDEX
Fiscal year ended the last day of February
2002
100.00
100.00
100.00
2003
103.92
91.39
76.18
2004
231.51
112.36
116.04
2005
224.27
128.62
117.23
2006
157.17
126.32
130.86
2007
185.59
152.86
137.85
The Stock Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or
subject to the liabilities of Section 18 under the Securities Exchange Act. In addition, it shall not be deemed incorporated
by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate this
information by reference.
26
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated income statement data for the years ended on the last day of February 2007, 2006 and
2005, and the selected consolidated balance sheet data as of the last day of February 2007 and 2006, have been derived
from our audited consolidated financial statements included elsewhere in this report. The selected consolidated income
statement data for the years ended on the last day of February 2004 and 2003, and the selected consolidated balance sheet
data as of the last day of February 2005, 2004 and 2003, have been derived from our audited consolidated financial
statements which are not included in this report. Information for the years ended on the last day of February 2005, 2004
and 2003 contains certain reclassifications necessary to restate prior years’ operations of Tactica as a discontinued
segment. This information should be read together with the discussion in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial statements and notes to those statements
included elsewhere in this report. All currency amounts in this document are denominated in U.S. dollars.
Years Ended The Last Day of February,
(in thousands, except per share data)
Statements of Income Data
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expenses
Operating income
Interest expense
Other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued segment's operations, net
of tax effects
Net earnings
Per Share Data
Basic
Continuing operations
Discontinued operations
Total basic earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted earnings per share
Weighted average number of common shares
outstanding:
Basic
Diluted
2007
2006
2005 (1)
2004 (1)
2003 (1)
$
634,932
355,552
$
589,747
323,189
$
581,549
307,045
$
474,868
257,651
$
379,751
224,027
279,380
208,964
70,416
(17,912)
2,643
55,147
5,060
50,087
266,558
195,180
71,378
(16,866)
1,290
55,802
6,492
49,310
274,504
172,480
102,024
(9,870)
(2,575)
89,579
12,907
76,672
217,217
131,443
85,774
(4,047)
4,312
86,039
14,477
71,562
155,724
105,522
50,202
(3,965)
2,333
48,570
10,778
37,792
-
-
(222)
(11,040)
924
$
50,087
$
49,310
$
76,450
$
60,522
$
38,716
$
1.66
$
-
$
1.66
$
1.58
$
-
$
1.58
$
1.65
$
-
$
1.65
$
1.56
$
-
$
1.56
$
$
$
2.58
(0.01)
2.57
$
$
$
2.52
(0.39)
2.13
$
$
$
1.34
0.03
1.37
$
$
$
2.36
(0.01)
2.35
$
$
$
2.29
(0.35)
1.94
$
$
$
1.28
0.03
1.31
30,122
31,717
29,919
31,605
29,710
32,589
28,356
31,261
28,189
29,548
27
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
Last Day of February,
(in thousands)
Balance Sheet Data:
Working capital (1)
Total assets
Long-term debt
Shareholders' equity (2)
Cash dividends
2007
2006
2005
2004
2003
$
238,131
906,272
240,000
527,417
-
$
185,568
857,744
254,974
475,377
-
$
156,312
811,449
260,000
420,527
-
$
166,445
489,609
45,000
350,103
-
$
163,452
405,629
55,000
289,602
-
(1) Fiscal year 2005, 2004 and 2003 results presented include 100 percent of the results of Tactica under the line item,
"Income (loss) from discontinued segment’s operations and impairment of related assets, net of tax.” We acquired a
55 percent interest in Tactica in March 2000. On April 29, 2004 we completed the sale of our interest in Tactica back
to certain of its key operating manager-shareholders. Accordingly, the results of operations of Tactica have been
reclassified out of income from continuing operations and working capital has been presented to eliminate the impact
of Tactica's current assets and current liabilities. Also, in the fourth quarter of fiscal 2004, we recorded a loss of
$5,699 from the impairment of Tactica goodwill, net of $1,938 of related tax benefits. Our consolidated financial
statements for fiscal 2005 (for the period of time we owned Tactica), 2004 and 2003, as restated include 100 percent
of Tactica's net income or loss because Tactica had accumulated a net deficit at the time that we acquired our
ownership interest, and because the minority shareholders of Tactica had not adequately guaranteed their portion of
the accumulated deficit.
(2) No common shares were repurchased during the fiscal years ended 2007, 2006 and 2003. In fiscal 2005, we
repurchased 757,710 common shares at a cost of $25,039. In fiscal 2004, we repurchased 806,126 common shares at
a cost of $20,572. All shares repurchased were concurrently cancelled.
28
ITEM 7. 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”) should
be read in conjunction with the other sections of this report, including Part I, “Item 1. Business”; Part II, “Item 6.
Selected Financial Data”; and Part II, “Item 8. Financial Statements and Supplementary Data.” 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 on Page 2 of this report in the section
entitled “Information Regarding Forward-Looking Statements,” Item 1A. “Risk Factors,” and in Item 7A. “Quantitative
and Qualitative Disclosures About Market Risk." In this MD&A, unless the context suggests otherwise or otherwise
indicated, amounts expressed are in thousands of U.S. dollars.
THE YEAR'S ACTIVITIES
Our overarching objective is to profitably grow our business and increase shareholder value. Our central
strategies to accomplish this objective include:
• Collaboration with Retailers: We work closely with our network of retailers to understand their needs and meet
their customers’ expectations.
• Acquisitions: We evaluate growth opportunities through complementary acquisition of additional brands and
businesses. Our preference is to own the brands we market, but this is not always possible. Therefore, we also
grow by entering into licensing arrangements for brands that have developed substantial brand equity in product
categories that we believe are a synergistic fit with ours.
•
International Growth: We continue to seek to expand our international sales footprint through our entry into
emerging growth markets.
• Building Brand Equity: Within our brand portfolio, we work to allocate resources to achieve the greatest gains
in brand equity.
•
Innovation: We encourage innovation in order to bring new products, features and functionality to market within
our existing business. This drives organic growth within our existing customer base and can offset the price
erosion that tends to take place over time as products mature within our lines.
• Supply Chain Improvement: We are working to shorten our supply chain to improve responsiveness to
changing consumer preferences.
• Productivity and Cost: We focus on increasing productivity and streamlining costs, without sacrificing customer
service or product quality.
• Adaptive Organization Structure: We seek to continually adapt and tune our organizational structure and
infrastructure. This helps us to stay responsive to changing market conditions and the demands placed on us as
we grow.
Transitions to our new U.S. Distribution Center: Fiscal 2007 began in the midst of the move of our
Housewares segment to our Global Enterprise Resource Planning System, including the transfer of Housewares inventory
from a Monee, Illinois distribution center operated by a third party to our new 1,200,000 square foot Southaven,
Mississippi distribution center. We also completed a move of our domestic grooming, skin care and hair products
inventories from our El Paso, Texas distribution center to the new Southaven, Mississippi distribution center. The fiscal
year ended with the consolidation of our domestic Personal Care segment appliance inventory into the same distribution
center. Transitions of this nature involve extremely complex processes, characterized by interruptions and the diversion
of management’s attention for a period of time after the move as the organization adapts to new systems and seeks to
29
respond quickly to its day-to-day operational requirements. The transitions proved challenging for us, but we believe we
emerged from the year an operationally stronger organization with improved capacity and effectiveness in our U.S.
distribution system.
The Housewares move to the new distribution center and related information systems began in December 2005
and was substantially completed during the first quarter of fiscal 2007. Our Housewares segment distribution and
logistics requirements differ significantly from our traditional Personal Care segment business. In our Housewares
segment, we were required to improve our ability to deliver larger, more complex assortments in smaller individual item
volumes to a much more diverse group of retailers, as compared to our Personal Care segment. Initially, we experienced
distribution order processing and shipment delays. These delays were the result of both software issues and adapting to
the new equipment, new employees, and the operation of the new distribution center. The delays caused a backlog in
orders and in some cases, order cancellations. Throughout the first fiscal quarter we worked to resolve the technical and
operational issues that were causing the delays, and address the issues with affected customers. We believe the strength of
our customer relationships were not affected over the long term. The delays and other costs of the transition adversely
affected our first quarter operating results. We estimate the negative impact of these issues on the Housewares segment’s
net sales for the quarter ending May 31, 2006 to range between $4.5 to $5 million. By the end of the quarter, we had
addressed most of the significant issues and the new distribution center began to attain its originally planned operational
throughput. In June 2006, we had caught up on our backlog.
During our first quarter of fiscal 2007, we also completed a move of our grooming, skin care and hair products
inventories from our El Paso, Texas distribution center to the new Southaven, Mississippi distribution center and
commenced shipments from that facility. We originally had planned to move the balance of our domestic Personal Care
segment appliance inventory into the new distribution center by the end of the first fiscal quarter. However, due to the
issues we experienced with our Housewares segment, we decided to delay the completion of this transition until we were
satisfied that the Housewares’ operations had sufficiently stabilized, and we were past our peak shipping season. We
moved our appliance inventories from the previously existing distribution center to the new distribution center beginning
in December 2006. The move was finished and we were operating completely out of the new distribution center by the
end of fiscal 2007. In these moves, we experienced some minor transitional issues, but none of the magnitude or impact
as those we experienced with Housewares.
During the fourth quarter of fiscal 2007, we installed additional storage racking, and associated handling
equipment in order to further expand our appliance storage capacity and improve operating efficiencies in the new
Southaven, Mississippi distribution center. The total project cost was approximately $1,660 and the equipment was
placed into service in mid-December.
The need to operate out of multiple domestic distribution facilities during the year resulted in some duplication of
costs. We believe these costs were a worthwhile investment in our ability to serve our customers over the long run. We
do not expect to achieve anticipated cost savings relating to our distribution center consolidation until later in fiscal 2008.
We can make no assurances that anticipated cost savings and efficiencies relating to our distribution consolidation will be
ultimately achieved. We believe that our competitive position and the long term health of our business depends on
fulfillment and transportation excellence. As our operations with our retailers, especially large retailers, become
increasingly intertwined, the breadth and complexity of services we must render in order to earn more shelf space and,
thus, increase market share, escalate. Consequently, it has become increasingly more expensive to do business with our
customers and we expect this trend to continue.
Recent Acquisitions: We evaluate opportunities to grow our business and brand portfolio by acquiring well-
recognized brands from larger consumer products companies, as well as other brands from smaller private companies.
Historically, the brands we have purchased from larger consumer products companies have a track record of support and
brand development. We believe that at the time we acquired them they were considered “non-core” by their previous
owners and did not benefit from focused management or strong marketing support. When we acquire brands from smaller
private companies, we usually do so because we believe they have been constrained by the limited resources of their prior
owners. After acquiring a brand, we seek to increase its sales, market share and distribution in both existing and new
channels. We pursue this growth through increased spending on advertising and promotion, new marketing strategies,
30
improved packaging and formulations, and innovative new products. While we did not complete any major acquisition
during fiscal 2007, we were able to incrementally add to our businesses with three significant licensing agreements and
one small brand acquisition as discussed below.
In March 2006, we entered into a license agreement with Mascolo Limited for the use of the Toni&Guy® brand
name for hair care appliance products. Under the agreement, we are licensed to sell hair dryers, straighteners, stylers,
tongs and a line of male grooming hair care appliances in the United Kingdom, Western Europe and portions of Asia. The
duration of the initial license agreement is 5 years, expiring March 2011, which may be extended an additional 2 years
upon proper notice. By the end of fiscal 2007, Toni&Guy® was our fourth highest selling brand out of the 13 brands we
actively market in Europe and Asia.
On September 25, 2006, the Company acquired all rights to trademarks, certain patents, formulas, tooling and
production processes to sell Vessel, Inc.’s rechargeable lighting products under various brand names, including Candela®,
a line of portable, cordless, rechargeable table and counter-top ambient lighting products. The lights use long-lasting
glow rechargeable LED lights, which are brighter, safer, cleaner, more durable and easier to use than candles. We are in
the process of designing new packaging, products and merchandising concepts aimed at an effective re-staging of the
lighting products under the OXO family of brands. We expect to make the first shipments in the second quarter of fiscal
2008.
In December 2006, we entered into two separate licensing arrangements: one with MBL/TIGI Products, L.P. for
the use of the Bed Head® by TIGI trademark, and another with MBL/Toni&Guy Products L.P. for the use of the
Toni&Guy® trademark. Both licenses grant us the right to use the trademarks to market personal care products in the
Western Hemisphere. Each license agreement is for five years, and may be extended for five additional three-year terms
upon proper notice. We plan to introduce a line of hair care appliance products under the Bed Head® by TIGI and
Toni&Guy® brand names that eventually will include hair dryers, hair styling irons and straighteners, hot air brushes, hair
setters, combs, brushes and hair care accessories, as well as a variety of other personal care products. We plan to begin
marketing in the United States, followed by the remainder of the Western Hemisphere, with product shipments to begin
during fiscal 2008.
Effective May 1, 2007, we acquired certain assets and liabilities of Belson Products, the professional salon
division of Applica Consumer Products, Inc. for an estimated net cash purchase price of $36,500. This transaction was
accounted for as a purchase of business and was paid for out of available cash on hand. Belson Products is a domestic
supplier of personal care products to the professional salon industry. Belson Products markets its professional products to
major beauty suppliers and other major distributors under brand names, including Belson®, Belson Pro®, Gold ‘N Hot®,
Curlmaster®, Premiere®, Profiles®, Comare®, Mega Hot®, and Shear Technology®. Products include electrical hair
care appliances, spa products and accessories, professional brushes and combs, and professional styling shears. Belson
Products are principally distributed throughout the United States, as well as Canada and the United Kingdom.
International Growth: We continue to experience strong growth in the Latin American region where we have
seen revenue growth in excess of 27 percent each of the last two fiscal years. Our best performing brands and product
categories in the region are the Brut® fragrances, Ammens® foot and body powders, Revlon® appliances and Vidal
Sassoon® appliances. In fiscal 2007, we continued to invest in growing the business and supporting infrastructure within
the region with Mexico City serving as the hub of activity. Our employee presence in the region has grown from 19 at the
end of fiscal 2006 to 32 by the end of fiscal 2007. We also made several strategic changes to our supply chain for liquid
products in order to enable us to better and more cost effectively serve Latin American markets. We believe certain
countries in Latin America present attractive opportunities for continued expansion because of strong economic growth,
the growing stability of its democracies, and recent high levels of foreign investment in the region. We plan to continue
the transition of our Mexican and other key Latin American operations to our global information system over the balance
of fiscal 2008 and possibly, fiscal 2009.
In Europe and in some other countries, our personal care business recovered nicely from a difficult year in fiscal
2006. Overall net sales were up 18.7 percent over the prior year. A significant part of this recovery was fueled by the
addition of Toni&Guy® appliances to our product offerings.
31
During the last fiscal year, we began to expand our Housewares segment’s sales operations in the United
Kingdom and Japan. During the year, we terminated certain existing distribution agreements we had in these countries
and set up separate selling offices and sales organizations, leveraging certain existing facilities, infrastructure and sales
contacts, where possible. In the United Kingdom, we have now established a separate distribution center for our
Housewares segment. We believe that with relatively modest continuing infrastructure investments, we can enhance our
presence in those markets.
Supply Chain and Other Operational Improvements: We manage a complex supply chain and operating
platform that over the past year shipped approximately 142 million units to over 16,000 wholesale, retail, and individual
customers. Our Company and industry are also facing challenges – the potential for a slowing U.S. economy, rising
energy costs, and domestic and international marketplace pressures. Continued consolidation and growth in the largest of
retailers has created a very competitive environment that requires careful target pricing, superb customer service,
operational excellence in order to maintain deliveries, and continuous product and process innovation. In this
environment, we believe that a key way we will grow is by becoming highly operationally effective and efficient. The
implementation of our Global Enterprise Resource Planning System, now in operation for close to 3 ½ years has been
instrumental in requiring us to closely examine and re-think how we do business. In fiscal years 2007, 2006 and 2005,
direct corporate information systems costs included in our consolidated statements of income in the “Selling, general and
administrative expenses” line was $8,248, $8,080, and $7,702. These amounts do not include the cost of personnel,
telecommunications, software and computer equipment charges incurred and paid directly by our various local operations
outside of El Paso, Texas. We continue to invest substantial internal resources extending the functionality and
performance of the system. In particular, a great majority of the enhancements we made this year were to the warehouse
and sales order management components of our information system. We believe that timely and effective change and
evolution in our systems will increase the total value proposition we offer to our customers and consumers, and thus
increase our competitive advantage. We believe these efforts and investments continue to stage us for the next level of
growth as we now have an infrastructure well poised to handle additional shipment volume. We realize that the next
opportunity for cost and service improvement lies in streamlining our supply chain and simplifying workflows, and
consequently, we believe it is time for another fresh look. Our supply chain has several key stages that a product must
travel through on its way to our customer. They are:
• Concept development and design;
• Target Costing / Pricing;
• Tooling Design;
• Final Engineering;
• Regulatory Compliance Testing and Approvals;
• Demand Forecasting and Production Planning;
• Production Order Placement;
• Production / Vendor Management;
• Quality Control;
•
Inbound Transportation;
• Warehousing and Distribution;
• Customer Order Management / Product Distribution; and
• Outbound Transportation / Delivery.
We have begun initiatives to reduce costs, improve responsiveness and transactional accuracy, and reduce lead-
times for nearly all of these key stages. We believe doing so will provide additional strategic competitive advantages that
will aid us in our drive to be the supplier of choice in all our markets. At the forefront of any decisions and changes we
will undergo will be our commitment to offer high quality, affordability, and effective customer service with the products
we ship.
32
Organizational Changes: We have added to and re-organized our senior management team. Responsibility for
our domestic Personal Care segment’s sales functions have been split into Retail and Professional divisions, each led by a
division president. We also split responsibilities for our supply chain initiatives and management between two new
executive positions. First, we created a senior management position to lead our supply chain initiatives and management
from the product development stage through the production / vendor management stage and oversee operations in the Far
East. Additionally, we created a senior management position, to lead our supply chain initiatives and management from
inbound transportation through customer delivery, and to oversee our distribution and logistics, customer service,
corporate information technology, and our consumer services functions.
Finally, we split our domestic customer service function into two teams, one to serve the Personal Care segment,
and another to serve the Housewares segment. The Housewares segment’s customer service operations are in the process
of transitioning to a new location in Chambersberg, Pennsylvania to be closer in proximity to the segment’s New York
City hub of sales and marketing operations. The nature of our Housewares segment’s customer service function will be
better focused on certain needs that distinguish their operation from our personal care segment, namely the requirement to
deliver larger, more complex assortments in smaller individual item volumes to a much more extensive and diverse group
of individual retailers.
Key Revenue and Net Earnings Growth Drivers for Fiscal 2008: We have outlined the following specific
objectives for fiscal year 2008 that we believe should help us drive increases in sales and net earnings:
• Placement and sales of Bed Head® by TIGI and Toni&Guy® appliances;
• Expansion of Fusion Tools™ appliance placement and sales in the professional salon distribution channels;
• Lower distribution, shipping and transportation expenses as our staff gains efficiencies through experience, and
the elimination of expenses associated with our formerly leased 619,000 square foot distribution center, which we
vacated by the end of fiscal year 2007;
• New OXO® product introductions, including but not limited to, the Candela® line of rechargeable lighting
products, as well as expanded international OXO® distribution and placement in the retail markets of the United
Kingdom and Japan;
•
Increased profitability for our grooming, skin care, and hair products category and international appliance sales, as
expenses are reduced over prior year, and expected sales of higher margin goods should favorably impact our
overall sales mix;
• Continued expansion of distribution in the brush, comb and accessories category; and
• Price increases to customers in several of our Personal Care and Housewares categories.
We especially believe that the new Bed Head® by TIGI product line of appliances and related products has significant
future growth potential. We hope that this new line of products will become a major contributor to Helen of Troy’s
overall future increased profitability.
33
Financial Highlights for Fiscal 2007
From an overall financial perspective, fiscal 2007 was a year of contrasts. From an income statement perspective,
net earnings were essentially flat year over year. Sales volume increases were offset by increased cost of sales due
principally to raw materials price increases, and the selling, general and administrative cost impact of transition issues
associated with the move of certain domestic inventories to a new distribution center throughout the year. From a balance
sheet management perspective, we grew stronger over the last fiscal year. We grew our total assets by $48,528, yet our
inventories decreased by $24,331, we reduced our debt by $14,974, and exited fiscal 2007 with $91,205 of cash and
temporary investments versus $18,320 of cash at the end of fiscal 2006.
• Consolidated net sales increased 7.7 percent, or $45,185, to $634,932 in fiscal 2007 versus $589,747 in fiscal
2006. Our Personal Care segment provided 6.1 percentage points of consolidated net sales growth, or $35,877.
Personal Care consolidated net sales increased 7.8 percent in fiscal 2007 when compared to fiscal 2006. Our
Housewares segment provided 1.6 percentage points of consolidated net sales growth, or $9,308. Housewares net
sales increased 7.3 percent in fiscal 2007 when compared to fiscal 2006.
• From a geographic perspective, net sales in the United States grew 5.0 percent, or $24,166, Latin America grew
27.4 percent, or $8,689, European and other international operations (principally the United Kingdom) grew 18.7
percent, or $8,974, and Canada grew 15.0 percent, or $3,356. International net sales accounted for 19.4 percent of
total consolidated net sales for fiscal 2007 compared to 17.3 percent of total consolidated net sales for fiscal 2006.
• Our net sales growth includes the benefit of a net positive foreign exchange impact of $2,738.
• Consolidated operating income declined 1.3 percent or $962 to $70,416 in fiscal 2007 versus $71,378 in fiscal
2006. The key driver of this relatively flat year over year performance was higher cost of sales, principally due to
the impact of raw materials pricing.
•
Interest expense was $17,912 in fiscal 2007 compared to $16,866 in fiscal 2006, principally due to higher interest
rates on floating rate debt. As discussed elsewhere in this report, at the end of the third quarter of fiscal 2007, we
entered into interest rate swap agreements to effectively fix interest rates on most of our floating rate debt.
• Other income (expense), net was $2,643 in fiscal 2007 compared to $1,290 in fiscal 2006. The most significant
driver of the increase in the fiscal 2007 amount was the additional interest income we earned on accumulating
levels of temporarily invested cash balances over the year.
•
Income tax expense was $5,060 in fiscal 2007, or 9.2 percent of earnings before income taxes, compared to
$6,492 in fiscal 2006, or 11.6 percent of earnings before income taxes.
• Our net earnings increased to $50,087 in fiscal 2007 from $49,310 in fiscal 2006, or by 1.6 percent.
• Our diluted earnings per share increased to $1.58 in fiscal 2007 from $1.56 in fiscal 2006, or by 1.3 percent.
34
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our selected operating data, in dollars, as a percentage of
net sales, and as a year-over-year percentage change.
Fiscal Year Ended (in thousands)
2006
2005
2007
% of Net Sales (1)
2006
2007
2005
% Change
07/06
06/05
Net sales
Personal Care Segment
Housewares Segment
Total net sales
Cost of sales
Gross profit
Selling, general, and administrative expense
Operating income
Other income (expense):
Interest expense
Other income (expense), net
Total other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued segment's operations, net
of tax benefits
Net earnings
* Calculation is not meaningful
$
497,824
137,108
634,932
$
461,947
127,800
589,747
$
501,406
80,143
581,549
78.4% 78.3% 86.2%
21.6% 21.7% 13.8%
100.0% 100.0% 100.0%
7.8%
-7.9%
7.3% 59.5%
1.4%
7.7%
355,552
279,380
208,964
70,416
(17,912)
2,643
(15,269)
55,147
5,060
50,087
323,189
266,558
195,180
71,378
(16,866)
1,290
(15,576)
55,802
6,492
49,310
307,045
274,504
172,480
102,024
(9,870)
(2,575)
(12,445)
89,579
12,907
76,672
56.0% 54.8% 52.8%
44.0% 45.2% 47.2%
10.0%
4.8%
5.3%
-2.9%
32.9% 33.1% 29.7%
11.1% 12.1% 17.5%
7.1% 13.2%
-1.3% -30.0%
-2.8%
0.4%
-2.4%
8.7%
0.8%
7.9%
-2.9%
0.2%
-2.6%
-1.7%
-0.4%
-2.1%
9.5% 15.4%
1.1%
2.2%
8.4% 13.2%
6.2% 70.9%
*
-2.0% 25.2%
*
-1.2% -37.7%
-22.1% -49.7%
1.6% -35.7%
-
50,087
$
-
49,310
$
(222)
76,450
$
0.0%
7.9%
0.0%
0.0%
8.4% 13.1%
*
*
1.6% -35.5%
(1) Net sales percentages by segment are computed as a percentage of the related segment’s net sales to total net sales.
All other percentages are computed as a percentage of total net sales.
The following table sets forth, for the periods indicated, the impact acquisitions had on our net sales.
IMPACT OF ACQUISITIONS ON NET SALES
(in thousands)
Prior year's net sales
Components of net sales change
Core business net sales change
Net sales from acquisitions (non-core business net sales)
Change in net sales
Net sales
Total net sales growth
Core business net sales change
Net sales change from acquisitions (non-core business net sales change)
Years Ended The Last Day of February,
2007
2005
2006
$
589,747
$
581,549
$
474,868
45,147
38
45,185
634,932
$
(21,277)
29,475
8,198
589,747
$
3,075
103,606
106,681
581,549
$
7.7%
7.7%
0.0%
1.4%
-3.7%
5.1%
22.5%
0.7%
21.8%
In the table above, the percentages shown are the changes of each component as a percentage of the prior year’s
total net sales. Core business net sales change represents the change in net sales for business that we operated over the
same fiscal periods in the prior year. Net sales from acquisitions are net sales arising from business acquired with no
comparable sales in the prior fiscal period. In fiscal 2007, lighting products provided $38 of commission revenue from
new product acquisitions. We are in the process of designing new packaging, products and merchandising concepts with
35
the objective of effectively re-staging the lighting products under the OXO® family of brands. We expect the first
shipments to occur in the second quarter of fiscal 2008. The net sales from acquisitions in fiscal 2006 are the sales from
our new Housewares division in the first quarter of fiscal 2006 and the SkinMilk® and TimeBlock® lines of skin care
products through September 30, 2005. The Housewares segment was acquired on June 1, 2004, consequently, net sales
for fiscal 2005 does not include Housewares sales for the first fiscal quarter.
Net Sales:
Consolidated net sales increased 7.7 percent or $45,185 in fiscal 2007 over fiscal 2006. There was only a nominal
amount of net sales from new product acquisitions for the year. Core business growth (growth without acquisitions)
accounted for almost all sales growth. Our Personal Care segment provided 6.1 percentage points of consolidated nets
sales growth, or $35,877. Personal Care net sales increased 7.8 percent in fiscal 2007 when compared to fiscal 2006. Our
Housewares segment provided 1.6 percentage points of consolidated net sales growth, or $9,308. Housewares
consolidated net sales increased 7.3 percent in fiscal 2007 when compared to fiscal 2006. Overall, higher average unit
selling prices contributed 5.3 percent to sales growth while increases in unit volumes contributed 2.4 percent to sales
growth. Higher unit selling prices resulted from product mix changes and more aggressive management of sales discounts
and allowances.
Consolidated net sales increased 1.4 percent or $8,198 in fiscal 2006 over fiscal 2005. New product acquisitions
accounted for 5.1 percentage points, or $29,475 of the sales percentage growth over fiscal 2005. Net sales from new
product acquisitions included net sales for the first quarter of fiscal 2006 for our Housewares segment (OXO®) and the
SkinMilk® and TimeBlock® lines of skin care products through September 30, 2005. Core business growth (growth
without acquisitions) showed an overall decline in fiscal 2006 of $21,277 or 3.7 percent. We experienced core business
growth in our grooming, skin care and hair care products business and our Housewares segment (net sales for the last 3
fiscal quarters of 2006), which combined to provide 4.0 percentage points of net sales growth. This growth was partially
offset by a negative 7.7 percentage point impact on net sales volume from declines in our appliances and our brushes,
combs and hair accessories business.
Segment Net Sales:
Personal Care
Our Personal Care segment currently offers products in three categories: appliances; grooming, skin care, and
hair products; and brushes, combs and accessories. Our Personal Care segment is dedicated to being the preferred
supplier of personal care and wellness products recognized for value added, consumer driven innovation and distinguished
by unsurpassed customer support.
Net sales in our Personal Care segment increased 7.8 percent or $35,877, to $497,824 in fiscal 2007 compared to
$461,947 in fiscal 2006. Domestically, we operate in mature markets where we compete on product innovation, price,
quality and customer service. We continuously adjust our product mix, pricing and marketing programs to try to maintain,
and in some cases, acquire more retail shelf space. Changes in product mix are generally allowing us to realize higher
average unit prices. Over the last year, the prices of raw materials such as copper, steel, plastics and alcohol have
experienced significant increases and have only just begun to moderate. We continue to evaluate the need to raise prices
with our customers and have already put certain increases into effect. In some cases, we have been successful raising
prices to our customers, or passing on cost increases by moving customers to newer product models with enhancements
that justify a higher price. In other cases, we have not been successful. Sales price increases and product enhancements
can have long lead times before their impact can be realized. The extent to which we will be able to continue with price
increases, the timing, and the ultimate impact of such increases on net sales is uncertain. Accordingly we have
experienced margin pressure in this segment.
• Appliances. Products in this group include hair dryers, straighteners, curling irons, hairsetters, women’s shavers,
mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths and body
massagers. Net sales for fiscal 2007 increased 7.5 percent, or $26,119, compared to fiscal 2006. Higher average
unit selling prices contributed 4.4 percent to sales growth while increases in unit volumes contributed 3.1 percent
36
to sales growth. We achieved higher average unit selling prices by consumers trading up, particularly in hand
held hair dryers, to more professional grade models with added features and functionality. We believe appliance
product sales under the Bed Head® by TIGI and the Toni&Guy® licensed brand names will provide opportunities
for additional sales in this line of business. Vidal Sassoon®, Revlon®, Toni&Guy®, Hot Tools®, Dr. Scholl's®,
Sunbeam®, and Health o meter® were key brands in this group.
• Grooming, Skin Care, and Hair Products. Net sales for fiscal 2007 increased 3.0 percent, or $2,548, over fiscal
2006. From a domestic perspective, sales were soft during the first half of the year and picked up modestly in the
second half, bolstered by the launch of Brut Revolution® fragrance line. Our Sea Breeze® products also posted
solid net sales growth, up 14.9 percent for the 2007 fiscal year when compared to 2006 fiscal results. Latin
American Brut® growth continued to be exceptionally strong, posting net sales growth up 24.3 percent for the
2007 fiscal year when compared to fiscal 2006. For the product group overall, unit volumes contributed 3.3
percent to sales growth offset by a 0.3 percent average unit selling price decline. Unit selling price declines were
due to the loss of higher price-point unit volume in the United States and offset by lower price-point unit volume
gains in Latin America. Our grooming, skin care, and hair care portfolio includes the following brands: Brut®,
Brut Revolution®, Sea Breeze®, SkinMilk®, Vitalis®, Ammens®, Condition 3-in-1®, Final Net®, Vitapointe®,
TimeBlock® and Epil-Stop®.
• Brushes, Combs, and Accessories. Net sales for fiscal 2007 increased 23.9 percent, or $7,210 compared to fiscal
2006. This was due to new customers and product development and positioning changes made over the last year.
Our new lines and mix of Vidal Sassoon® and Revlon® accessories, high end private label products, and other
product initiatives are achieving higher unit prices along with new distribution. Higher average unit selling prices
contributed 15.7 percent to sales growth while increases in unit volumes contributed 8.2 percent to sales growth.
We believe brushes, combs and accessories sales under the Bed Head® by TIGI and the Toni&Guy® licensed
brand names will provide opportunities for additional sales in this line of business. Vidal Sassoon®, Revlon® and
Karina® were the key selling brands in this line.
Net sales decreased 7.9 percent, or $39,459, in our Personal Care segment in fiscal 2006 under fiscal 2005. On a
percentage point basis (percent of total consolidated net sales), the net decline accounted for 6.8 percent of the change in
overall consolidated net sales. The grooming, skin care and hair care products business provided 0.9 percentage points, or
$5,044, of our overall net sales growth. This was offset by declines of 7.0 percentage points, or $40,796, in our appliance
business and 0.7 percentage points, or $3,707, in our brushes, combs and hair accessories business. The primary reason
for the revenue decline was our response to competitive pricing pressures both domestically and abroad, a loss of product
placement, weak market conditions in the United Kingdom where key retailers exited calendar 2005 with significant
excess retail inventories, and high customer returns in the first quarter of fiscal 2006. With the exception of the United
Kingdom, we experienced net sales growth in every other European market where we operate. In fiscal 2006, appliances
and brushes, combs and accessories accounted for 82 percent of the segment’s net sales, while grooming, skin care and
hair care products accounted for 18 percent of the Personal Care segment’s net sales.
Housewares
Our Housewares segment reports the operations of OXO International (“OXO”) whose products include kitchen
tools, cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash cans, storage and organization
products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting products.
Net sales in our Housewares segment increased 7.3 percent, or $9,308, to $137,108 in fiscal 2007 compared to
$127,800 in fiscal 2006. Higher average unit selling prices contributed 8.9 percent to sales growth, offset by a 1.6 percent
impact of unit volume decreases. Unit selling prices increased because the Houseware segment’s business has been
expanding its product mix into higher price point goods such as trash cans, tea kettles, and hand tools. This was partially
offset by first fiscal quarter declines in unit volumes due to issues associated with our transition to our new distribution
center. In fiscal 2007, food preparation products accounted for approximately 80 percent of the segment’s net sales,
household cleaning tools accounted for approximately 12 percent of the segment’s net sales, and storage, organization,
garden tools and all other categories accounted for approximately 8 percent of the segment’s net sales.
37
Net sales in our Housewares segment increased $47,657, to $127,800 in fiscal 2006 compared to $80,143 in fiscal
2005. Reported net sales for fiscal 2005 excluded $21,255 of pro forma net sales for the three months ended May 31,
2004 since we did not acquire OXO until June 1, 2004. On a fully comparable period basis, our Housewares segment
sales would be $127,800 for fiscal 2006 versus $101,398 for the full fiscal 2005 year, for a net sales increase of 26.0
percent. Growth was driven by continued extension of our business within existing key customers, and the addition of a
new line of hand tools featuring our highly desired non-slip Good Grips® comfort and ergonomic design, which had
significant initial shipments in the second half of fiscal 2006. In addition to our new line of hand tools, we expanded our
tea kettle line and introduced a line of unique silicone based textile kitchen mitts and trivets which have been well
received. In fiscal 2006, food preparation products accounted for 76 percent of the segment’s net sales, household
cleaning tools accounted for 11 percent of the segment’s net sales, and storage, organization, garden tools and all other
categories accounted for 13 percent of the segment’s net sales.
Geographic Net Sales:
The following table sets forth, for the periods indicated, our net sales by geographic region, in dollars, as a
percentage of net sales, and as a year-over-year percentage change.
Fiscal Year Ended (in thousands)
2006
2005
2007
% of Net Sales (1)
2006
2007
2005
% Change
07/06
06/05
Net sales by geographic region
United States
Canada
Europe and other
Latin America
Total net sales
$
$
$
511,786
25,687
57,044
40,415
634,932
487,620
22,331
48,070
31,726
589,747
$
$
$
475,212
20,707
60,671
24,959
581,549
80.6% 82.7% 81.7%
3.6%
3.8%
8.2% 10.4%
4.3%
5.4%
100.0% 100.0% 100.0%
4.0%
9.0%
6.4%
2.6%
5.0%
7.8%
15.0%
18.7% -20.8%
27.4% 27.1%
1.4%
7.7%
(1) Net sales percentages by geographic region are computed as a percentage of the geographic region’s net sales to total
net sales.
In fiscal 2007, the United States accounted for 4.1 percentage points (percent of total consolidated net sales), of
our consolidated net sales growth, or $24,166, while international operations contributed an overall 3.6 percentage points
of our consolidated net sales growth, or $21,019 of our consolidated net sales growth. Latin American operations
accounted for 1.5 percentage points of our consolidated net sales growth, or $8,689. Canadian operations accounted for
0.6 percentage points of our consolidated net sales growth, or $3,356. Europe and other country operations rebounded
nicely in fiscal 2007 contributing 1.5 percentage points, or a $8,974 consolidated net sales increase. Net sales in the
United Kingdom accounted for $5,182 of the European and other consolidated net sales gains. Expanded placements with
key retailers, new grocer and wholesale distribution, and improved retail market conditions contributed to the gain.
Growth in remaining European and other foreign markets in which we operate contributed for $3,792 of consolidated net
sales growth. Our net sales growth included the benefit of a net positive foreign exchange impact of $2,738 in fiscal
2007. In fiscal 2007 Canada, Europe and other, and Latin American regions accounted for approximately 21, 46 and 33
percent of international net sales, respectively.
In fiscal 2006, the United States accounted for 2.1 percentage points (percent of total consolidated net sales), of
our consolidated net sales growth, or $12,408, while international operations experienced an overall 0.7 percentage point
decline, or $4,210 of our consolidated net sales growth. Latin American operations accounted for 1.1 percentage points of
our consolidated net sales growth, or $6,767. Canadian operations accounted for 0.3 percentage points of our
consolidated net sales growth, or $1,624. Europe and other country operations accounted for a 2.1 percentage point
decline, or a $12,601 consolidated net sales decline. Net sales in the United Kingdom accounted for $16,209 of the
European and other consolidated net sales decline due to weak retail market conditions in most of our Personal Care
segment product categories exacerbated by key retailers ending calendar 2005 with significant excess retail inventories.
With the exception of the United Kingdom, we saw net sales growth in remaining European and other foreign markets in
which we operate. Our net sales growth included the benefit of a net positive foreign exchange impact of $1,204 in fiscal
2006. In fiscal 2006, Canada, Europe and other, and Latin American regions accounted for approximately 22, 47 and 31
percent of international net sales, respectively.
38
Gross Profit Margins:
Gross profit, as a percentage of net sales, decreased to 44.0 percent in fiscal 2007 from 45.2 percent in fiscal
2006. The 1.2 percent decrease in gross profit was due to:
• Price concessions, allowances and accommodations granted to customers for late shipments in our Housewares
segment during the first fiscal quarter.
• The Housewares segment’s expansion into higher unit price, lower margin product lines.
• Margin pressure in both segments, primarily due to raw materials and energy price increases.
• Promotional pricing and close-out selling throughout the fiscal year, primarily in the Personal Care segment, in
order to reduce domestic inventory levels.
• An increase in the amount of direct import programs we manage for our customers. Under a direct import
program, we design and arrange for the shipment of product specifically for a particular customer. The product is
shipped with the customer as the importer of record and title to the goods transfers upon departure from our
manufacturers. The customer is responsible for all inbound transportation and importation costs which results in
us charging a reduced selling price on the related goods.
Overall, margins continued to benefit from favorable currency exchange rates, The British Pound, Euro, Canadian Dollar
and Brazil Real were all a source of exchange rate gains. The Mexican Peso partially offset these gains as it continued to
weaken against the U.S. dollar throughout the year. In fiscal 2007, almost all of our products were purchased by us in
U.S. dollars.
Gross profit, as a percentage of net sales, decreased to 45.2 percent in fiscal 2006 from 47.2 percent in fiscal
2005. The 2.0 percent decrease in gross profit was due to:
the higher costs of customer promotion programs which reduced net sales;
•
•
• price increases on raw materials used in our grooming, skin care, and hair products.
a reduction in sales prices on certain key items in order to maintain our competitive position; and
Overall, margins benefited from favorable currency exchange rates; however, exchange rates were not as favorable in
2006 as they were in 2005. The Canadian Dollar, Brazil Real and Mexican Peso were all a source of exchange rate gains.
These gains where somewhat offset by unfavorable exchange rates for the British Pound and Euro in the second half of
fiscal 2006. In fiscal 2006, almost all of our products were purchased in U.S. dollars.
Selling, general, and administrative expense (“SG&A” ):
SG&A decreased slightly to 32.9 percent of net sales in fiscal 2007 from 33.1 percent in fiscal 2006. Expenses as
a percentage of sales remained relatively flat year over year, but remain relatively high from a recent historical
perspective. In fiscal 2007, impacts of depreciation and higher facility related costs from the operational transition of our
domestic distribution system, increased personnel costs, and compliance charges paid to vendors for claims associated
with our Housewares segment’s order processing and shipping issues occurring earlier during the fiscal year, all
contributed to keeping cost levels high. We continue to evolve our operations and processes in ways we believe will
ultimately drive down costs. We believe that our competitive position and the long term health of our business depends
on fulfillment and transportation excellence. As our operations with our retailers, especially large retailers, become
increasingly intertwined, the breadth and complexity of services we must render in order to earn more shelf space and,
thus, increase market share, escalate. Consequently, it has become increasingly more expensive to do business with our
customers and we expect this trend to continue. While we expect to see costs continue to moderate throughout fiscal
39
2008, we do not expect to achieve anticipated cost savings relating to our distribution center consolidation until early to
the middle of fiscal 2008. We can make no assurances that anticipated cost savings and efficiencies relating to our
distribution consolidation will be ultimately achieved.
SG&A increased to 33.1 percent of net sales in fiscal 2006 from 29.7 percent in fiscal 2005. The 3.4 percent
increase in SG&A between fiscal 2006 and fiscal 2005 was principally due to:
•
increased personnel expenses partially offset by lower incentive compensation costs;
• higher depreciation associated with our new information system;
•
increased advertising;
• higher distribution costs due to the use of outside third party warehouses to manage and distribute certain
inventories which were consolidated into our new 1,200,000 square foot distribution center in Mississippi;
• non-recurring moving and start-up costs incurred in fourth quarter of fiscal 2006 in connection with the physical
transition to the new distribution center;
• higher outbound freight costs (primarily from a sharp rise in fuel surcharges);
• higher design royalty costs due to the growth in the Housewares segment; and
•
increased operating rent expense and property taxes.
Operating Income:
Operating income by operating segment for fiscal 2007, 2006 and 2005 was as follows:
Fiscal Year Ended (in thousands)
2006
2005
2007
% of Net Sales (1)
2006
2007
2005
% Change
07/06
06/05
Operating income by segment
Personal Care
Housewares
Total operating income
$
$
42,530
27,886
70,416
$
$
37,260
34,118
71,378
$
76,993
25,031
102,024
$
8.5%
8.1% 15.4%
20.3% 26.7% 31.2%
11.1% 12.1% 17.5%
14.1% -51.6%
-18.3% 36.3%
-1.3% -30.0%
(1) Operating income percentages by segment are computed as a percentage of the segments’ net sales.
Operating profit for each operating segment is computed based on net sales, less cost of goods sold and any
selling, general, and administrative expenses (“SG&A”) associated with the segment. The selling, general, and
administrative expenses used to compute each segment’s operating profit are comprised of SG&A directly associated with
the segment, plus overhead expenses that are allocable to the operating segment. In connection with the acquisition of our
Housewares segment, the seller agreed to perform certain operating functions for the segment for a transitional period of
time that ended in February 2006. The costs of these functions were reflected in SG&A for the Housewares segment’s
operating income. During the transitional period, we did not make an allocation of our corporate overhead to the
Housewares segment.
For fiscal year ended February 28, 2007, we began making an allocation of corporate overhead and distribution
center expenses to Housewares in lieu of transition charges previously recorded. For the fiscal year ended February 28,
2007, we allocated expenses totaling $12,753 to the Housewares segment, some of which were previously absorbed by the
Personal Care segment. For fiscal 2006 and the last nine months of fiscal 2005 transition charges of $11,241 and $4,656,
respectively, were used to compute the Housewares segments operating income.
40
During the first quarter of fiscal 2007, we completed the transition of our Housewares segment’s operations to our
internal operating systems and our new distribution center in Southaven, Mississippi. During the last quarter of fiscal
2007, we completed the process of consolidating our domestic appliance inventories into the same new distribution center.
Because of these transitions, we have incurred, and will continue to incur, additional expenses that we believe will decline
as operations in the new distribution center stabilize at some point later in fiscal 2008.
We are in the process of re-evaluating our allocation methodology, and plan to change our methodology in fiscal
2008 to better reflect the evolving economics of our operation. We expect the new methodology may result in some
additional reduction in operating income for the Housewares segment, offset by an increase in the operating income for
the Personal Care segment. Until we finalize our approach, the extent of this operating income impact between the
segments cannot be determined.
Consolidated operating income declined 1.3 percent, or $962, to $70,416 in fiscal 2007 versus $71,378 in fiscal
2006. From a consolidated perspective, the key driver of this relatively flat year over year performance was higher cost of
sales, principally due to the impact of raw materials pricing.
Personal Care
The Personal Care segment’s operating income increased $5,270, or 14.1 percent, for fiscal 2007 compared to
fiscal 2006, and decreased $39,733, or 51.6 percent, for fiscal 2006 compared to fiscal 2005. The Personal Care
segment’s operating income as a percentage of the segment’s net sales was 8.5, 8.1 and 15.4 percent for fiscal 2007, 2006
and 2005, respectively. Sales increases, better SG&A cost absorption, partially offset by increased cost of sales as
previously discussed, accounted for the increase in operating income in fiscal 2007 from fiscal 2006. Sales declines,
increased cost of sales and increases in SG&A as previously discussed, accounted for the decrease in operating income in
fiscal 2006 from fiscal 2005.
Housewares
The Housewares segment’s operating income decreased $6,232 or 18.3 percent for fiscal 2007 compared to fiscal
2006. As previously discussed, a number of factors accounted for the decline:
•
•
lower sales in the first fiscal quarter, due to our transition to a new distribution center;
the segment’s expansion into higher unit price, lower margin product lines;
• material price increases;
•
•
•
the impacts of depreciation and higher facility related costs;
compliance charges paid to vendors for claims associated with our Housewares segment’s order processing and
shipping issues occurring earlier during the fiscal year; and
added corporate overhead and distribution center expense allocations that were previously absorbed by the
Personal Care segment.
The Housewares segment’s operating income increased $9,087, or 36.3 percent, for fiscal 2006 compared to fiscal
2005. $7,388 of the increase was due to the inclusion of the first quarter’s operations in fiscal 2006, while fiscal 2005 did
not include first quarter operations since we did not acquire OXO until June 1, 2004. Gross profit declined due to product
mix as OXO expanded its food preparation business, adding a number of items that have lower margins, but carry higher
price points.
The Housewares segment’s operating income as a percentage of the segment’s net sales was 20.3, 26.7 and 31.2
percent for fiscal 2007, 2006 and 2005, respectively.
41
Interest expense and Other income (expense):
Interest expense increased to $17,912 in fiscal 2007 compared to $16,866 in fiscal 2006. The overall increase is
principally due to higher interest rates on floating rate debt. As discussed elsewhere in this report, at the end of the third
quarter of fiscal 2007, we entered into interest rate swap agreements to effectively fix interest rates on most of our floating
rate debt.
Interest expense increased to $16,866 in fiscal 2006 compared to $9,870 in fiscal 2005. The overall increase in
interest expense is the result of the inclusion of a full year’s interest expense from the use of both short-term and long-
term debt to fund the fiscal 2005 acquisitions, $914 of interest incurred on IRS tax payments made to settle tax disputes
related to prior years (see Note (8) to our consolidated financial statements), and an increase in interest rates on our
variable rate debt.
Other income (expense) was $2,643, $1,290, and ($2,575) in fiscal 2007, 2006 and 2005, respectively. The
following schedule shows key components of other income (expense):
Fiscal Year Ended (in thousands)
2006
2005
2007
% of Net Sales (1)
2006
2007
2005
% Change
07/06
06/05
Other income (expense):
Interest income
Realized and unrealized gain (losses) on securities
Litigation settlement gain, net
Miscellaneous other income (expense), net
Total other income (expense)
* Calculation is not meaningful
$
$
$
1,965
2
450
226
2,643
889
(135)
400
136
1,290
359
(3,410)
-
476
(2,575)
$
$
$
0.3%
0.0%
0.1%
0.0%
0.4%
0.2%
0.0%
0.1%
0.0%
0.2%
0.1%
-0.6%
0.0%
0.1%
-0.4%
121.0% 147.6%
-101.5% -96.0%
12.5%
*
66.2% -71.4%
104.9% -150.1%
(1) Sales percentages are computed as a percentage of total net sales.
Fiscal year 2007 interest income was higher than the previous year due to the additional interest income we
earned on accumulating levels of temporarily invested cash balances over the year. Fiscal year 2006 interest income was
higher than the previous year primarily due to the receipt of $463 of interest on an income tax refund.
Realized and unrealized gain (losses) on securities for fiscal 2007, 2006 and 2005 included unrealized losses of
$60, $30 and $2,910, respectively on marketable securities acquired in connection with the sale of Tactica (see Note (16)
to our consolidated financial statements). At acquisition, the securities had a market value of $3,030. At February 28,
2007, the market value of these securities was $30.
We recorded other income of $450 and $400 in fiscal 2007 and 2006, respectively, for favorable litigation
settlements.
The principal items comprising miscellaneous other income for fiscal 2006 include a gain on the sale of a
distribution center of $1,304 offset by a loss on a bankruptcy settlement of $1,550 (see Note (16) to our consolidated
financial statements).
Income tax expense:
Our fiscal 2007, 2006 and 2005 income tax expense was 9.2, 11.6 and 14.4 percent, respectively of net income
before taxes, continuing our trend of lower rates over the past few years. The declines are due to the continuing trend of
more of our income in fiscal 2007, 2006 and 2005 being taxed in lower tax rate jurisdictions as non-U.S. operations
continue to become a larger portion of our business.
We established a Macao offshore company (“MOC”) and began operating from Macao in the third quarter of
fiscal 2005. As a MOC we have been granted an indefinite tax holiday and currently pay no taxes. In addition, in fiscal
42
2006 we incurred tax losses in certain higher rate jurisdictions, but this impact was offset somewhat by $2,792 of
additional U.S. tax arising from our fourth quarter repatriation of $48,554 in foreign earnings as allowed under The
American Jobs Creation Act of 2004 (see Note (8) to our consolidated financial statements).
In fiscal 2005, we decreased our tax accruals by $2,046 due to the settlement reached with the United States
Internal Revenue Service for fiscal years 2000 through 2002. Had these accruals not been adjusted, our income tax
expense for fiscal 2005 would have been 16.7 percent of net income before taxes.
DISCONTINUED OPERATIONS
As more fully described in Note (16) to our consolidated financial statements, on April 29, 2004 we completed
the sale of our 55 percent interest in Tactica back to certain shareholder-operating managers. In exchange for our 55
percent share of Tactica and the release of $16,396 of its secured debt and accrued interest owed to us, we received
marketable securities, intellectual properties, and the right to certain tax refunds.
Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-
Lived Assets” (“SFAS 144”) provides accounting guidance for accounting for segments to be disposed by sale and, in our
circumstances, requires us to report Tactica as a discontinued operation. SFAS 144 requires us to report Tactica’s
operating results, net of taxes, as a separate summarized component after net income from continuing operations for each
year presented. In fiscal 2005, we recorded a loss of $222 net of taxes in connection with the discontinued operations of
Tactica. The accompanying consolidated statements of income and consolidated statements of cash flows contain all
appropriate reclassifications for each year presented.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Selected measures of our liquidity and capital resources for fiscal years ended 2007 and 2006 are shown below:
SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL RESOURCES
Accounts Receivable Turnover (Days) (1)
Inventory Turnover (Times) (1)
Working Capital (in thousands)
Current Ratio
Ending Debt to Ending Equity Ratio (2)
Return on Average Equity (1)
Fiscal Year Ended
2007
2006
71.6
2.2
$238,131
2.8 : 1
47.4%
10.0%
75.2
1.9
$185,568
2.5 : 1
55.7%
11.0%
(1) Accounts receivable turnover, inventory turnover, and return on average equity computations use 12 month trailing
sales, cost of sales or net income components as required by the particular measure. The current and four prior
quarters' ending balances of accounts receivable, inventory, and equity are used for the purposes of computing the
average balance component as required by the particular measure.
(2) Total debt is defined as all debt outstanding at the balance sheet date. This includes the sum of the following lines on
our consolidated balance sheets: “Current portion of long-term debt” and “Long-term debt, less current portion.” For
further information regarding this financing, see Notes (5) and (7) to our consolidated financial statements and our
discussion below under “Financing Activities.”
43
Operating Activities:
From a balance sheet management perspective, we grew stronger over the last fiscal year. We grew our total
assets by $48,528, yet our inventories decreased by $24,331, and we reduced our debt by $14,974. Operating activities
provided $90,406 of cash during fiscal 2007, and we ended the fiscal year with $91,205 of cash and temporary
investments.
In fiscal 2007, our accounts receivable increased $8,607 to $115,896 while our accounts receivable turnover
decreased to 71.6 days from 75.2 days in fiscal 2006. This calculation is based on a rolling five quarter accounts
receivable balance. In fiscal 2007, accounts receivable turnover improved due to more aggressive management of
collections and sales allowances now that we have gained sufficient operating experience with new systems put into place
in the later half of fiscal 2005.
In fiscal 2007, a focus on inventory reductions contributed $24,331 of additional cash flow from operations.
As a result, over the fiscal year, inventory turnover increased to 2.2 from 1.9 in fiscal 2006.
Working capital increased to $238,131 at the end of fiscal 2007 compared to $185,568 at the end of fiscal 2006.
As a result of our improved working asset management, our current ratio increased to 2.8:1 in fiscal 2007 from 2.5:1 in
fiscal 2006.
Investing Activities:
In fiscal 2007, investing activities used $62,479 of cash compared with $35,264 used in fiscal 2006. Listed below
are some significant highlights of our 2007 investing activities:
• We spent $507 on the Housewares segment conversion to our new information systems.
• We spent $830 to acquire office space in Mexico City and $247 to remodel and furnish this and other facilities in
Latin America.
• We spent $1,660 on additional storage racking, material handling equipment and building improvements in our
new Southaven, Mississippi distribution center.
• We spent $1,631 on molds and tooling, $831 on information technology infrastructure, and $923 for recurring
additions and/or replacements of fixed assets in the normal and ordinary course of business.
• We spent $354 for lighting product trademarks acquired from Vessel, Inc.
• We spent $412 on patent costs and registrations, including $120 of patents acquired from Vessel, Inc.
• We temporarily invested excess cash on hand in AAA auction rate notes, AAA variable rate demand bonds, and
similar investments that we disposed of within 35 or fewer days. We consider these investments to be highly
liquid and believe they carry minimal risk of principal fluctuation. These instruments are classified as
“Temporary investments” and are stated on our consolidated balance sheets at market value. In fiscal 2007, we
purchased $147,725 and sold $91,975 of such securities leaving $55,750 on hand at year end.
• We sold 3.9 acres of raw land adjacent to our El Paso, Texas office and distribution center. The land was sold for
$666 and resulted in a gain on the sale of $422.
Listed below are some significant highlights of our 2006 and 2005 investing activities:
• During the second quarter of fiscal 2006, we commenced construction of a 1,200,000 square foot distribution
center in Southaven, Mississippi. On November 22, 2005 we took possession of the completed distribution center
44
paying a final purchase price of $33,744. Total costs of the project, including material handling equipment and
fixtures was $45,862. The project was funded out of a combination of cash from operations, our existing
revolving line of credit and draws against $15,000 of Industrial Revenue Bonds, as further discussed under Note
(7) to our consolidated financial statements and the proceeds from the sale of our existing distribution center in
Southaven, Mississippi, as discussed below.
• On February 2, 2006, we sold a 619,000 square foot distribution center in Southaven, Mississippi for $16,850
recording a gain on the sale of $1,304.
•
•
•
•
•
•
•
•
In fiscal 2006, we incurred capital expenditures of $267 on our Global Enterprise Resource Planning System.
Capital expenditures on this system decreased from levels of spending in fiscal 2005. Also during fiscal 2006, we
spent $842 converting OXO to the new system.
In fiscal 2006, we also invested $1,497 in new molds and tooling, $689 on distribution equipment and material
handling systems at our existing operational facilities, $1,183 on general computer software and hardware and
$1,589 for recurring additions and/or replacements of fixed assets in the normal and ordinary course of business.
In fiscal 2006, we spent $438 on new patent costs and registrations.
In fiscal 2006, we purchased $15,400 and sold $15,400 of temporary investments and had no such securities at
fiscal year end. We temporarily invested excess cash on hand in AAA auction rate notes, AAA variable rate
demand bonds, and similar investments that we disposed of within 35 or fewer days. We consider these
investments to be highly liquid and believe they carry minimal risk of principal fluctuation. These instruments
are classified as “Temporary investments” and are stated on our consolidated balance sheets at market value.
In fiscal 2005, we spent $273,173 to acquire certain assets and liabilities of OXO International from WKI Holding
Company, Inc. OXO serves as the underlying business platform for our new Housewares segment, offering home
products and tools in several categories including kitchen, cleaning, barbecue, barware, garden, automotive,
storage and organization. During fiscal 2005, $262,228 of the purchase price and subsequent purchase price
adjustments were recorded under the investing activities section of the cash flow statement for the fiscal year
ended February 28, 2005.
In fiscal 2005, we acquired certain assets related to the worldwide production and distribution of TimeBlock®
and SkinMilk® body and skin care products lines from Naterra International, Inc. TimeBlock® is a line of
clinically tested anti-aging skin care products. SkinMilk® is a line of body, bath and skin care products enriched
with real milk proteins, vitamins and botanical extracts. The assets consist principally of patents, trademarks and
trade names, product formulations and production technology, distribution rights and customer lists. We paid the
purchase price of $12,001 in cash funded out of our revolving line of credit. The purchase price was allocated
$11,906 to trademarks and $95 to property and equipment. The entire purchase price was recorded in the
investing activities section of the cash flow statement for the fiscal year ended February 28, 2005.
In fiscal 2005, we sold a 12,000 square foot office facility in Hong Kong for $6,726 resulting in a $22 loss. The
facility was previously used as a procurement office, procurement showroom and staff training site. These
functions were moved to other facilities we maintain in Macao and China. The proceeds from the sale of this
facility are recorded under the investing activities section of the cash flow statement for the fiscal year ended
February 28, 2005.
In fiscal 2005, we incurred capital expenditures of $5,760 on our Global Enterprise Resource Planning System.
On September 7, 2004, we went live on the new system. Capital spending on the initial implementation was
substantially complete. In fiscal 2005, we spent $198 to begin the process of converting OXO to the new system.
45
•
•
•
In fiscal 2005, we also invested $991 in new molds and tooling, $1,734 on land to be used for future expansion,
$876 on additional computer software and hardware and $2,101 for recurring additions and/or replacements of
fixed assets in the normal and ordinary course of business.
In fiscal 2005, we invested an additional $374 on new patent costs and registrations.
In fiscal 2005, we purchased $13,000 and sold $28,000 of temporary investments and had no such securities at
fiscal year end. We temporarily invested excess cash on hand in AAA auction rate notes, AAA variable rate
demand bonds, and similar investments that we disposed of within 35 or fewer days. We consider these
investments to be highly liquid and believe they carry minimal risk of principal fluctuation. These instruments
are classified as “Temporary investments” and are stated on our consolidated balance sheets at market value.
Financing Activities:
During fiscal 2007, financing activities used $10,792 of cash. Highlights of those activities follow:
• During fiscal 2007, we drew $7,660 against our $15,000 industrial revenue bond established to acquire
equipment, machinery and related assets for our new Southaven, Mississippi distribution center. At May 31,
2006, we converted the $12,634 total drawn into a five-year Industrial Development Revenue Bond. We paid off
$4,974 of this debt in September 2006 and in January 2007 we paid off $7,660, the balance of the debt. Also in
January 2007, we paid a $10,000 principal installment on our fixed rate senior debt.
• During fiscal 2007, 247,686 share option grants were exercised for common shares providing $3,067 of cash and
$544 of tax benefits. Purchases through our employee stock purchase plan of 22,348 shares provided an
additional $375 of cash. No common shares were repurchased during the fiscal year.
• On March 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), which
requires all share-based payments to employees to be recognized in the financial statements based on their fair
values using an option-pricing model at the date of grant. We have elected to use the modified prospective method
for adoption, which requires compensation expense to be recorded for all unvested stock options beginning in the
first quarter of adoption, based on the fair value at the original grant date. Prior year financial statements have not
been restated. As required by SFAS 123R, we recorded $196 of deferred tax benefits associated with the year’s
share-based compensation expense as cash flow from financing activities under the line entitled “Share-based
compensation tax benefit” in our fiscal 2007 consolidated statement of cash flow.
During fiscal 2006, financing activities used $2,923 of cash. Highlights of those activities follow:
• During fiscal 2006, 161,675 share option grants were exercised for common shares providing $1,798 of cash and
$402 of tax benefits. Purchases through our employee stock purchase plan of 22,171 shares provided an additional
$396 of cash. No common shares were repurchased during the fiscal year.
•
•
In August 2005, we entered into a Loan Agreement with the Mississippi Business Finance Corporation (the
“MBFC”) in connection with the issuance by the MBFC of up to $15,000 Mississippi Business Finance
Corporation Taxable Industrial Development Revenue Bonds, Series 2005 (Helen of Troy LP Southaven, MS
Project) (the “Bonds”). The proceeds of the Bonds are to be used for the acquisition and installation of equipment,
machinery and related assets located in our new Southaven, Mississippi distribution center then under
construction. Interim draws, accumulating up to the $15,000 limit could be made through May 31, 2006, with
interest paid quarterly. The outstanding principal converted to five-year Bonds with principal paid in equal
annual installments beginning May 31, 2007, and interest paid quarterly. In September 2005 we made an initial
draw of $4,974 under the Bonds. At that time, pursuant to the Loan Agreement, we elected a 12-month LIBOR
rate plus a margin of 1.125 percent.
In January 2006, we paid a $10,000 principal installment on our fixed rate senior debt.
46
During fiscal 2005, financing activities provided $202,451 of cash. Highlights of those activities follow:
• During fiscal 2005, we entered into a series of financing transactions that established a new five-year, $75,000
revolving credit facility, cancelled an existing $50,000 revolving credit facility, borrowed and subsequently repaid
$200,000 under a Term Loan Credit Agreement, and issued $225,000 of floating rate senior debt with five, seven
and ten year maturities.
• We entered into a five-year $75,000 Revolving Line of Credit Agreement, dated as of June 1, 2004, with Bank of
America, N.A. and other lenders. Borrowings under the Revolving Line of Credit Agreement accrue interest
equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively,
upon timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month
LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the “Leverage Ratio” at the time of the
borrowing. The “Leverage Ratio” is defined by the Revolving Line of Credit Agreement as the ratio of total
consolidated indebtedness, including the subject funding on such date to consolidated EBITDA for the period of
the four consecutive fiscal quarters most recently ended, with EBITDA adjusted on a pro forma basis to reflect the
acquisition of OXO and the disposition of Tactica. The rates paid on various draws during the period from June 1,
2004 through February 28, 2005 ranged from 2.195 percent to 5.500 percent. The Revolving Line of Credit
Agreement allows for the issuance of letters of credit up to $10,000. Outstanding letters of credit reduce the
$75,000 borrowing limit dollar for dollar. All amounts are due and the facility terminates on June 1, 2009. The
obligations under the agreement are unsecured. The agreement has been guaranteed, on a joint and several basis,
by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
On June 29, 2004, we closed on a $225,000 Floating Rate Senior Note (“Senior Notes”) financing arranged by
Banc of America Securities LLC with a group of ten financial institutions. The Senior Notes consist of $100,000
of five year notes, $50,000 of seven year notes, and $75,000 of ten year notes. The five, seven and ten year notes
mature on June 29, 2009, 2011 and 2014, respectively. Interest on the notes is payable quarterly. Interest rates
are reset quarterly based on the three-month LIBOR rate plus 85 basis points for the five and seven year notes,
and the three-month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during fiscal 2005 on
these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for
the ten year notes. The Senior Notes allow for prepayment subject to the following terms: five year notes could
be prepaid in the first year with a 2 percent penalty, thereafter there is no penalty; seven and ten year notes could
be prepaid after one year with a 1 percent penalty, and after two years with no penalty. The proceeds of the
Senior Notes financing were used to repay the $200,000 borrowings under a prior term loan credit facility, and
$25,000 of the outstanding borrowings on our $75,000 Revolving Line of Credit Agreement. The Senior Notes
are unsecured and require the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, consolidated
net worth levels, and other customary covenants. The Senior Notes have been guaranteed, on a joint and several
basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
Our ability to access our Revolving Line of Credit facility is subject to our compliance with the terms and
conditions of the credit facility and long-term debt agreements, including financial covenants. The financial covenants
require us to maintain certain Debt/EBITDA ratios, fixed charge coverage ratios, consolidated net worth levels, and other
financial requirements. Certain covenants as of February 28, 2007, limit our total outstanding indebtedness from all
sources to no more than 3.5 times the latest twelve months trailing EBITDA. These covenants effectively limited our
ability to incur no more than $55,367 of additional debt from all sources, including draws on our Revolving Line of Credit
Agreement. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under
certain conditions. In the event we were to default on any of our other debt, it would constitute a default under our credit
facilities as well. As of February 28, 2007, we are in compliance with the terms of the various credit agreements.
47
Contractual Obligations:
Our contractual obligations and commercial commitments, as of the end of fiscal 2007 were:
PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED THE LAST DAY OF FEBRUARY
(in thousands)
Total
2008
1 year
2009
2 years
2010
3 years
2011
4 years
2012
5 years
After
5 years
Term debt - fixed rate
Term debt - floating rate *
Long-term incentive plan payouts
Interest on floating rate debt *
Interest on fixed rate debt
Open purchase orders
Minimum royalty payments
Advertising and promotional
Operating leases
Open letters of credit pending settlement
Other
Total contractual obligations
$
$
$
$
$
$
$
25,000
225,000
3,525
59,560
4,191
68,792
68,530
76,238
11,426
394
358
543,014
10,000
-
1,430
13,343
1,612
68,792
2,636
10,114
1,602
394
358
110,281
3,000
-
1,420
13,343
950
-
6,774
5,659
1,127
-
-
32,273
3,000
100,000
675
9,416
733
-
8,393
6,010
1,152
-
-
129,379
3,000
-
-
7,453
516
-
8,110
7,039
882
-
-
27,000
3,000
50,000
-
5,489
299
-
7,800
7,199
870
-
-
74,657
3,000
75,000
-
10,516
81
-
34,817
40,217
5,793
-
-
169,424
$
$
$
$
$
$
$
* The future obligation for interest on our variable rate debt has historically been estimated assuming the rates in effect
as of the end of the latest fiscal quarter on which we are reporting. As mentioned in Note 14 to the consolidated
financial statements, on September 28, 2006, the Company entered into interest rate hedge agreements (the “swaps”)
in conjunction with its outstanding unsecured floating interest rate $100,000, 5 Year; $50,000, 7 Year; and $75,000,
10 Year Senior Notes. The swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the
Senior Notes. The swaps effectively fix the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01
percent, respectively, beginning September 29, 2006. Consequently, the estimated future variable rate interest
obligations related to this debt have been computed using these rates.
Off-Balance Sheet Arrangements:
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 flows 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. In addition, we continue to evaluate
acquisition opportunities on a regular basis and may augment our internal growth with acquisitions of complementary
businesses or product lines. We may finance acquisition activity with available cash, the issuance of common shares, or
with additional debt, depending upon the size and nature of any such transaction and the status of the capital markets at
the time of such acquisition.
48
CRITICAL ACCOUNTING POLICIES
The SEC defines critical accounting policies as “those that are both most important to the portrayal of a
company's financial condition and results, and require management’s most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain.” We consider the
following policies to meet this definition.
Income Taxes - We must make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities
because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We
must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must
increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax
assets, our tax provision is increased in any period in which we determine that the recovery is not probable.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of other
complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax
jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately
determine that payment of these amounts are unnecessary, we reverse the liability and recognize a tax benefit during the
period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for
taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to
be.
Estimates of credits to be issued to customers - We regularly receive requests for credits from retailers for
returned products or in connection with sales incentives, such as cooperative advertising and volume rebate agreements.
We reduce sales or increase selling, general, and administrative expenses, depending on the nature of the credits, for
estimated future credits to customers. Our estimates of these amounts are based either on historical information about
credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. This process entails a
significant amount of inherent subjectivity and uncertainty.
Valuation of inventory - We account for our inventory using a first-in first-out system in which we record
inventory on our balance sheet at the lower of its average cost or its net realizable value. Determination of net realizable
value requires us to estimate the point in time at which an item's net realizable value drops below its cost. We regularly
review our inventory for slow-moving items and for items that we are unable to sell at prices above their original cost.
When we identify such an item, we reduce its book value to the net amount that we expect to realize upon its sale. This
process entails a significant amount of inherent subjectivity and uncertainty.
Carrying value of long-lived assets - We apply the provisions of Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and Statement of Financial Accounting Standards No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) in assessing the carrying values
of our long-lived assets. SFAS 142 and SFAS 144 both require that we consider whether circumstances or conditions exist
which suggest that the carrying value of a long-lived asset might be impaired. If such circumstances or conditions exist,
further steps are required in order to determine whether the carrying value of the asset exceeds its fair market value. If
analysis indicates that the asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to
the excess of the asset’s carrying value over its fair value. The steps required by SFAS 142 and SFAS 144 entail
significant amounts of judgment and subjectivity. We completed our analysis of the carrying value of our goodwill and
other intangible assets during the first quarter of fiscal 2008, and determined that no impairment adjustments were
required.
49
Economic useful life of intangible assets - We apply Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”), in determining the useful economic lives of intangible assets that
we acquire and that we report on our consolidated balance sheets. SFAS 142 requires that we amortize intangible assets,
such as licenses and trademarks, over their economic useful lives, unless those assets' economic useful lives are indefinite.
If an intangible asset’s economic useful life is deemed to be indefinite, that asset is not amortized. When we acquire an
intangible asset, we consider factors such as the asset's history, our plans for that asset, and the market for products
associated with the asset. We consider these same factors when reviewing the economic useful lives of our previously
acquired intangible assets as well. We review the economic useful lives of our intangible assets at least annually. The
determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails
significant subjectivity and uncertainty. We have completed our analysis of the remaining useful economic lives of our
intangible assets during the first quarter of fiscal 2008 and determined that the useful lives currently being used to
determine amortization of each asset are appropriate.
For a more comprehensive list of our accounting policies, we encourage you to read Note (1) included in the
accompanying consolidated financial statements. Note (1) describes several other policies, including policies governing
the timing of revenue recognition, that are important to the preparation of our consolidated financial statements, but do not
meet the SEC's definition of critical accounting policies because they do not involve subjective or complex judgments.
NEW ACCOUNTING GUIDANCE
Refer to Note (1) of the notes to the consolidated financial statements for a discussion of new accounting
pronouncements and the potential impact to our consolidated results of operations and financial position.
50
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates and currency exchange rates are our primary financial market risks. Fluctuation in
interest rates causes variation in the amount of interest that we can earn on our available cash and the amount of interest
expense we incur on our short-term and long-term borrowings. Interest on our long-term debt outstanding as of February
28, 2007 is both floating and fixed. Fixed rates are in place on $25,000 of senior notes at rates ranging from 7.01 percent
to 7.24 percent.
Floating rates are in place on $225,000 of debt. Interest rates on these notes are reset as described in Note (7) to
our consolidated financial statements. Interest rates during the latest fiscal year on these notes ranged from 5.37 to 6.35
percent. During the third quarter of fiscal 2007, we decided to actively manage our floating rate debt using interest rate
swaps. The Company entered into three interest rate swaps that convert an aggregate notional principal of $225,000 from
floating interest rate payments under its 5, 7 and 10 Year Senior notes to fixed interest rate payments ranging from 5.89 to
6.01 percent. In these transactions, we executed three contracts to pay fixed rates of interest on an aggregate notional
principal amount of $225,000 at rates currently ranging from 5.04 to 5.11 percent while simultaneously receiving floating
rate interest payments currently set at 5.36 percent on the same notional amount. The fixed rate side of the swap will not
change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets
are concurrent with the interest payments made on the underlying debt. These swaps are used to reduce the Company’s
risk of the possibility of increased interest costs; however, should interest rates drop significantly, we could also lose the
benefit that floating rate debt can provide in a declining interest rate environment
These levels of debt, the future impact of any draws against our Revolving Line of Credit Agreement, whose
interest rates can vary with the term of each draw, and the uncertainty regarding the level of future interest rates, increases
our risk profile.
Because we purchase a majority of our inventory using U.S. Dollars, we are subject to minimal short-term foreign
exchange rate risk in purchasing inventory. However, long-term declines in the value of the U.S. Dollar could subject us
to higher inventory costs. Such an increase in inventory costs could occur if foreign vendors were to react to such a
decline by raising prices. Sales in the United States are transacted in U.S. Dollars. The majority of our sales in the United
Kingdom are transacted in British Pounds, in France and Germany are transacted in Euros, in Mexico are transacted in
Pesos, in Brazil are transacted in Reals, and in Canada are transacted in Canadian Dollars. When the U.S. Dollar
strengthens against other currencies in which we transact sales, we are exposed to foreign exchange losses on those sales
because our foreign currency sales prices are not adjusted for currency fluctuations. When the U.S. Dollar weakens
against those currencies, we realize foreign currency gains.
Our net sales denominated originally in currencies other than the U.S. Dollar totaled $94,098, $85,692 and
$87,880 during the fiscal years ended 2007, 2006 and 2005, respectively. We incurred foreign currency exchange gains
(losses) of $459, $105 and ($1,142) during the fiscal years ended 2007, 2006 and 2005, respectively.
We hedge against foreign currency exchange rate risk by entering into a series of forward contracts designated as
cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions
denominated in certain currencies other than the U.S. Dollar. In these transactions, we execute a forward currency
contract that will settle at the end of a forecasted period. Because the size and terms of the forward contract are designed
so that its fair market value will move in the opposite direction and approximate magnitude of the underlying foreign
currency’s forecasted exchange gain or loss during the forecasted period, a hedging relationship is created. To the extent
we forecast the expected foreign currency cash flows from the period the forward contract is entered into until the date it
will settle with reasonable accuracy, we significantly lower or materially eliminate a particular currency’s exchange risk
exposure over the life of the related forward contract.
For transactions designated as cash flow hedges, the effective portion of the change in the fair value (arising from
the change in the spot rates from period to period) is deferred in Other Comprehensive Income. These amounts are
subsequently recognized in "Selling, general, and administrative expense" in our consolidated statements of income in the
51
same period as the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of
the change in fair value (arising from the change in the difference between the spot rate and the forward rate) is
recognized in the period it occurred. These amounts are also recognized in "Selling, general, and administrative expense"
in our consolidated statements of income. Our cash flow hedges, while executed in order to minimize our foreign
currency exchange rate risk, do subject us to fair value fluctuations on the underlying contracts. We do not enter into any
forward exchange contracts or similar instruments for trading or other speculative purposes.
The following table summarizes the various forward contracts and interest rate swap contracts we designated as
cash flow hedges that were open at the end of fiscal 2007 and 2006:
CASH FLOW HEDGES
February 28, 2007
Contract
Type
Currency
to Deliver
Notional
Amount
Foreign Currency Contracts
Range of Maturities
Contract Date
From
To
Spot Rate at
Contract Date
Spot Rate at
Feb. 28, 2007
Weighted
Average
Forward Rate
at Inception
Weighted
Average
Forward Rate
at Feb 28,
2007
Market Value
of the
Contract in
U.S. Dollars
(Thousands)
Sell
Sell
Subtotal
Pounds
Pounds
£10,000,000
£5,000,000
5/12/2006
11/28/2006
12/14/2007
12/11/2008
2/14/2008
1/15/2009
1.8940
1.9385
1.9636
1.9636
1.9010
1.9242
1.9543
1.9408
Interest Rate Swap Contracts
Swap
Swap
Swap
Subtotal
Dollars
Dollars
Dollars
$100,000,000
$50,000,000
$75,000,000
9/28/2006
9/28/2006
9/28/2006
6/29/2009
6/29/2011
6/29/2014
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
(Pay fixed rate at 5.11%, receive floating rate at 5.36%)
Fair Value of Cash Flow Hedges
($533)
($83)
($616)
($326)
($342)
($833)
($1,501)
($2,117)
Contract
Type
Currency
to Deliver
Notional
Amount
Contract Date
From
To
Spot Rate at
Contract Date
Spot Rate at
Feb. 28, 2006
February 28, 2006
Range of Maturities
Weighted
Average
Forward Rate
at Inception
Weighted
Average
Forward Rate
at Feb. 28,
2006
Market Value
of the
Contract in
U.S. Dollars
(Thousands)
Sell
Pounds
£10,000,000
1/26/2005
12/11/2006
2/9/2007
1.8700
1.7540
1.8228
1.7644
$584
The following table shows the approximate potential fair value gain or loss in U.S. Dollars that would arise from a
hypothetical 10 percent change as of February 28, 2007 in each hedged currency’s forward rate, and a 10 percent change
in each interest rate swap’s forward floating rate.
British Pound Hedges
Interest Rate Swaps
Change in Fair Value Due To
a 10% Movement in Forward Rates
(in thousands)
Favorable
Unfavorable
$
2,925
5,738
$
(2,925)
(5,738)
This table is for risk analysis purposes and does not purport to represent actual losses or gains in fair value that we
will incur. It is important to note that the change in value represents the estimated change in the fair value of the
contracts. Because the contracts hedge an underlying exposure, we would expect a similar and opposite change in foreign
exchange gains or losses and floating interest rates over the same periods as the contracts.
We expect that as currency market conditions warrant, and our foreign denominated transaction exposure grows,
we will continue to execute additional contracts in order to hedge against potential foreign exchange losses.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 28, 2007 and February 28, 2006
Consolidated Statements of Income for each of the years in the three-year period
ended February 28, 2007
Consolidated Statements of Shareholders' Equity and Comprehensive Income for each of
the years in the three-year period ended February 28, 2007
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended February 28, 2007
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year
period ended February 28, 2007
All other schedules are omitted as the required information is included in the consolidated financial statements or is not
applicable.
54
55
57
58
59
60
61
95
53
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Helen of Troy’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined by Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act.
Our internal control system was designed by, or under the supervision of, our principal executive and principal
financial officers, management, and other personnel, with guidance, where appropriate from our Board of Directors, to
provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and
dispositions of assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and Board of Directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of
human error and the circumvention or overriding of controls. Accordingly, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks
that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies
or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of February 28,
2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its assessment, management believes that, as of February 28, 2007, our internal control over financial
reporting was effective based on those criteria to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Our independent registered public accounting firm, KPMG LLP, has issued an audit report on management’s
assessment of the Company's internal control over financial reporting. This report appears on page 56.
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Helen of Troy Limited:
We have audited the accompanying consolidated balance sheets of Helen of Troy Limited and subsidiaries (the
Company) as of February 28, 2007 and 2006 and the related consolidated statements of income, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended February 28, 2007. In
connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule
titled Schedule II – Valuation and Qualifying Accounts. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Helen of Troy Limited and subsidiaries as of February 28, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period ended February 28, 2007, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Note (9) to the consolidated financial statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, effective March 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of February 28, 2007,
based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated May 14, 2007 expressed an unqualified
opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
May 14, 2007
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Helen of Troy Limited:
We have audited management's assessment, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting, that Helen of Troy Limited and subsidiaries (the Company) maintained effective
internal control over financial reporting as of February 28, 2007, based on criteria established in Internal Control—
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and Board of Directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial
reporting as of February 28, 2007, is fairly stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework, issued by the COSO. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of February 28, 2007, based on criteria established in
Internal Control—Integrated Framework, issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Helen of Troy Limited and subsidiaries as of February 28, 2007 and
2006, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows
for each of the years in the three-year period ended February 28, 2007, and our report dated May 14, 2007 expressed an
unqualified opinion on those consolidated financial statements.
Houston, Texas
May 14, 2007
56
/s/ KPMG LLP
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except shares and par value)
Assets
Current assets:
Cash and cash equivalents
Temporary investments
Trading securities, at market value
Foreign currency forward contracts
Receivables - principally trade, less allowance of $1,002 and $850
Inventories
Prepaid expenses
Deferred income tax benefits
Total current assets
Property and equipment, at cost less accumulated depreciation of $35,325 and $27,039
Goodwill
Trademarks, net of accumulated amortization of $230 and $225
License agreements, net of accumulated amortization of $15,953 and $14,514
Other intangible assets, net of accumulated amortization of $4,561 and $3,044
Tax certificates
Other assets
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
Accounts payable, principally trade
Accrued expenses and current liabilities
Income taxes payable
Total current liabilities
Long-term compensation liability
Deferred income tax liability
Long-term debt, less current portion
Total liabilities
Last Day of February,
2006
2007
$
35,455
55,750
189
-
115,896
144,070
8,379
13,479
373,218
96,669
201,002
158,061
26,362
14,653
25,144
11,163
906,272
$
$
18,320
-
97
584
107,289
168,401
5,793
10,690
311,174
100,703
201,003
157,711
27,801
15,757
28,425
15,170
857,744
$
$
10,000
37,779
62,384
24,924
135,087
$
10,000
30,175
54,145
31,286
125,606
2,095
1,673
240,000
378,855
1,706
81
254,974
382,367
Commitments and contingencies (See Notes 3, 8, 10 and 14)
Stockholders' equity
Cumulative preferred shares, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued
Common shares, $.10 par. Authorized 50,000,000 shares; 30,286,406 and 30,013,172 shares
-
-
issued and outstanding
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
See accompanying notes to consolidated financial statements.
57
3,029
94,951
431,003
(1,566)
527,417
906,272
$
3,001
90,300
380,916
1,160
475,377
857,744
$
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expense
Operating income
Other income (expense):
Interest expense
Other income (expense), net
Total other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued segment's operations, net of tax benefits of $442
Net earnings
Earnings per share:
Basic
Continuing operations
Discontinued operations
Total basic earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted earnings per share
Weighted average common shares used in
computing net earnings per share
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years Ended The Last Day of February,
2007
2006
2005
$
634,932
355,552
279,380
$
589,747
323,189
266,558
$
581,549
307,045
274,504
208,964
70,416
195,180
71,378
172,480
102,024
(17,912)
2,643
(15,269)
55,147
5,060
50,087
(16,866)
1,290
(15,576)
55,802
6,492
49,310
(9,870)
(2,575)
(12,445)
89,579
12,907
76,672
-
50,087
$
-
49,310
$
(222)
76,450
$
$
1.66
$
-
$
1.66
$
1.65
$
-
$
1.65
$
$
$
2.58
(0.01)
2.57
1.58
$
$
-
$
1.58
1.56
$
$
-
$
1.56
$
$
$
2.36
(0.01)
2.35
30,122
31,717
29,919
31,605
29,710
32,589
58
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in thousands)
Balances February 29, 2004
$
2,929
$
73,679
$
(918)
$
274,413
$
350,103
Common
Shares
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive Retained
Earnings
Income (Loss)
Total
Shareholders'
Equity
Components of comprehensive income:
Net earnings
Change in value of stock available for sale
Reclassification of losses to income
Unrealized gain on cash flow hedges - foreign currency
Total comprehensive income
Elimination of minority interest upon sale of Tactica
Exercise of stock options, including tax benefits of $8,301
Issuance of common shares in connection with employee
stock purchase plan
Acquisition and retirement of common shares
Balances February 28, 2005
Components of comprehensive income:
Net earnings
Unrealized gain on cash flow hedges - foreign currency
Total comprehensive income
Exercise of stock options, including tax benefits of $402
Issuance of common shares in connection with employee
stock purchase plan
Balances February 28, 2006
Components of comprehensive income:
Net earnings
Unrealized loss on cash flow hedges - interest rate swaps
Unrealized loss on cash flow hedges - foreign currency
Total comprehensive income
Share base compensation
Exercise of stock options, including tax benefits of $544
Issuance of common shares in connection with employee
-
-
-
-
-
129
2
(77)
2,983
-
-
-
-
-
-
-
16,747
322
(3,025)
87,723
-
-
-
2,610
(2,610)
(866)
-
-
-
-
(1,784)
-
2,944
76,450
-
-
-
2,679
-
-
(21,937)
331,606
49,310
-
16
2,184
-
-
2
3,001
394
90,300
-
-
-
-
25
-
-
-
693
3,586
-
1,160
-
(991)
(1,735)
-
380,916
50,087
-
-
-
-
76,450
2,610
(2,610)
(866)
75,584
2,679
16,876
324
(25,039)
420,527
49,310
2,944
52,254
2,200
396
475,377
50,087
(991)
(1,735)
47,361
693
3,611
stock purchase plan
Balances February 28, 2007
3
3,029
$
372
94,951
$
-
(1,566)
$
-
431,003
$
375
527,417
$
See accompanying notes to consolidated financial statements.
59
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities
$
50,087
$
49,310
$
76,450
Years Ended The Last Day of February,
2006
2005
2007
Depreciation and amortization
Provision for doubtful receivables
Stock-based compensation expense
Unrealized (gain) loss - trading securities and securities held for sale
Deferred taxes, net
Gain on disposal of property, plant, and equipment
Loss from operations of discontinued segment
Changes in operating assets and liabilities:
Accounts receivable
Forward contracts
Inventories
Prepaid expenses
Prepayment of royalties
Purchase of tax certificates
Other assets
Accounts payable
Accrued expenses
Income taxes payable
Cash flows of discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital, license, trademark, and other intangible expenditures
Purchase of temporary securities
Sales of temporary securities
Proceeds from sales of property, plant, and equipment
Increase in other assets
Cash flows of discontinued operations
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from debt
Repayment of short-term acquisition financing
Repayment of long-term debt
Payment of financing costs
Proceeds from exercise of stock options and employee stock purchases, net
Common share repurchases
Share-based compensation tax benefit
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow disclosures:
Interest paid for continuing operations
Income taxes paid for continuing operations (net of refunds)
Common shares received as exercise price of options
See accompanying notes to consolidated financial statements.
60
14,301
(152)
693
(2)
(677)
(225)
-
(8,455)
2,703
24,331
914
-
-
2,579
7,604
3,067
(6,362)
-
90,406
(7,395)
(148,625)
92,875
666
-
-
(62,479)
7,660
-
(22,634)
-
3,986
-
196
(10,792)
12,427
(1,317)
-
95
(2,954)
(1,304)
-
5,767
(2,973)
(30,926)
2,628
-
-
1,819
(4,017)
866
5,334
-
34,755
(52,367)
(15,400)
15,400
16,850
253
-
(35,264)
4,974
-
(10,000)
(91)
2,194
-
-
(2,923)
9,708
1,067
-
3,410
(1,725)
(180)
222
(37,473)
1,406
(33,418)
(1,209)
(1,689)
(25,144)
2,798
18,550
21,476
11,554
(433)
45,370
(286,263)
(13,000)
28,000
7,068
81
(2)
(264,116)
425,000
(200,000)
(10,000)
(4,429)
3,122
(11,242)
-
202,451
17,135
18,320
35,455
$
(3,432)
21,752
18,320
$
(16,295)
38,047
21,752
$
$
16,939
$
7,935
$
-
$
15,342
$
4,062
$
-
$
$
$
8,589
4,395
5,758
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
When used in these notes, the terms “Helen of Troy,” “the Company,” “we”, “our” or “us” means Helen of Troy
Limited, a Bermuda company, and its subsidiaries.
We are a global designer, developer, importer, marketer and distributor of an expanding portfolio of brand-name
consumer products. We have two active segments: Personal Care and Housewares. Our Personal Care segment’s
products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air brushes, home
hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair
accessories, liquid hair styling products, men’s fragrances, men’s deodorants, foot powder, body powder, and skin
care products. Our Housewares segment reports the operations of OXO International (“OXO”) whose products
include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash cans, storage and
organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting
products. Both our Personal Care and Housewares segments sell their products primarily through mass
merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply retailers
and wholesalers. We purchase our products from unaffiliated manufacturers, most of which are located in The
People's Republic of China and the United States.
Our financial statements are prepared in U.S. Dollars and in accordance with U.S. generally accepted accounting
principles. These principles require management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
For both fiscal 2006 and fiscal 2005, we have reclassified certain amounts, and in some cases provided additional
information in our consolidated financial statements and accompanying footnotes to conform to the current year’s
presentation. These reclassifications have no impact on previously reported net earnings.
In these consolidated financial statements and accompanying notes, amounts shown are in thousands of U.S. dollars,
except as otherwise indicated.
(b) Consolidation
Our consolidated financial statements include the accounts of Helen of Troy Limited and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Tactica International, Inc. ("Tactica"), a subsidiary in which we acquired a 55 percent interest in fiscal 2001, has been
presented as a discontinued operation in accordance with the requirements of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets.” As more fully described in
Note (16) to our consolidated financial statements, on April 29, 2004 we completed the sale of our ownership interest
in Tactica back to certain of its key operating manager-shareholders. For the periods presented through the date of
Tactica’s sale, our consolidated net income included 100 percent of Tactica's net income or loss because the minority
interest in Tactica's accumulated deficit had not been extinguished.
(c) Revenue recognition
Sales are recognized when revenue is realized or realizable and has been earned. Sales and shipping terms vary among
our customers, and, as such, revenue is recognized when risk and title to the product transfer to the customer. Net
sales is comprised of gross revenues less estimates of expected returns, trade discounts, and customer allowances,
which include incentives such as cooperative advertising agreements and off-invoice markdowns. Such deductions are
recorded and/or amortized during the period the related revenue is recognized.
61
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) Consideration paid to customers
We offer our customers certain incentives in the form of cooperative advertising arrangements, volume rebates,
product markdown allowances, trade discounts, cash discounts, and slotting fees. We account for these incentives in
accordance with Emerging Issues Task Force Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer" ("EITF 01-9"). In instances where the customer is required to provide us with proof of performance,
reductions in amounts received from customers as a result of cooperative advertising programs are included in our
consolidated statement of income on the line entitled "Selling, general, and administrative expenses" ("SG&A").
Other reductions in amounts received from customers as a result of cooperative advertising programs are recorded as
reductions of net sales. Markdown allowances, slotting fees, trade discounts, cash discounts, and volume rebates are
all recorded as reductions of net sales. Customer incentives included in SG&A were $12,568, $12,124 and $13,869,
for the fiscal years 2007, 2006, and 2005, respectively.
(e) Inventories and cost of sales
Our inventories consist almost entirely of finished goods. We account for inventory using a first-in, first-out system in
which we record inventory on our balance sheet at the lower of our average cost or net realizable value. A product's
average cost is comprised of the amount that we pay our manufacturer for product, tariffs and duties associated with
transporting product across national borders, freight costs associated with transporting the product from our
manufacturers to our distribution centers, and general and administrative expenses directly attributable to the
procurement of inventory.
General and administrative expenses in inventory include all the expenses of operating the Company's sourcing
activities, expenses incurred for production monitoring, and expenses incurred for product design, engineering and
packaging. We charged $11,457, $10,667 and $11,082 of such general and administrative expenses to inventory
during fiscal years 2007, 2006, and 2005, respectively. We estimate that $4,873 and $5,075 of general and
administrative expenses directly attributable to the procurement of inventory were included in our inventory balances
on hand at fiscal year ends 2007 and 2006, respectively.
The "Cost of sales" line item on the consolidated statements of income is comprised of the book value (lower of
average cost or net realizable value) of inventory sold to customers during the reporting period. When circumstances
dictate that we use net realizable value in lieu of cost, we base our estimates on expected future selling prices less
expected disposal costs.
(f) Shipping and handling revenues and expenses
Shipping and handling expenses are included in our consolidated statements of income on the "Selling, general, and
administrative expenses" line. These expenses include distribution center costs, third party logistics costs and
outbound transportation costs. Our expenses for shipping and handling totaled $58,863, $51,017 and $38,355 during
fiscal years 2007, 2006, and 2005, respectively. We report revenue from shipping and handling charges on the "Net
sales" line of our consolidated statements of income, in accordance with paragraph 5 of Emerging Issues Task Force
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." We only include charges for shipping and
handling in "Net sales" for sales made directly to consumers and retail customers ordering relatively small dollar
amounts of product. Our shipping and handling expenses far exceed our shipping and handling revenues.
(g) Valuation of accounts receivable
Our allowance for doubtful receivables reflects our best estimate of probable losses, determined principally on the
basis of historical experience and specific allowances for known troubled accounts.
62
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(h) Property and equipment
These assets are stated at cost. Depreciation is recorded primarily on a straight-line basis over the estimated useful
lives of the assets. Expenditures for repair and maintenance of property and equipment are expensed as incurred. For
tax purposes, accelerated depreciation methods are used as allowed by tax laws.
(i) License agreements, trademarks, patents and other intangible assets
A significant portion of our sales are made subject to license agreements with the licensors of the Vidal Sassoon®,
Revlon®, Sunbeam®, Health o meter® and Dr. Scholl's® trademarks. Our license agreements are reported on our
consolidated balance sheets at cost, less accumulated amortization. The cost of our license agreements represents
amounts paid to licensors to acquire the license or to alter the terms of the license in a manner that we believe to be in
our best interest. Royalty payments are not included in the cost of license agreements. We amortize license costs on a
straight-line basis over the appropriate lives of the respective agreements. Net sales subject to trademark license
agreements comprised 53, 52 and 56 percent of total consolidated net sales for fiscal years 2007, 2006, and 2005,
respectively. Royalty expense under our license agreements is recognized as incurred and is included in our
consolidated statements of income on the "Selling, general, and administrative expenses" line.
We also sell products under trademarks that we own. Trademarks that we acquire from other entities are generally
recorded on our consolidated balance sheets based upon the appraised cost of acquiring the trademark, net of any
accumulated amortization. Costs associated with developing trademarks internally are recorded as expenses in the
period incurred. When trademarks have readily determinable useful lives, we amortize their costs on a straight-line
basis over such lives. In certain instances, we have determined that particular trademarks have an indefinite useful
life. In these cases, no amortization is recorded.
Patents acquired through purchase from other entities, if material, are recorded on our consolidated balance sheets
based upon the appraised cost of the acquired patents and amortized over the remaining life of the patent in the
jurisdiction filed. Additionally, we incur certain internal costs, primarily legal fees in connection with the design,
development and filing of patents on new products under internal development that are capitalized as incurred and
amortized on a straight-line basis over the life of the patent in the jurisdiction filed, typically 14 years.
Other intangible assets include customer lists and a non-compete agreement that we acquired from other entities.
These are recorded on our consolidated balance sheets based upon the appraised cost of the acquired asset and
amortized on a straight-line basis over the remaining life of the asset as determined either through outside appraisal
(customer lists) or the term of the non-compete agreement.
See Notes (3) and (4) for additional information on our intangible assets.
(j) Income taxes
We use the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are
recognized for the future tax consequences of temporary differences between the book and tax bases of applicable
assets and liabilities. Generally, deferred tax assets represent future income tax reductions while deferred tax
liabilities represent income taxes that we expect to pay in the future. We measure deferred tax assets and liabilities
using enacted tax rates for the years in which we expect temporary differences to be reversed or be settled. Changes in
tax rates affect the carrying values of our deferred tax assets and liabilities. The effects of any tax rate changes are
recognized in the periods when they become effective.
63
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(k) Earnings per share
We compute basic earnings per share based upon the weighted average number of common shares outstanding during
the period. We compute diluted earnings per share based upon the weighted average number of common shares plus
the effects of potentially dilutive securities. Our dilutive securities consist entirely of outstanding options for common
shares that were “in-the-money”, meaning that the exercise price of the options was less than the average market price
of our common shares during the year. “Out-of-the-money” options are outstanding options to purchase common
shares that were excluded from the computation of earnings per share because the exercise price of the options was
greater than the average market price of our common shares during the year.
For each of our three fiscal years, the components of basic and diluted shares were as follows:
WEIGHTED AVERAGE DILUTED SECURITIES
(in thousands)
Basic weighted average shares outstanding
Additional shares assuming conversion of in-the-money stock options
and use of proceeds to repurchase outstanding shares
Diluted weighted average shares outstanding assuming conversion
In-the-money options
Out-of-the-money options
(l) Cash equivalents and temporary investments
Years Ended The Last Day of February,
2005
2006
2007
30,122
1,595
31,717
6,559
192
29,919
1,686
31,605
5,989
934
29,710
2,879
32,589
6,805
41
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents comprised $31,982 and $18,549 of the amount reported on our consolidated balance
sheets as “Cash and cash equivalents” at fiscal year ends 2007 and 2006, respectively. Our cash equivalents consist
primarily of commercial paper.
We also invest excess cash on hand in AAA auction rate notes, AAA variable rate demand bonds, and similar
investments that we ordinarily dispose of within 35 or fewer days. We consider these investments to be highly liquid
and believe they carry minimal risk of principal fluctuation. These instruments are classified as “Temporary
investments” and are stated on our consolidated balance sheets at market value. At the end of fiscal 2007, we held
$55,750 of temporary investments.
(m) Trading securities and stock available for sale
Trading securities consist of shares of common stock of publicly traded companies and are stated on our consolidated
balance sheets at market value, as determined by the most recent trading price of each security as of the balance sheet
date. We determine the appropriate classification of our investments when those investments are purchased and
reevaluate those determinations at each balance sheet date. At February 28, 2007, we held investments in equity
securities of unaffiliated companies for the purpose of trading them in the near term. Therefore, certain investments
in equity securities are classified as trading securities and included in the "Current assets" section of our consolidated
balance sheets. All unrealized gains and losses attributable to such securities are included in "Other income" on the
consolidated statements of income.
The sum of unrealized and realized net gains and (losses) attributable to trading securities totaled $2, ($95) and ($500)
in fiscal 2007, 2006, and 2005, respectively.
64
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In connection with the sale of Tactica in fiscal 2005, as further discussed in Note (16) to these consolidated financial
statements, we acquired certain marketable securities having a market value of $3,030 that carried a restriction that
prevented us from disposing of the stock prior to July 31, 2005. Accordingly, these securities were classified as
available for sale, and included in the “Other assets” section of our consolidated balance sheets. At the end of the
third quarter of fiscal 2005, we had continued to incur losses on the stock, and we believed that the losses would be
other than temporary. At that time, the stock had a market value of $420, and we recorded a $2,610 unrealized loss on
the stock. In the first quarter of fiscal 2007, we reclassified the stock from available for sale to the trading securities
line in our consolidated balance sheets. The stock had market values of $30, $90 and $120 at fiscal year ends 2007,
2006 and 2005, respectively. Unrealized losses on stock were $60, $30 and $2,910 for fiscal 2007, 2006 and 2005,
respectively.
(n) Foreign currency transactions and related derivative financial instruments
The U.S. Dollar is our functional currency. All our non-U.S. subsidiaries' transactions involving other currencies
have been remeasured in U.S. Dollars using average exchange rates for the months in which the transactions occurred.
Changes in exchange rates that affect cash flows and the related receivables or payables are included as part of the
totals on our consolidated statements of income on the line entitled "Selling, general, and administrative expenses.”
Our foreign exchange gains (losses), including the impact of currency hedges totaled $459, $105 and ($1,142) during
fiscal years 2007, 2006, and 2005, respectively.
In order to manage our exposure to changes in foreign currency exchange rates, we use forward currency contracts to
exchange foreign currencies for U.S. Dollars at specified rates. We account for these transactions in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 requires that these forward currency contracts be recorded on the balance sheet
at their fair value and that changes in the fair value of the forward exchange contracts are recorded each period in our
consolidated statements of income or our consolidated statement of shareholders' equity and comprehensive income,
depending on the type of hedging instrument and the effectiveness of the hedges. In our case, we record these
transactions on the line entitled "Selling, general, and administrative expenses" in our consolidated statements of
income, or the line entitled "Unrealized gain (loss) on cash flow hedging derivatives" in our consolidated statement of
shareholders' equity and comprehensive income, as appropriate. All our current contracts are cash flow hedges and
are adjusted to their fair market values at the end of each calendar quarter. We evaluate all hedging transactions each
quarter to determine that they are effective. Any ineffectiveness is recorded in our consolidated statements of income.
See Note (14) to these consolidated financial statements for a further discussion of our hedging activities.
(o) Advertising
Advertising costs are expensed in the fiscal year in which they are incurred and included in our consolidated
statements of income on the "Selling, general, and administrative expenses" line. We incurred advertising costs
including amounts paid to customers for local media and print advertising of $28,678, $29,066 and $25,559 during
fiscal years 2007, 2006, and 2005, respectively.
65
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(p) Warranties
Our products are under warranty against defects in material and workmanship for a maximum of two years. We have
established accruals to cover future warranty costs of $6,450 and $7,373 as of fiscal year ends 2007 and 2006,
respectively. We estimate our warranty accrual using historical trends and believe that these trends are the most
reliable method by which we can estimate our warranty liability. The following table summarizes the activity in the
Company's accrual for the past three fiscal years:
ACCRUAL FOR WARRANTY RETURNS
(in thousands)
Balance at the beginning of the period
Additions to the accrual
Reductions of the accrual - payments and credits issued
Balance at the end of the period
Years Ended The Last Day of February,
2005
2006
2007
$
$
$
7,373
18,080
(19,003)
6,450
5,767
22,901
(21,295)
7,373
4,114
19,880
(18,227)
5,767
$
$
$
Certain entities whose financial statements are a part of these consolidated financial statements have guaranteed
obligations of other entities within the consolidated group. Financial Accounting Standards Board (FASB)
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" requires disclosure of these guarantees, of our product warranty liabilities, and
of various indemnity arrangements to which we are a party. Additional disclosures related to this policy are contained
in Notes (5), (6), (7) and (10) to these consolidated financial statements.
(q) Carrying value of long-lived assets
We apply the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), in assessing the carrying values of our long-lived assets. SFAS 142
and SFAS 144 both require that we consider whether circumstances or conditions exist that suggest that the carrying
value of a long-lived asset might be impaired. If such circumstances or conditions exist; further steps are required in
order to determine whether the carrying value of the asset exceeds its fair market value. If the analyses indicate that
the asset's carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the
asset's carrying value over its fair value. In fiscal 2007, 2006 and 2005, we did not record any charges for impairment
of long-lived assets.
(r) Economic useful lives and amortization of intangible assets
We apply Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142") in determining the useful economic lives of intangible assets that we acquire and report on our consolidated
balance sheets. SFAS 142 requires that we amortize intangible assets, such as licenses and trademarks, over their
economic useful lives, unless those assets' economic useful lives are indefinite. If an intangible asset's economic
useful life is deemed to be indefinite, that asset is not amortized. When we acquire an intangible asset, we consider
factors such as the asset's history, our plans for that asset, and the market for products associated with the asset. We
consider these same factors when reviewing the economic useful lives of our existing intangible assets as well. We
review the economic useful lives of our intangible assets at least annually.
66
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Intangible assets consist primarily of goodwill, license agreements, trademarks, customer lists and patents. We
amortize certain intangible assets using the straight-line method over appropriate periods ranging from five to forty
years. We recorded intangible asset amortization totaling $2,961, $3,202 and $2,732 during fiscal 2007, 2006 and
2005, respectively. See Notes (3) and (4) to these consolidated financial statements for more information about our
intangible assets.
(s) Interest income
Interest income is included in "Other income, net" on the consolidated statements of income. Interest income totaled
$1,965, $888 and $359 in fiscal 2007, 2006, and 2005, respectively. Interest income is normally earned on cash
invested in short-term accounts and cash equivalents, however in fiscal 2006, interest income included interest earned
on an income tax receivable of $463.
(t) Deferred financing costs
The Company has incurred debt issuance costs in connection with its long-term debt. These costs are capitalized as
deferred financing costs and amortized using the straight-line method over the term of the related debt.
(u) Financial instruments
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and income taxes
payable approximate fair value because of the short maturity of these items. See Note (7) for our assessment of the
fair value of our guaranteed Senior Notes and other long-term-debt. We hedge a portion of our foreign exchange rate
risk by entering into contracts to exchange foreign currencies for U.S. Dollars at specified rates.
During fiscal 2007, we entered into interest rate swaps (the “swaps”), to protect our funding costs against rising
interest rates. The interest rate swaps allowed us to raise long-term borrowings at floating rates and effectively swap
them into fixed rates at the point in time we believed it advantageous to do so. Under our swaps, we agree with other
parties to exchange quarterly, the difference between fixed-rate and floating-rate interest amounts calculated by
reference to notional amounts that perfectly match our underlying debt. Under these swap agreements, we pay the
fixed rates and receive the floating rates. The swaps settle quarterly and terminate upon maturity of the related debt.
The fair values of our foreign exchange contracts and interest rate swaps are determined in accordance with Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." See
Note (14) for more information on our hedging activities.
(v) Share-based compensation plans
Prior to March 1, 2006, we applied the disclosure-only provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). In accordance with the provisions of
SFAS 123, we applied APB 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in
accounting for our share-based compensation plans and, accordingly, did not recognize compensation expense for
stock options because we issued options at exercise prices equal to or greater than the market value at date of grant.
Effective March 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), which
revises SFAS 123 and supersedes APB 25. SFAS 123R requires all share-based payments to employees to be
recognized in the financial statements based on their fair values using an option-pricing model at the date of grant.
We have elected to use the modified prospective method for adoption, which requires compensation expense to be
recorded for all unvested stock options beginning in the first quarter of adoption, based on the fair value at the original
grant date. Prior year financial statements have not been restated. We have elected to use the alternative short-cut
67
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
method to calculate the historical pool of windfall tax benefits upon adoption of SFAS 123R in accordance with
FASB Staff Position (“FSP”) No. FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of
Share-based Payment Awards. For the year ended February 28, 2007, we have determined that we have a pool of
windfall tax benefits.
Additionally pursuant to SFAS 123R, we have estimated forfeitures for options and awards at the dates of grant based
on historical experience and will revise as necessary if actual forfeitures significantly differ from these estimates.
We use a Black-Scholes option-pricing model to calculate the fair value of options. This model requires various
judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used
in the model change significantly, share-based compensation may differ materially in the future from that recorded in
the current period.
The impact from the adoption of SFAS 123R during fiscal 2007, decreased earnings before taxes, net earnings, basic
and diluted earnings per share, for the fiscal year ended February 28, 2007, by $693, $497, and $0.02 per share,
respectively.
See Note (9) for more information on our share based compensation plans.
(w) New accounting guidance
Liability Recognition on Endorsement Split-Dollar Life Insurance Arrangements - In June 2006, the EITF reached
a consensus on EITF Issue No. 06-4 ("EITF 06-4"), "Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," which requires the application of the
provisions of SFAS No. 106 (“SFAS 106”), “Employers’ Accounting for Postretirement Benefits Other Than
Pensions” to endorsement split-dollar life insurance arrangements. SFAS 106 would require us to recognize a liability
for the discounted future benefit obligation that we will have to pay upon the death of the underlying insured
employee. An endorsement-type arrangement generally exists when the Company owns and controls all incidents of
ownership of the underlying policies. EITF 06-4 is currently effective for fiscal years beginning after December 15,
2007. We have certain policies which may be subject to the provisions of this new pronouncement and are currently
determining the effect, if any, the adoption of EITF 06-4 will have on our financial statements.
Uncertainty in Income Taxes - In July 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in
Income Taxes—An Interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48
are effective for fiscal years beginning after December 15, 2006. Accordingly, we will adopt FIN 48 on March 1,
2007. We are currently determining the effect, if any, the adoption of FIN 48 will have on our financial statements.
Fair Value Measurements - In September 2006, the FASB issued SFAS 157 “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not
require any new fair value measurements, but will potentially require additional disclosures regarding existing fair
value measurements we currently report. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We are currently determining the
effect, if any, this pronouncement will have on our financial statements.
68
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Effects of Misstatements - In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB
108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes of determining whether the current year’s
financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial
adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the
beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings, only if
material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The
adoption of SAB 108 did not have a material impact on our financial statements.
Fair Value Option for Financial Statements - In February 2007, the FASB issued Financial Accounting Standards
No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities–Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain
other items at fair value at specified election dates. SFAS 159 will be effective for fiscal years beginning on or after
November 15, 2007. We are currently assessing, if any, the impact of SFAS 159 on our financial statements.
69
NOTE 2 - PROPERTY AND EQUIPMENT
A summary of property and equipment was as follows:
PROPERTY AND EQUIPMENT
(in thousands)
Land
Buildings and improvements
Computer and other equipment
Molds and tooling
Transportation equipment
Furniture and fixtures
Construction in process
Information system under development
Less accumulated depreciation
Property and equipment, net
Estimated
Useful Lives
(Years)
Last Day of February,
2006
2007
$
-
10 - 40
3 - 10
1 - 3
3 - 5
5 - 15
-
-
$
9,537
62,666
41,265
6,538
3,912
7,815
261
-
131,994
(35,325)
96,669
$
9,623
62,374
37,601
4,907
3,875
7,865
457
1,040
127,742
(27,039)
100,703
$
On May 31, 2006, we sold 3.9 acres of raw land adjacent to our El Paso, Texas office and distribution center. The land
was sold for $666 and we recorded a gain on the sale of $422.
On July 7, 2006, we acquired a 3,600 square foot office facility in Mexico City for approximately $830. To date we have
paid approximately $247 to remodel and furnish this and other facilities in South America.
During the fourth quarter of fiscal 2007, we completed a project to acquire and install additional storage racking, and
associated handling equipment for our new Southaven, Mississippi distribution center. The total project cost was
approximately $1,660 and was placed into service in mid-December.
In the fourth quarter of fiscal 2007, we terminated a transportation management software implementation project that had
incurred $200 of cost during fiscal 2006 and 2007. These costs were written off with a corresponding loss recorded under
the line “Other income (expense), net” for fiscal 2007.
We recorded $10,082, $7,264, and $5,025 of depreciation expense for fiscal 2007, 2006, and 2005, respectively. Capital
expenditures for property and equipment totaled $6,629, $51,929 and $14,663 in fiscal 2007, 2006, and 2005,
respectively.
Through the end of fiscal 2006, we leased 108,000 square feet of warehouse space, as well as various administrative
office spaces, from a real-estate partnership in which our Chief Executive Officer and another member of our Board of
Directors are limited partners. This lease was terminated on February 28, 2006, and associated inventory, furniture and
equipment, and records storage were consolidated into other existing facilities. During fiscal 2006 and 2005 we paid this
real-estate partnership rent of $507 and $526.
70
NOTE 3 - INTANGIBLE ASSETS
The following table is a summary, by operating segment, of the carrying amounts and associated accumulated
amortization for our intangible asset balances as of February 28, 2007 and February 28, 2006.
INTANGIBLE ASSETS
(in thousands)
Type / Description
Segment
Estimated
Life
Gross
February 28, 2007
Accumulated
Carrying Amortization Carrying
(if Applicable) Amount
Amount
Net
Gross
February 28, 2006
Accumulated
Carrying Amortization Carrying
(if Applicable) Amount
Amount
Net
Goodwill:
OXO
All other goodwill
Trademarks:
Housewares
Personal Care
Indefinite
Indefinite
$
165,934
35,068
201,002
-
$
-
-
$
165,934
35,068
201,002
$
165,934
35,069
201,003
-
$
-
-
$
165,934
35,069
201,003
OXO
Brut
All other - definite lives
All other - indefinite lives
Housewares
Personal Care
Personal Care
Personal Care
Indefinite
Indefinite
[1]
Indefinite
Licenses:
Seabreeze
All other licenses
Personal Care
Personal Care
Indefinite
8 - 25 Years
75,554
51,317
338
31,082
158,291
18,000
24,315
42,315
-
-
(230)
-
(230)
-
(15,953)
(15,953)
75,554
51,317
108
31,082
158,061
18,000
8,362
26,362
75,200
51,317
338
31,081
157,936
18,000
24,315
42,315
-
-
(225)
-
(225)
-
(14,514)
(14,514)
75,200
51,317
113
31,081
157,711
18,000
9,801
27,801
Other:
Patents, customer lists and
non-compete agreements
Total
Housewares
2 - 14 Years
19,214
420,822
$
(4,561)
(20,744)
$
14,653
400,078
$
18,801
420,055
$
(3,044)
(17,783)
$
15,757
402,272
$
[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years
The following table summarizes the amortization expense attributable to intangible assets for the fiscal years 2007, 2006,
and 2005, as well as estimated amortization expense for the fiscal years 2008 through 2012.
AMORTIZATION OF INTANGIBLES
(in thousands)
Aggregate Amortization Expense
For the twelve months ended
February 28, 2007
February 28, 2006
February 28, 2005
Estimated Amortization Expense
For the fiscal years ended
February 2008
February 2009
February 2010
February 2011
February 2012
$
$
$
2,961
3,202
2,732
$
$
$
$
$
2,898
2,648
2,603
2,131
2,024
Many of the license agreements under which we sell or intend to sell products with trademarks owned by other entities
require that we pay minimum royalties and make minimum levels of advertising expenditures. For the fiscal year ending
February 28, 2008, minimum royalties due and minimum advertising expenditures under certain of our license agreements
total $2,636 and $5,729, respectively.
71
NOTE 4 - ACQUISITIONS AND NEW TRADEMARK LICENSE AGREEMENTS
Epil-Stop® Acquisition - In the first quarter of fiscal 2005, as part of the proceeds of our sale of Tactica, we recorded
$2,255 for the Epil-Stop® trademark, which we believe to have an indefinite useful life (see Note (16)).
OXO® Acquisition - On June 1, 2004, we acquired certain assets and liabilities of OXO International ("OXO") for a net
cash purchase price of $273,173 including the assumption of certain liabilities. The acquisition was funded through a
combination of short-term and long-term debt as further discussed in Notes (5) and (7) to these consolidated financial
statements. We completed an analysis of the economic lives of all the assets acquired and determined the appropriate
allocation of the initial purchase price based upon independent appraisals. In the acquisition, we recorded goodwill of
$165,388 (subsequently adjusted to $165,934), trademarks with indefinite useful lives (and thus not subject to
amortization) of $75,200, and other intangible assets totaling $17,990 (subsequently adjusted to $18,364). "Other
intangible assets" are subject to amortization over varying lives ranging from 2 to 13 years and consist of patents,
customer lists and a non-compete agreement. We believe that the OXO acquisition resulted in recognition of goodwill
primarily because of its industry position, management strength, and business growth potential. The following schedule
presents the net assets acquired at closing.
OXO - Net Assets Acquired on June 1, 2004
(in thousands)
Finished goods inventories
Property and equipment
Trademarks
Goodwill
Other intangible assets
Total assets acquired
Less: Current liabilities assumed
Net assets acquired
$
15,728
2,907
75,200
165,388
17,990
277,213
(4,040)
273,173
$
SkinMilk® and TimeBlock® Acquisition – On September 29, 2004, we acquired certain assets related to the worldwide
production and distribution of TimeBlock® and SkinMilk® body and skin care products lines from Naterra International,
Inc. TimeBlock® is a line of clinically tested anti-aging skin care products. SkinMilk® is a line of body, bath and skin
care products enriched with real milk proteins, vitamins and botanical extracts. The assets consist principally of patents,
trademarks and trade names, product formulations and production technology, distribution rights, and customer lists. The
Company paid the purchase price of $12,001 in cash funded from our revolving line of credit. We completed an analysis
of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price
based upon independent appraisals. The following schedule presents the assets acquired at closing:
Assets Acquired from Naterra International, Inc.
(in thousands)
Skin Milk® Trademark
TimeBlock® Trademark
Fixed assets
Total assets acquired
72
$
$
9,178
2,728
95
12,001
NOTE 4 – ACQUISITIONS AND NEW TRADEMARK LICENSE AGREEMENTS, CONTINUED
Candela® Acquisition - On September 25, 2006, we acquired all rights to trademarks, certain patents, formulas, tooling
and production processes to Vessel, Inc.’s rechargeable lighting products under various brand names, including Candela®.
The products will be sold by our Housewares segment. We believe the acquired trademarks have indefinite economic
lives. The following schedule presents the assets acquired at closing and management’s purchase price allocation:
Assets Acquired from Vessel, Inc.
(in thousands)
Trademarks
Patents
Fixed Assets
Total assets acquired
$
$
354
120
26
500
Bed Head® by TIGI and Toni&Guy® - On December 6, 2006, we entered into licensing arrangements with MBL/TIGI
Products, L.P. and MBL/Toni&Guy Products L.P. for the use of the Bed Head® by TIGI and Toni&Guy® trademarks for
personal care products in the Western Hemisphere. We plan on introducing a line of hair care appliance products under
the Bed Head® by TIGI and Toni&Guy® brand names that eventually will include hair dryers, hair styling irons and
straighteners, hot air brushes, hair setters, combs, brushes and hair care accessories, as well as a variety of other personal
care products. We plan to begin marketing in the United States, followed by the remainder of the Western Hemisphere,
with product shipments to begin during fiscal 2008.
NOTE 5 – SHORT-TERM DEBT
We entered into a five year $75,000 Credit Agreement (“Revolving Line of Credit Agreement”), dated as of June 1, 2004,
with Bank of America, N.A. and other lenders. Borrowings under the Revolving Line of Credit Agreement accrue interest
equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America's prime rate. Alternatively, upon
timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a
margin of 0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the borrowing. The "Leverage
Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the
subject funding on such date to consolidated EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
for the period of the four consecutive fiscal quarters most recently ended. The rates paid on various draws during the 2006
fiscal year ranged from 4.09 percent to 7.50 percent. The credit line allows for the issuance of letters of credit up to
$10,000. Outstanding letters of credit reduce the $75,000 borrowing limit dollar for dollar. During fiscal 2007, we did not
draw on the Revolving Line of Credit. As of February 28, 2007, there were no revolving loans and $394 of open letters of
credit outstanding against this facility.
The Revolving Line of Credit Agreement requires the maintenance of certain debt/EBITDA, fixed charge coverage ratios,
and other customary covenants. Certain covenants, as of the latest balance sheet date, limit our total outstanding
indebtedness from all sources to no more than 3.5 times the latest twelve months’ trailing EBITDA. These covenants
effectively limited our ability to incur no more than $55,367 of additional debt from all sources, including draws on our
Revolving Line of Credit Agreement. The agreement is guaranteed, on a joint and several basis, by the parent company,
Helen of Troy Limited, and certain subsidiaries. Any amounts outstanding under the Revolving Line of Credit Agreement
will mature on June 1, 2009. As of February 28, 2007, we were in compliance with the terms of this agreement.
73
NOTE 6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of other accrued liabilities is as follows:
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(in thousands)
Last Day of February,
2006
2007
$
$
25,054
8,889
9,269
2,833
2,549
1,218
1,438
1,390
831
616
1,501
6,796
62,384
24,176
7,603
7,617
2,671
2,577
1,502
1,495
858
593
-
-
5,053
54,145
$
$
Accrued sales returns, discounts and allowances
Accrued compensation
Accrued advertising
Accrued interest
Accrued royalties
Accrued professional fees
Accrued benefits and payroll taxes
Accrued freight
Accrued property, sales and other taxes
Foreign currency forward contracts at fair value
Interest rate swaps at fair value
Other
Total Accrued Expenses
74
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt (in thousands) was as follows:
LONG-TERM DEBT
(in thousands)
Original
Date
Borrowed
Range of Interest Rates
Latest
Rate
2007
2006
Payable Matures
Last Day of February,
2006
2007
$40,000 unsecured Senior Note Payable at a
fixed interest rate of 7.01%. Interest payable
quarterly, principal of $10,000 payable
annually beginning on January 2005.
$15,000 unsecured Senior Note Payable at a
fixed interest rate of 7.24%. Interest payable
quarterly, principal of $3,000 payable
annually beginning on July 2008.
$100,000 unsecured floating interest rate 5
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis
points. Principal is due at maturity. Notes
can be prepaid without penalty. *
$50,000 unsecured floating interest rate 7
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis
points. Principal is due at maturity. Notes can
be prepaid without penalty. *
$75,000 unsecured floating interest rate 10
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 90 basis
points. Principal is due at maturity. Notes can
be prepaid without penalty. *
$12,634 unsecured Industrial Development
Revenue Bond. **
Less current portion of long-term debt
Long-term debt, less current portion
01/96
7.01%
7.01%
7.01% 01/08
$
10,000
$
20,000
07/97
7.24%
7.24%
7.24% 07/12
15,000
15,000
5.37%
to
6.35%
5.37%
to
6.35%
5.42%
to
6.40%
5.42%
to
6.65%
06/04
06/04
06/04
08/05
3.41%
to
5.37%
3.41%
to
5.37%
3.46%
to
5.42%
5.30%
to
5.42%
5.89% 06/09
100,000
100,000
5.89% 06/11
50,000
50,000
6.01% 06/14
75,000
75,000
-
-
-
250,000
(10,000)
240,000
$
4,974
264,974
(10,000)
254,974
$
* Floating interest rates are hedged with interest rate swaps to effectively fix interest rates as discussed later in this note.
** On September 15, 2006 and January 22, 2007, we prepaid without penalty $4,974 and $7,660, respectively of the
Industrial Development Revenue Bond.
The fair market value at February 28, 2007 computed using discounted cash flow analysis was $10,267 and $16,354 on
the $10,000 and $15,000 of book value, fixed rate debt, respectively. All other long-term debt has floating interest rates,
and its book value approximates its fair value at February 28, 2007.
On September 28, 2006, we entered into interest rate hedge agreements in conjunction with our outstanding unsecured
floating interest rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes (the “swaps”). The swaps are
a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The swaps effectively fix the
interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning September 29,
75
NOTE 7 - LONG-TERM DEBT, CONTINUED
2006. Under our swaps, we agree with other parties to exchange quarterly, the difference between fixed-rate and floating-
rate interest amounts calculated by reference to notional amounts that perfectly match our underlying debt. Under these
swap agreements, we pay the fixed rates and receive the floating rates. The swaps settle quarterly and terminate upon
maturity of the related debt. The swaps are considered cash flow hedges under SFAS No. 133 because they are intended
to hedge, and are effective as a hedge, against variable cash flows.
All of our long-term debt is guaranteed by either the parent company, Helen of Troy Limited, and/or certain subsidiaries
on a joint and several basis and has customary covenants covering Debt/EBITDA ratios, fixed charge coverage ratios,
consolidated net worth levels, and other financial requirements. Certain covenants as of the latest balance sheet date, limit
our total outstanding indebtedness from all sources to no more than 3.5 times the latest twelve months trailing EBITDA.
These covenants effectively limited our ability to incur no more than $55,367 of additional debt from all sources,
including draws on our Revolving Line of Credit Agreement. Additionally, our debt agreements restrict us from incurring
liens on any of our properties, except under certain conditions. As of February 28, 2007, we are in compliance with all
the terms of these agreements.
The following table contains a summary of the components of our interest expense for the periods covered by our
consolidated statements of income:
Years Ended The Last Day of February,
2005
2006
2007
$
$
$
17,388
811
(287)
17,912
16,084
782
-
16,866
$
$
$
9,269
601
-
9,870
INTEREST EXPENSE
(in thousands)
Interest and commitment fees
Deferred finance costs
Interest rate swap settlements
Total interest expense
76
NOTE 8 - INCOME TAXES
Our components of earnings from continuing operations before income tax expense are as follows:
Years Ended Last Day of February,
(in thousands)
2006
2005
2007
U.S.
Non-U.S.
Total
$
$
$
9,298
45,849
55,147
7,045
48,757
55,802
15,529
74,050
89,579
$
$
$
Our components of income tax expense attributable to continuing operations are as follows:
Years Ended Last Day of February,
(in thousands)
2006
2005
2007
U.S.
Current
Deferred
Non-U.S.
Current
Deferred
Total
$
3,910
(296)
3,614
$
2,481
2,876
5,357
$
5,410
(1,590)
3,820
1,589
(143)
1,446
5,060
$
1,869
(734)
1,135
6,492
$
9,108
(21)
9,087
12,907
$
Our total income tax expense from continuing operations differs from the amounts computed by applying the statutory tax
rate to earnings before income taxes. The reasons for these differences are as follows:
Years Ended Last Day of February,
(in thousands)
2006
2005
2007
Expected tax expense at the U.S. statutory rate of 35%
Impact of U.S. state income taxes
Decrease in income taxes resulting from income from non-U.S. operations
subject to varying income tax rates
Reversal of prior accruals as a result of final tax audit settlements
Repatriation of prior years' foreign earnings
Actual tax expense
35.0%
0.7
(26.5)
-
-
9.2%
35.0%
0.2
(28.6)
-
5.0
11.6%
35.0%
-
(18.3)
(2.3)
-
14.4%
On February 22, 2006, the Board of Directors of a subsidiary of the Company approved the repatriation, pursuant to The
American Jobs Creation Act of 2004, of $48,554 in foreign earnings. As a result, we incurred a one-time tax charge of
$2,792 in the fourth quarter of fiscal 2006.
77
NOTE 8 - INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
the last day of February 2007 and 2006 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Accounts receivable
Inventories, principally due to additional
cost of inventories for tax purposes
Write down of marketable securities
Accrued expenses and other
Contribution carryforward
Total gross deferred tax assets
Valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Net deferred tax asset
Last Day of February,
(in thousands)
2007
2006
$
5,826
1,203
$
4,861
1,801
6,386
1,020
5,750
0
20,185
4,275
1,170
3,078
793
15,978
(1,708)
(368)
(6,671)
11,806
$
(5,001)
10,609
$
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion of all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. We
consider the scheduled reversal of deferred tax liabilities, expected future taxable income, and tax planning strategies in
making this assessment. In fiscal 2007, we increased our valuation allowance $1,340, principally due to net operating loss
carryforwards in certain tax jurisdictions whose benefits we now believe we will not be able to utilize.
The schedule below shows the composition of our net operating loss carryforwards and the approximate future taxable
income we will need to generate in order to utilize all carryforwards prior to their expiration.
U.S. net operating loss carryforwards
Non-U.S. net operating loss carryforwards with definite
carryover periods
Non-U.S. net operating loss carryforwards with indefinite
carryover periods
Subtotals
Less portion of valuation allowance established for net
operating loss carryforwards
Total
At February 28, 2007
(in thousands)
Expiration
Date Range
(Where Applicable)
Gross
Deferred Tax
Assets
Required
Future Taxable
Income
2019 - 2027
$
2,386
$
6,991
2008 - 2016
Indefinite
232
3,208
5,826
11,332
14,139
32,462
$
(1,668)
4,158
$
(10,234)
22,228
As of February 28, 2007, subject to the valuation allowances provided, we believe it is more likely than not that we will
realize the benefits of these deductible differences. Any future amount of deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income during any carryforward periods are
reduced.
78
NOTE 8 - INCOME TAXES, CONTINUED
Hong Kong Income Taxes – On May 10, 2006, the IRD and the Company reached a settlement regarding tax liabilities
for the fiscal years 1995 through 1997. This agreement was subsequently approved by the IRD’s Board of Review. For
those tax years, we agreed to an assessment of approximately $4,019 including estimated penalties and interest. Our
consolidated financial statements at May 31, 2006 and February 28, 2006 included adequate provisions for this liability.
As a result of this tax settlement, in the first quarter of fiscal 2007, we reversed $192 of tax provision previously
established and recorded $279 of associated interest. During the second quarter of fiscal 2007, the liability was paid with
$3,282 of tax reserve certificates and the balance in cash.
For the fiscal years 1998 through 2003, the IRD has assessed a total of $25,461 (U.S.) in tax on certain profits of our
foreign subsidiaries. Hong Kong is seeking to levy taxes on income earned from certain activities previously conducted in
Hong Kong. Negotiations with the IRD regarding these issues and their settlement are ongoing, and it is unclear at this
time when they will be resolved.
In connection with the IRD's tax assessment for the fiscal years 1998 through 2003, we have purchased tax reserve
certificates in Hong Kong totaling $25,144. Tax reserve certificates represent the prepayment by a taxpayer of potential
tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve
certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to
the risks associated with foreign currency fluctuations.
If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the resulting assessment
could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. Although the final resolution of the proposed
adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we have
provided for our best estimate of the total probable tax liability for this matter. While the resolution of the issue may
result in tax liabilities that are significantly higher or lower than the reserves established for this matter, management
currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity.
However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in
the quarter in which an adjustment is recorded or the tax is due or paid.
Effective March 2005, we had concluded the conduct of all operating activities in Hong Kong that we believe were the
basis of the IRD’s assessments. Over the course of the prior year, the Company had moved these activities to China and
Macao. The Company established a Macao offshore company (“MOC”) and began operating from Macao in the third
quarter of fiscal 2005. As a MOC, we have been granted an indefinite tax holiday and currently pay no taxes.
Accordingly, no additional accruals for Hong Kong contingent tax liabilities beyond February 2005 have been provided.
United States Income Taxes - The Internal Revenue Service (the “IRS”) has completed its audits of the U.S. consolidated
federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed
adjustments to taxes of $13,424 for the three years under audit. We have resolved the various tax issues and reached an
agreement on additional tax in the amount of $3,568. The resulting tax liability had already been provided for in our tax
reserves and we have decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and 2002,
accordingly. This additional tax liability and associated interest of $914 were settled in the fourth quarter of fiscal 2006.
The IRS is auditing our U.S. consolidated federal tax returns for fiscal years 2003 and 2004 and has provided notice of
proposed adjustments of $5,953 to taxes for the years under audit. The Company is vigorously contesting these
adjustments. Although the ultimate outcome of the dispute with the IRS cannot be predicted with certainty, management
is of the opinion that adequate provisions for taxes in those years have been made in our consolidated financial statements.
The IRS recently began an examination of the U.S. consolidated federal tax return for fiscal year 2005. The audit is in the
preliminary stages and, to date, no adjustments have been proposed.
79
NOTE 8 - INCOME TAXES, CONTINUED
Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities
because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We
must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must
increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax
assets, our tax provision is increased in any period in which we determine that the recovery is not probable.
In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our income not
being subject to taxation in the United States. If such income were subject to U.S. federal income taxes, our effective
income tax rate would increase materially. The American Jobs Creation Act of 2004 (the “AJCA”), included an anti-
inversion provision that denies certain tax benefits to companies that have reincorporated outside the United States after
March 4, 2003. We completed our reincorporation in 1994; therefore, our transaction is grandfathered by the AJCA, and
we expect to continue to benefit from our current structure.
In addition to future changes in tax laws, our position on various tax matters may be challenged. Our ability to maintain
our position that the parent company is not a Controlled Foreign Corporation (as defined under the U.S. Internal Revenue
Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled Foreign Corporation is a non-U.S. corporation
whose largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of
the shares in such corporation. If a change of ownership were to occur such that the parent company became a Controlled
Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on
our business.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of other complex tax
regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based
on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment
of these amounts are not probable, we reverse the liability and recognize a tax benefit during the period in which we
determine that the liability is no longer probable. We record an additional charge in our provision for taxes in the period in
which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
NOTE 9 – SHARE-BASED COMPENSATION PLANS
We have equity awards outstanding under four share-based compensation plans. The plans consist of two employee stock
option and restricted stock plans, a non-employee director stock option plan, and an employee stock purchase plan. These
plans are described below. The plans are generally administered by the Compensation Committee of the Board of
Directors, consisting of non-employee independent directors.
Effective March 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based
Payment’’ (‘‘SFAS 123R’’), utilizing the modified prospective method whereby prior periods will not be restated for
comparability. SFAS 123R requires recognition of share-based compensation expense in the statements of income over
the vesting period based on the fair value of the award at the grant date. Previously, the Company used the intrinsic value
method under Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’),
as amended by related interpretations of the Financial Accounting Standards Board (“FASB”). Under APB 25, no
compensation cost was recognized for stock options because the quoted market price of the stock at the grant date was
equal to or less than the amount per share the employee had to pay to acquire the stock after fulfilling the vesting period.
SFAS 123R supersedes APB 25 as well as Statement of Financial Accounting Standard 123 "Accounting for Stock-Based
Compensation", which permitted pro forma footnote disclosures to report the difference between the fair value method
and the intrinsic value method.
80
NOTE 9 - SHARE-BASED COMPENSATION PLANS, CONTINUED
Under stock option and restricted stock plans adopted in 1994 and 1998, as amended (the "1994 Plan" and the "1998
Plan," respectively), we have reserved a total of 14,750,000 common shares for issuance to key officers and employees.
Under these plans, we grant options to purchase our common shares at a price equal to or greater than the fair market
value on the grant date. Both plans contain provisions for incentive stock options, non-qualified stock options and
restricted share grants. Generally, options granted under the 1994 Plan and the 1998 Plan become exercisable immediately
or over one, four, or five-year vesting periods and expire on dates ranging from seven to ten years from the date of grant.
As of February 28, 2007, 478,886 shares remained available for issue under the 1998 plan and 6,490,758 options were
outstanding under these plans.
Under a stock option plan for non-employee directors (the "Directors’ Plan") adopted in fiscal 1996, we reserved a total of
980,000 of our common shares for issuance to non-employee members of the Board of Directors. We granted options
under the Directors' Plan at a price equal to the fair market value of our common shares at the date of grant. Options
granted under the Directors' Plan vest one year from the date of issuance and expire ten years after issuance. The
Directors’ Plan expired by its terms on June 6, 2005. On that date, the remaining 284,000 shares available for issue
expired. As of February 28, 2007, 260,000 options were outstanding under this plan.
Under an employee stock purchase plan (the "Stock Purchase Plan"), we have reserved a total of 500,000 common shares
for issuance to our employees, nearly all of whom are eligible to participate. Under the terms of the Stock Purchase Plan,
employees authorize the withholding of up to 15 percent of their wages or salaries to purchase our common shares. The
purchase price for shares acquired under the Stock Purchase Plan is equal to the lower of 85 percent of the share’s fair
market value on either the first day of each option period or the last day of each period. During the second and fourth
quarters of fiscal 2007, plan participants acquired 12,485 and 11,863 shares, respectively at a price of $15.21 and $15.64
per share, respectively under the Stock Purchase Plan. At February 28, 2007, 307,386 shares remained available for
future issue under this plan.
For the fiscal year ending February 28, 2007, the Company expensed $693 pre-tax, for stock options issued and employee
share purchases under the above plans. These amounts were classified in selling, general, and administrative expense in
the consolidated statements of income. The following table highlights the impact of share based compensation expense:
SHARE-BASED PAYMENT EXPENSE
(in thousands, except per share data)
Stock options
Employee stock purchase plan
Share-based payment expense
Less income tax benefits
Share-based payment expense, net of income tax benefits
Earnings per share impact of share-based payment expense:
Basic
Diluted
Years Ended Last Day of February,
2006 (1)
2007
2005 (1)
$
$
595
98
693
(196)
497
-
$
-
-
-
$
-
-
$
-
-
-
$
-
$
$
0.02
0.02
$
-
$
-
$
-
$
-
(1) Prior year amounts are before adoption of SFAS 123R under the modified prospective method. Under this method,
periods prior to adoption are not restated.
81
NOTE 9 - SHARE-BASED COMPENSATION PLANS, CONTINUED
The following table provides the pro forma effect on net earnings and earnings per share as if the fair-value-based
measurement method had been applied to all stock-based compensation for fiscal years 2006 and 2005:
PRO FORMA NET INCOME AND PRO FORMA EARNINGS PER SHARE
(in thousands, except per share data)
Net income:
As reported
Less fair-value cost of options with original vesting schedules
Add income tax benefits on non-accelerated options
Less fair-value cost of options where original vesting schedules were accelerated on
February 24, 2006
Add income tax benefits on accelerated options
Pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
Years Ended Last Day of February,
2006
2005
$
49,310
(2,751)
800
$
76,450
(1,952)
515
(1,641)
460
46,178
$
-
-
75,013
$
$
1.65
1.54
$
2.57
2.52
$
1.56
1.46
$
2.35
2.30
On February 24, 2006, the Compensation Committee of our Board of Directors approved the immediate acceleration of
vesting on unvested and "out-of-the money" stock options previously awarded to officers and employees with option
exercise prices greater than $19.65. The affected options held by officers and employees had a range of exercise prices
between $20.35 and $33.88, with a weighted average exercise price of $24.79. Vesting of options exercisable for a total
of 285,217 shares was accelerated. The closing price per share of our common shares on February 24, 2006 was $19.65.
Except for the vesting change, all affected stock options continued to be governed by their respective original terms and
conditions. At the time they were accelerated, these options represented 4.1percent of the total of all outstanding options.
We took this action in order to reduce the future compensation expense associated with unvested stock options following
the adoption of SFAS No.123R. As a result of the acceleration, we estimate that future stock option related compensation
expense that otherwise would be required to be recorded in connection with the accelerated options will be reduced by
$1,641, on a pre-tax basis, over the original option remaining vesting periods.
The fair value of all share-based payment awards are estimated using a Black-Scholes option pricing model with the
following assumptions and weighted-average fair values for the fiscal years 2007, 2006 and 2005:
ASSUMPTIONS USED FOR FAIR VALUE OF STOCK OPTION GRANTS
Weighted-average risk-free interest rate
Dividend yield
Weighted-average expected volatility
Weighted-average expected life (in years)
Years Ended Last Day of February,
2007
2006
2005
4.8%
0.0%
37.4%
4.52
3.6%
0.0%
41.6%
3.76
3.7%
0.0%
39.3%
3.27
The following describes how certain assumptions affecting the estimated fair value of options or discounted employee
share purchases (“share based payments”) are determined. The risk-free interest rate is based on U.S. Treasury securities
82
NOTE 9 - SHARE-BASED COMPENSATION PLANS, CONTINUED
with maturities equal to the expected life of the share based payments. The dividend yield is computed as zero because
we have not historically paid dividends nor do we expect to at this time. Expected volatility is based on a weighted
average of the market implied volatility and historical volatility over the expected life of the underlying share-based
payments. We use our historic experience to estimate the expected life of each stock-option grant and also to estimate the
impact of exercise, forfeitures, termination and holding period behavior for fair value expensing purposes.
Employee share purchases vest immediately at the time of purchase. Accordingly, the fair value award associated with
their discounted purchase price is expensed at the time of purchase.
A summary of option activity under all plans follows:
SUMMARY OF STOCK OPTION ACTIVITY
(in thousands, except contractual term and per share data)
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
Options
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
Outstanding at February 29, 2004
Granted
Exercised
Forfeited / expired
Outstanding at February 28, 2005
Granted
Exercised
Forfeited / expired
Outstanding at February 28, 2006
Granted
Exercised
Forfeited / expired
Outstanding at February 28, 2007
7,983
190
(1,288)
(39)
6,846
306
(162)
(67)
6,923
131
(248)
(55)
6,751
$
12.97
29.49
(6.65)
(17.01)
14.60
18.83
(11.16)
(23.21)
14.83
22.64
(12.46)
(21.25)
15.01
$
4.82
9.92
5.44
7.14
5.52
8.72
6.47
$
129,005
33,911
5.66
93,722
1,780
4.83
39,317
1,939
$
5.57
3.87
$
56,211
$
Exercisable at February 28, 2007
6,407
$
14.78
$
5.47
3.66
$
54,897
83
NOTE 9 - SHARE-BASED COMPENSATION PLANS, CONTINUED
A summary of non-vested option activity and changes under all plans follows:
NON-VESTED STOCK OPTION ACTIVITY
(in thousands, except per share data)
Weighted
Average
Grant Date
Fair Value
Non-Vested
Options
Outstanding at February 28, 2004
Granted
Vested or forfeited
Outstanding at February 28, 2005
Granted
Vested or forfeited
Outstanding at February 28, 2006
Granted
Vested or forfeited
Outstanding at February 28, 2007
801
190
(287)
704
306
(581)
429
131
(216)
344
$
4.82
9.92
(7.09)
5.27
7.14
(5.52)
6.27
8.72
(5.94)
7.41
$
A summary of our total unrecognized share-based compensation cost as of February 28, 2007 is as follows:
UNRECOGNIZED SHARE-BASED COMPENSATION EXPENSE
(in thousands, except weighted average expense period data)
Weighted
Average
Remaining
Period of Expense
Recognition
(in months)
Unearned
Compensation
Stock options
$
2,006
48.4
84
NOTE 9 - SHARE-BASED COMPENSATION PLANS, CONTINUED
The following table summarizes additional information about stock options outstanding at February 28, 2007:
SUMMARY OF OPTIONS OUTSTANDING AND EXERCISABLE
(actual number of shares)
Outstanding Stock Options
ISOs
Total
Non-Qs
Total
Directors' Plan
Total
Number of
Options
Price Range
(per share)
48,250
71,625
2,666
483,685
606,226
1,783,500
1,516,500
2,006,834
577,698
5,884,532
44,000
20,000
36,000
160,000
260,000
$
$
$
$
5.69
12.93
15.00
17.76
$
$
$
$
5.69
12.63
14.94
18.00
$
$
$
$
4.41
12.63
14.94
21.47
to
to
to
to
to
to
to
to
to
to
to
to
$
$
$
$
11.78
14.34
15.51
33.88
$
$
$
$
12.53
14.47
17.63
23.91
$
$
$
$
12.53
14.47
17.63
33.35
Weighted-
Average
Remaining
Contractual
Life (years)
Weighted-
Average
Exercise
Price
(per share)
Exercisable Stock Options
Weighted-
Average
Exercise
Price
(per share)
Number of
Options
$
$
3.78
3.65
3.11
6.36
5.82
4.35
3.80
1.79
6.84
3.58
4.10
4.96
1.89
7.49
5.94
$
$
$
$
9.81
13.71
15.38
22.38
20.32
10.21
13.37
16.21
21.72
14.20
8.63
13.28
15.95
26.51
21.00
43,750
55,725
1,866
274,787
376,128
1,783,500
1,512,000
2,006,834
468,094
5,770,428
44,000
20,000
36,000
160,000
260,000
$
$
$
$
9.62
13.62
15.33
24.79
21.32
10.21
13.37
16.21
21.83
14.07
8.63
13.28
15.95
26.51
21.00
$
$
NOTE 10 – OTHER COMMITMENTS AND CONTINGENCIES
Indemnity Agreements - Under agreements with customers, licensors, and parties from whom we have acquired assets or
entered into business combinations, we indemnify these parties against liability associated with our products.
Additionally, we are party to a number of agreements under leases where we indemnify the lessor for liabilities
attributable to our action or conduct. The indemnity agreements to which we are a party do not, in general, increase our
liability for claims related to our products or actions and have not materially affected our accompanying consolidated
financial statements.
Employment Contracts - We have entered into employment contracts with certain of our officers. These agreements
provide for minimum salary levels and potential incentive bonuses. One agreement automatically renews itself each day
for a new three-year period and provides that in the event of a merger, consolidation, or transfer of all or substantially all
of our assets to an unaffiliated party, the officer may make an election to receive a cash payment for the balance of the
obligations under the agreement. The expiration dates for these agreements range from June 1, 2008 to February 28, 2010.
The aggregate commitment for future salaries pursuant to such contracts, at February 28, 2007, excluding incentive
compensation, was $4,650.
85
NOTE 10 – OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
On April 21, 2005, the Company and Gerald J. Rubin, the Chairman of the Board, Chief Executive Officer, and President
of the Company, executed an amendment to Mr. Rubin’s employment agreement, effective as of April 15, 2005 making
the following changes:
• The term of the agreement was reduced from five years to three years, renewing on a daily basis
for a new three-year term as currently provided in the original agreement; and
• Reduced the period for severance payouts from five years to three years. The formula for
calculating the amount of the annual severance payments required by the agreement remains
unchanged.
International Trade - We purchase most of our appliances and a significant portion of other products that we sell from
unaffiliated manufacturers located in the Far East, mainly the Peoples' Republic of China. Due to the fact that most of our
products are manufactured in the Far East, we are subject to risks associated with trade barriers, currency exchange
fluctuations, and political unrest. These risks have not historically affected our operations. Additionally, we believe that
we could obtain similar products from facilities in other countries, if necessary. However, the relocation of any production
capacity could require substantial time and increased costs.
Customer Incentives - We regularly enter into arrangements with customers whereby we offer those customers
incentives, including incentives in the form of volume rebates. Our estimate of the liability for such incentives is included
on the consolidated balance sheets on the line entitled "Accrued expenses," and in Note (6) included in the lines entitled
“Accrued Sales Returns, Discounts and Allowances,” and “Accrued Advertising” and is based on incentives applicable to
sales up to the respective balance sheet dates.
Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one action against our
Company, Gerald J. Rubin, our Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson,
our Chief Financial Officer, on behalf of purchasers of our publicly traded securities. The plaintiffs alleged violations of
Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder, on the grounds that the Company
and the two officers engaged in a scheme to defraud our shareholders through the issuance of positive earnings guidance
intended to artificially inflate our share price so that Mr. Rubin could sell almost 400,000 of our common shares at an
inflated price. The plaintiffs are seeking unspecified damages, interest, fees, costs, an accounting of any alleged insider
trading proceeds, and injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset
freeze on the defendants’ alleged insider trading proceeds. The class period in the consolidated action is October 12, 2004
through October 10, 2005.
We intend to defend the foregoing lawsuit vigorously, but, because the lawsuit is still in the preliminary stages, we cannot
predict the outcome and are not currently able to evaluate the likelihood of success or the range of potential loss, if any,
that might be incurred in connection with the action. There is a risk that such litigation could result in substantial costs
and divert management’s attention and resources from its business, which could adversely effect our business. We carry
insurance that provides an aggregate coverage of $20 million after a self-insured retention of $500 thousand for the period
during which the claims were filed, but cannot evaluate at this time whether such coverage will be adequate to cover
losses, if any, arising out of the lawsuit.
86
NOTE 10 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
On May 15, 2006, we filed a motion to dismiss the aforementioned lawsuit citing numerous deficiencies with the claims
asserted in the lawsuit. On June 29, 2006, the plaintiffs filed with the court their opposition to our motion to dismiss. On
July 17, 2006, we filed a reply rebutting the plaintiffs’ June 29th opposition. On March 20, 2007, the court heard the
plaintiff’s and our arguments regarding our motion to dismiss. As of the date this report was filed, the matter was before
the court for its consideration. If we were to lose on any issues connected with the lawsuit or if the lawsuit is not settled
on favorable terms, the judgment or settlement may have a material adverse effect on our consolidated financial position,
results of operations and cash flows.
Other Litigation - We are involved in various other legal claims and proceedings in the normal course of operations. We
believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results
of operations, or liquidity.
Preference Shares, Anti-takeover provisions - Under the terms of a Shareholders' Rights Plan approved by our Board of
Directors in fiscal year 1999, we declared a dividend of one preference share right ("right") for each outstanding share of
common shares. The dividend resulted in no cash payment by us, created no liability on our part, and did not change the
number of shares of our common shares outstanding. The rights are inseparable from the shares of our common shares
and entitle its holders to purchase one one-thousandth of a share of Series-A, First Preference Shares ("preference
shares"), par value $1.00, at a price of $100 per one one-thousandth of a preference share. Should certain persons or
groups of persons ("Acquiring Persons") acquire more than 15 percent of our outstanding common shares, our Board of
Directors may either adjust the price at which holders of rights may purchase preference shares or may redeem all of the
then outstanding rights at $.01 per right. The rights associated with the acquiring person's shares of common shares would
not be exercisable. These rights have certain anti-takeover effects. The rights could cause substantial dilution to a person
or group that attempts to acquire Helen of Troy Limited in certain circumstances, but should not interfere with any merger
or other business combination approved by our Board of Directors. These rights expire December 1, 2008, unless their
expiration date is advanced or extended or unless under the terms of the agreement these rights are earlier redeemed or
exchanged.
Contractual Obligations and Commercial Commitments - Our contractual obligations and commercial commitments, as
of February 28, 2007 were:
PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED THE LAST DAY OF FEBRUARY
(in thousands)
Total
2008
1 year
2009
2 years
2010
3 years
2011
4 years
2012
5 years
After
5 years
Term debt - fixed rate
Term debt - floating rate *
Long-term incentive plan payouts
Interest on floating rate debt *
Interest on fixed rate debt
Open purchase orders
Minimum royalty payments
Advertising and promotional
Operating leases
Open letters of credit pending settlement
Other
Total contractual obligations
$
$
$
$
$
$
$
25,000
225,000
3,525
59,560
4,191
68,792
68,530
76,238
11,426
394
358
543,014
10,000
-
1,430
13,343
1,612
68,792
2,636
10,114
1,602
394
358
110,281
3,000
-
1,420
13,343
950
-
6,774
5,659
1,127
-
-
32,273
3,000
100,000
675
9,416
733
-
8,393
6,010
1,152
-
-
129,379
3,000
-
-
7,453
516
-
8,110
7,039
882
-
-
27,000
3,000
50,000
-
5,489
299
-
7,800
7,199
870
-
-
74,657
3,000
75,000
-
10,516
81
-
34,817
40,217
5,793
-
-
169,424
$
$
$
$
$
$
$
* The future obligation for interest on our variable rate debt has historically been estimated assuming the rates in effect
as of the end of the latest fiscal quarter on which we are reporting. As mentioned above in Note 7, on September 28,
2006, the Company entered into interest rate hedge agreements (the “swaps”) in conjunction with its outstanding
unsecured floating interest rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes. The swaps
87
NOTE 10 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The swaps effectively
fix the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning
September 29, 2006. Consequently, the estimated future variable rate interest obligations related to this debt have
been computed using these rates.
We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal
2017. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our
operating leases was $4,619, $2,818 and $1,757 for fiscal 2007, 2006 and 2005, respectively.
NOTE 11 - FOURTH QUARTER CHARGES/TRANSACTIONS
Our results for the fourth quarters of fiscal 2007 and 2005 did not contain any transactions of a non-routine nature.
On February 24, 2006 the Board of Directors of a subsidiary of the Company approved the repatriation, pursuant to The
American Jobs Creation Act of 2004, of $48,554 in foreign earnings. As a result, we incurred a one-time tax charge of
$2,792 in the fourth quarter of fiscal 2006.
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands, except per share amounts):
Fiscal 2007:
Net sales
Gross profit
Net earnings
Earnings per share
Basic
Diluted
Fiscal 2006:
Net sales
Gross profit
Net earnings
Earnings per share
Basic
Diluted
May
August
November
February
Total
$
130,441
$
147,172
$
213,437
$
143,882
$
634,932
57,941
6,679
0.22
0.21
66,668
10,874
0.36
0.35
91,477
$
63,294
22,813
9,721
0.76
0.72
0.32
0.30
279,380
50,087
1.66
1.58
$
127,392
$
130,389
$
197,458
$
134,508
$
589,747
58,692
10,547
0.35
0.33
60,218
9,452
0.32
0.30
86,044
22,666
0.76
0.72
61,604
6,645
0.22
0.21
266,558
49,310
1.65
1.56
88
NOTE 13 - SEGMENT INFORMATION
The following table contains segment information for fiscal years covered by our consolidated financial statements:
FISCAL YEARS ENDED 2007, 2006 AND 2005
(in thousands)
2007
Net sales
Operating income
Identifiable assets
Capital, license, trademark and other intangible expenditures
Depreciation and amortization
2006
Net sales
Operating income
Identifiable assets
Capital, license, trademark and other intangible expenditures
Depreciation and amortization
2005
Net sales
Operating income
Identifiable assets
Capital, license, trademark and other intangible expenditures
Depreciation and amortization
Personal
Care
Housewares
Total
$
497,824
42,530
554,295
4,912
9,430
$
137,108
27,886
351,977
2,483
4,871
$
634,932
70,416
906,272
7,395
14,301
Personal
Care
Housewares
Total
$
461,947
37,260
512,594
29,979
9,020
$
127,800
34,118
345,150
22,388
3,407
$
589,747
71,378
857,744
52,367
12,427
Personal
Care
Housewares (1)
Total
$
501,406
76,993
506,957
21,738
7,556
$
80,143
25,031
304,492
264,525
2,152
$
581,549
102,024
811,449
286,263
9,708
(1) Includes only operations from June 1, 2004 through February 28, 2005.
Our Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers,
mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers,
brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants, foot powder, body
powder, and skin care products. Our Housewares segment reports the operations of OXO International (“OXO”) whose
products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash cans, storage
and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting
products. We use outside manufacturers to produce our goods. Both our Personal Care and Housewares segments sell
their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty
stores, and beauty supply retailers and wholesalers.
Operating profit for each operating segment is computed based on net sales, less cost of goods sold and any selling,
general, and administrative expenses ("SG&A") associated with the segment. The selling, general, and administrative
expenses used to compute each segment's operating profit are comprised of SG&A directly associated with the segment,
plus overhead expenses that are allocable to the operating segment. In connection with the acquisition of our Housewares
segment, the seller agreed to perform certain operating functions for the segment for a transitional period of time that
ended February 28, 2006. The costs of these functions were reflected in SG&A for the Housewares segment’s operating
income. During the transitional period, we did not make an allocation of our corporate overhead to Housewares. For the
fiscal year ended February 28, 2007, we began making an allocation of corporate overhead and distribution center
expenses to Housewares in lieu of transition charges previously recorded. For the fiscal year ended February 28, 2007,
we allocated expenses totaling $12,753 to the Housewares segment, some of which were previously absorbed by the
89
NOTE 13 - SEGMENT INFORMATION, CONTINUED
Personal Care segment. For the fiscal year ended February 28, 2006 and nine months ended February 28, 2005, transition
charges of $11,241 and $4,656 respectively, were used to compute the Housewares segment’s operating income.
Major expense categories presently allocated to the Housewares segment, in lieu of the transition services charges the
Housewares segment incurred prior to March 1, 2006, include the following:
Customer Service;
Credit, Collection and Accounting;
Distribution Center and Equipment Costs;
Distribution Labor Charges; and
General and Administrative Overhead.
During the first quarter of fiscal 2007, we completed the transition of our Housewares segment’s operations to our internal
operating systems and our new distribution center in Southaven, Mississippi. During the last quarter of fiscal 2007, we
completed the process of consolidating our domestic appliance inventories into the same new distribution center. Because
of these transitions, we have incurred, and will continue to incur, additional expenses that we believe will decline as
operations in the new distribution center stabilize at some point later in fiscal 2008.
We are in the process of re-evaluating our allocation methodology, and plan to change our methodology in fiscal 2008 to
better reflect the evolving economics of our operation. At that time, we expect the new methodology may result in some
additional reduction in operating income for the Housewares segment, offset by an increase in the operating income for
the Personal Care segment. Until we finalize our approach, the extent of this operating income impact between the
segments cannot be determined.
Other items of income and expense, including income taxes, are not allocated to operating segments.
Our domestic and international net revenues from third parties and long-lived assets for the years ended the last day of
February are as follows (in thousands):
2007
2006
2005
NET SALES FROM THIRD PARTIES:
United States
International
Total
LONG-LIVED ASSETS:
United States
International
Total
$
$
511,786
123,146
634,932
$
$
507,379
25,675
533,054
$
$
$
$
$
$
$
$
487,620
102,127
589,747
507,478
39,092
546,570
475,212
106,337
581,549
497,135
28,153
525,288
Sales to our largest customer and its affiliates accounted for approximately 21, 22 and 25 percent of our net sales in fiscal
2007, 2006, and 2005, respectively. Sales to our second largest customer accounted for approximately 9, 10 and 8
percent of our net sales in fiscal 2007, 2006, and 2005, respectively. No other customers accounted for ten percent or
more of net sales during those fiscal years.
Of our total sales to our largest customer and its affiliate, 92, 91 and 95 percent, were made within the United States
during fiscal 2007, 2006, and 2005, respectively. All of our total sales to our second largest customer were made within
the United States during fiscal 2007, 2006, and 2005.
90
NOTE 14 - FORWARD CONTRACTS
Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from
transactions denominated in currencies other than the U.S. Dollar ("foreign currencies"). Such transactions include sales,
certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts
receivable, and trade accounts payable are denominated in foreign currencies. These sales were primarily
denominated in the Canadian Dollar, the British Pound, Euro, Brazilian Real and the Mexican Peso. We make most of our
inventory purchases from the Far East and use the U.S. Dollar for such purchases.
We identify foreign currency risk by regularly monitoring our foreign currency-denominated transactions and balances.
Where operating conditions permit, we reduce foreign currency risk by purchasing most of our inventory with U.S.
Dollars and by converting cash balances denominated in foreign currencies to U.S. Dollars.
We also hedge against foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow
hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in
currencies other than the U.S. Dollar. In these transactions, we execute a forward currency contract that will settle at the
end of a forecasted period. Because the size and terms of the forward contract are designed so that its fair market value
will move in the opposite direction and approximate magnitude of the underlying foreign currency’s forecasted exchange
gain or loss during the forecasted period, a hedging relationship is created. To the extent we forecast the expected foreign
currency cash flows from the period the forward contract is entered into until the date it will settle with reasonable
accuracy, we significantly lower or materially eliminate a particular currency’s exchange risk exposure over the life of the
related forward contract.
For transactions designated as foreign currency cash flow hedges, the effective portion of the change in the fair value
(arising from the change in the spot rates from period to period) is deferred in other comprehensive income. These
amounts are subsequently recognized in "Selling, general, and administrative expense" in the consolidated statements of
income in the same period as the forecasted transactions close out over the remaining balance of their terms. The
ineffective portion of the change in fair value (arising from the change in the difference between the spot rate and the
forward rate) is recognized in the period it occurred. These amounts are also recognized in "Selling, general, and
administrative expense" in the consolidated statements of income. We do not enter into any forward exchange contracts
or similar instruments for trading or other speculative purposes.
During the third quarter of fiscal 2007, we decided to actively manage our floating rate debt using interest rate swaps (the
“swaps”). We entered into three interest rate swaps that converted an aggregate notional principal of $225,000 from
floating interest rate payments under our 5, 7 and 10 Year Senior Notes to fixed interest rate payments ranging from 5.89
to 6.01 percent. In these transactions, we executed three contracts to pay fixed rates of interest on an aggregate notional
principal amount of $225,000 at rates ranging from 5.04 to 5.11 percent while simultaneously receiving floating rate
interest payments currently set at 5.36 percent on the same notional amount. The fixed rate side of the swap will not
change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets
are concurrent with the interest payments made on the underlying debt. These swaps are used to reduce the Company’s
risk of the possibility of increased interest costs; however, should interest rates drop significantly, we could also lose the
benefit that floating rate debt can provide in a declining interest rate environment.
The swaps are considered 100 percent effective. Gains and losses related to the swaps, net of related tax effects are
reported as a component of “Accumulated other comprehensive income” and will not be reclassified into earnings until
the conclusion of the hedge. A partial net settlement occurs quarterly concurrent with interest payments made on the
underlying debt. The settlement is the net difference between the fixed rates payable and the floating rates receivable over
the quarter under the swap contracts. The settlement is recognized as a component of "Interest expense" in the
consolidated statements of income.
91
NOTE 14 - FORWARD CONTRACTS, CONTINUED
The following table summarizes the various forward contracts and interest rate swap contracts that we designated as cash
flow hedges and were open at the end of fiscal 2007 and 2006:
CASH FLOW HEDGES
February 28, 2007
Contract
Type
Currency
to Deliver
Notional
Amount
Foreign Currency Contracts
Range of Maturities
Contract Date
From
To
Spot Rate at
Contract Date
Spot Rate at
Feb. 28, 2007
Weighted
Average
Forward Rate
at Inception
Weighted
Average
Forward Rate
at Feb 28,
2007
Market Value
of the
Contract in
U.S. Dollars
(Thousands)
Sell
Sell
Subtotal
Pounds
Pounds
£10,000,000
£5,000,000
5/12/2006
11/28/2006
12/14/2007
12/11/2008
2/14/2008
1/15/2009
1.8940
1.9385
1.9636
1.9636
1.9010
1.9242
1.9543
1.9408
Interest Rate Swap Contracts
Swap
Swap
Swap
Subtotal
Dollars
Dollars
Dollars
$100,000,000
$50,000,000
$75,000,000
9/28/2006
9/28/2006
9/28/2006
6/29/2009
6/29/2011
6/29/2014
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
(Pay fixed rate at 5.11%, receive floating rate at 5.36%)
Fair Value of Cash Flow Hedges
($533)
($83)
($616)
($326)
($342)
($833)
($1,501)
($2,117)
Contract
Type
Currency
to Deliver
Notional
Amount
Contract Date
From
To
Spot Rate at
Contract Date
Spot Rate at
Feb. 28, 2006
February 28, 2006
Range of Maturities
Weighted
Average
Forward Rate
at Inception
Weighted
Average
Forward Rate
at Feb. 28,
2006
Market Value
of the
Contract in
U.S. Dollars
(Thousands)
Sell
Pounds
£10,000,000
1/26/2005
12/11/2006
2/9/2007
1.8700
1.7540
1.8228
1.7644
$584
NOTE 15 - NON-MONETARY TRANSACTIONS
We occasionally enter into barter transactions in which we exchange inventory for various services, usually advertising.
During fiscal 2005, we entered into two such transactions in which we exchanged inventory with a book value of $1,011
for certain advertising credits. As a result of these transactions, we recorded both sales and cost of goods sold equal to the
exchanged inventory's net book value, which approximated their fair value. As of February 28, 2006, all credits from the
non-monetary transactions had been utilized. We have used $915 and $1,196 of barter related advertising credits during
fiscal 2006 and 2005, respectively.
92
NOTE 16 – SALE OF TACTICA INTERNATIONAL, INC. AND SUBSEQUENT BANKRUPTCY
On April 29, 2004, we sold our 55 percent interest in Tactica International, Inc. to certain shareholder-operating
managers. In exchange for our 55 percent ownership share of Tactica and the release of $16,936 of its secured debt and
accrued interest owed to us, we received marketable securities, intellectual properties and the right to certain tax refunds.
The fair value of net assets received was equal to the book value of net assets transferred; accordingly, no gain or loss was
recorded as a result of this sale. The schedule below shows the assets we received in a non-cash exchange for our
ownership interest in Tactica.
Assets Received in Noncash Exchange for Ownership Interest in Tactica at April 29, 2004
(in thousands)
Tax refunds receivable
Marketable securities recorded as stock available for sale
Epil-Stop trademark
Total assets received
$
$
2,908
3,030
2,255
8,193
The marketable securities received in the Tactica sale carried a restriction that prevented us from disposing of the stock
prior to July 31, 2005. Accordingly, these securities were classified as available for sale and included in the “Other
assets” section of our consolidated balance sheets. At the end of the third quarter of fiscal 2005, we had continued to
incur losses on the stock and we believed that the losses would be other than temporary. At that time, the stock had a
market value of $420, and we recorded a $2,610 unrealized loss on the stock. In the first quarter of fiscal 2007, we
reclassified the stock from available for sale to the trading securities line in our consolidated balance sheets. The stock
had market values of $30, $90 and $120 at fiscal year ends 2007, 2006 and 2005, respectively. Unrealized losses on stock
were $60, $30 and $2,910 for fiscal 2007, 2006 and 2005, respectively.
Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), provides accounting guidance for accounting for segments to be disposed of by sale and, in our
circumstances, required us to report Tactica’s operating results, net of taxes, as a separate summarized component after
income from continuing operations for fiscal 2005.
On October 21, 2004, Tactica filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code. Early in the fourth quarter of fiscal 2006, The U.S. Bankruptcy Court for the Southern District of New
York approved Tactica’s bankruptcy reorganization plan, which among other things, required Helen of Troy to pay
Tactica’s unsecured creditors $1,800. The schedule below shows how the liability was liquidated out of sums that were
held in bankruptcy escrow:
Tactica International, Inc. Bankruptcy Settlement
(in thousands)
Funds due to the Company from escrow:
Income tax refund receivable
Interest income on income tax refund receivable
Reimbursements due from Tactica's former minority shareholders
Total
Less amounts to be paid to unsecured creditors
Net proceeds received from escrow
$
2,908
463
250
3,621
(1,800)
1,821
$
In connection with the above settlement, we recorded a net settlement loss of $1,550 on the Company’s books during
fiscal 2006, and it is included in the line item entitled “Other expense, net” in the consolidated statement of income. We
also incurred $378 of legal fees related to the Tactica bankruptcy during fiscal 2006. These legal fees were expensed as
incurred and included in the line entitled “Selling, general, and administrative expense” in the consolidated statement of
income.
93
NOTE 17 - 401(k) DEFINED CONTRIBUTION PLANS
We sponsor defined contribution savings plans in the US and other countries where we have employees. Total matching
contributions made to these savings plans for the fiscal years ended 2007, 2006 and 2005 were $467, $643 and $581,
respectively.
NOTE 18 – SUBSEQUENT EVENTS
Effective May 1, 2007, we acquired certain assets and liabilities of Belson Products, the professional salon division of
Applica Consumer Products, Inc. for an estimated net cash purchase price of $36,500. This transaction was accounted for
as a purchase of a business and was paid for out of available cash on hand. Net assets acquired consist principally of
accounts receivable, finished goods inventories, goodwill, patents, trademarks, tradenames, product design specifications,
production know-how, certain fixed assets, distribution rights and customer lists, a covenant not-to-compete, less certain
product related operating accruals and liabilities. We have begun the process of completing our analysis of the economic
lives of the assets acquired and appropriate allocation of the initial purchase price.
Belson Products is a supplier of personal care products to the professional salon industry. Belson Products markets its
professional products to major beauty suppliers and other major distributors under brand names, including Belson®,
Belson Pro®, Gold ‘N Hot®, Curlmaster®, Premiere®, Profiles®, Comare®, Mega Hot®, and Shear Technology®.
Products include electrical hair care appliances, spa products and accessories, professional brushes and combs, and
professional styling shears. Belson Products are principally distributed throughout the United States, as well as Canada
and the United Kingdom.
94
HELEN OF TROY LIMITED AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Description
Year ended February 28, 2007
Additions
Balance at
Beginning
of Year
Charged to
cost and
expenses [1]
Charged to
revenues
Deductions [2]
Balance at
End of Year
Allowance for accounts receivable
$
850
$
586
$
-
$
434
$
1,002
Year ended February 28, 2006
Allowance for accounts receivable
$
2,167
$
648
$
-
$
1,965
$
850
Year ended February 28, 2005
Allowance for accounts receivable
$
1,100
$
1,728
$
-
$
661
$
2,167
[1] Represents periodic charges to the provision for doubtful accounts.
[2] Represents write offs of doubtful accounts net of recoveries of previously reserved amounts.
95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act as of the end of the period covered by this report.
Management has concluded that our disclosure controls and procedures are effective to ensure that information we are
required to disclose in reports that we file or submit under the Securities Exchange Act is accumulated and communicated
to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control
over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In the process of our evaluation, among other matters, we considered the existence of any “significant
deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether we had identified any
acts of fraud involving personnel with a significant role in our internal control over financial reporting. In the professional
auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are deficiencies in the
design or operation of controls that could adversely affect our ability to record, process, summarize and report financial
data in the financial statements. Auditing literature defines “material weakness” as a particularly serious reportable
condition in which the internal control does not reduce to a relatively low level the risk that misstatements caused by error
or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the normal course of performing their
assigned functions.
The management reports on internal control over financial reporting and the attestation report of the independent
registered public accounting firm required by this item are set forth under Item 8 of this report on pages 54 through 56,
and are incorporated herein by reference.
CHANGES IN INTERNAL CONTROLS
In connection with the evaluation described above, we identified no change in our internal control over financial
reporting that occurred during our fiscal quarter ended February 28, 2007, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
96
ITEM 9B. OTHER INFORMATION
None
97
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information in our Proxy Statement is incorporated by reference in response to this Item 10, as noted below:
•
•
•
•
Information about our Directors who are standing for reelection is set forth under “Election of Directors”;
Information about our executive officers is set forth under “Executive Officers”;
Information about our Audit Committee, including members of the committee, and our designated “audit
committee financial experts” is set forth under “Corporate Governance, The Board, Board Committees and
Meetings”; and
Information about Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a)
Beneficial Ownership Reporting Compliance.”
We have adopted a Code of Ethics governing our Chief Executive Officer, Chief Financial and Principal
Accounting Officer, and finance department members. The full text of our Code of Ethics is published on our website, at
www.hotus.com, under the “Investor Relations-Corporate Governance” caption. We intend to disclose future
amendments to, or waivers from, certain provisions of this Code on our website or in a current report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the captions “Executive Compensation”; “Employment Contract for Chairman of the
Board, Chief Executive Officer and President”; and “Compensation Discussion and Analysis” in our Proxy Statement is
incorporated by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management”
and “Executive Compensation” in our Proxy Statement is incorporated by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth under the captions “Certain Relationships and Related Transactions” and “Corporate
Governance, The Board, Board Committees and Meetings” in our Proxy Statement is incorporated by reference in
response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth under the caption “Audit and Other Fees Paid to our Independent Registered Public
Accounting Firm” in our Proxy Statement is incorporated by reference in response to this Item 14.
98
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
1.
2.
3.
Financial Statements: See "Index to Consolidated Financial Statements" under Item 8 on page 53 of
this report
Financial Statement Schedule: See "Schedule II" on page 94 of this report
Exhibits
The exhibit numbers preceded by an asterisk (*) indicate exhibits physically filed with this 2007 Form 10-K. All other
exhibit numbers indicate exhibits filed by incorporation by reference. Exhibits preceded by a cross (†) are management
contracts or compensatory plans or arrangements.
3.1
3.2
4.1
10.1†
10.2†
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12†
Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on
December 30, 1993 (the "1993 S-4")).
Bye-Laws, as Amended (incorporated by reference to Exhibit 4.2 to Helen of Troy Limited's Registration
Statement on Form S-8, File Number 333-128832, filed with the Securities and Exchange Commission on
October 10, 2005).
Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust and
Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Registrant's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on December 4, 1998).
Form of Directors' and Executive Officers' Indemnity Agreement (incorporated by reference to Exhibit 10.2
to the 1993 S-4).
1994 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the 1993 S-4).
Revlon Consumer Products Corporation (RCPC) North American Appliances License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.31 to Helen of Troy Corporation's
Quarterly Report on Form 10-Q for the period ending November 30, 1992 (the "November 1992 10-Q")).
Revlon Consumer Products Corporation (RCPC) International Appliances License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.32 to the November 1992
10-Q).
Revlon Consumer Products Corporation (RCPC) North American Comb and Brush License Agreement
dated September 30, 1992 (incorporated by reference to Exhibit 10.33 to the November
1992 10-Q).
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November
1992 10-Q).
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November
1992 10-Q).
First Amendment to RCPC North America Comb and Brush License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.27 to the 1993 10-K).
First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.28 to the 1993 10-K).
First Amendment to RCPC International Comb and Brush License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.29 to the 1993 10-K).
Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility (incorporated by reference to
Exhibit 10.23 to Helen of Troy Limited's Quarterly Report on Form 10-Q for the period ending November
30, 1996).
Helen of Troy Limited 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.3 to
Helen of Troy Limited's Registration Statement on Form S-8, File Number 333-67369, filed with the
Securities and Exchange Commission on November 17, 1998).
99
10.13†
10.14†
10.15
10.16†
10.17
10.18
10.19
10.20†
10.21
10.22†
10.23†
10.24†
10.25
10.26
21*
23*
31.1*
31.2*
32.1*
32.2*
Amended and Restated Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated
March 1, 1999 (incorporated by reference to Exhibit 10.29 to Helen of Troy Limited's Quarterly Report on
Form 10-Q for the period ending August 31, 1999 (the “August 1999 10-Q”)).
Amended and Restated Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.30 to the August 1999 10-Q).
Master License Agreement dated October 21, 2002, between The Procter & Gamble Company and Helen of
Troy Limited (Barbados) (Confidential treatment has been requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the Commission).
Amended and Restated Helen of Troy 1997 Cash Bonus Performance Plan, dated August 26, 2003
(incorporated by reference to Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form 10-Q for
the period ended August 31, 2003 (the “August 2003 10-Q”)).
Credit Agreement, dated as of June 1, 2004, among Helen of Troy L.P., Helen of Troy Limited, Bank of
America, N.A. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed on June 3, 2004).
Guaranty, dated as of June 1, 2004, made by Helen of Troy Limited (Bermuda), Helen of Troy Limited
(Barbados), Hot Nevada, Inc., Helen of Troy Nevada Corporation, Helen of Troy Texas Corporation, Idelle
Labs Ltd. and OXO International Ltd., in favor of Bank of America, N.A. and other lenders, pursuant to the
Credit Agreement, dated June 1, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K, filed on June 3, 2004).
Note Purchase Agreement, dated June 29, 2004, by and among Helen of Troy Limited (Bermuda), Helen of
Troy L.P., Helen of Troy Limited (Barbados) and the purchasers listed in Schedule A thereto (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 2, 2004).
Amendment to Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated March
1, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on
April 26, 2005).
Second Amendment to Credit Agreement, dated as of September 23, 2005, among Helen of Troy L.P.,
Helen of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated by reference to
Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form 10-Q for the period ended November 30,
2005 (the “November 2006 10-Q”)).
Amended and Restated Helen of Troy Limited 1998 Stock Option and Restricted Stock Plan (incorporated
by reference to Appendix A of Helen of Troy Limited’s Definitive Proxy Statement on Schedule 14A, File
Number 001-14669, filed with the Securities and Exchange Commission on June 15, 2005).
Form of Helen of Troy Limited Nonstatutory Stock Option Agreement.
Form of Helen of Troy Limited Incentive Stock Option Agreement.
Third Amendment to Credit Agreement, dated as of November 15, 2005, among Helen of Troy L.P., Helen
of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated by reference to
Exhibit 10.2 to the November 2006 10-Q).
First Amendment to Guarantee Agreement, dated as of November 15, 2005, among Helen of Troy Limited
(Bermuda), Helen of Troy Limited (Barbados), HOT Nevada, Inc., Helen of Troy Nevada Corporation,
Helen of Troy Texas Corporation, Idelle Labs Ltd., OXO International Ltd. and Bank of America, N.A. (as
Guaranteed party) (incorporated by reference to Exhibit 10.3 to the November 2006 10-Q).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Gerald J. Rubin
Gerald J. Rubin, Chairman,
Chief Executive Officer and Director
May 14, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Gerald J. Rubin
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
May 14, 2007
/s/ Thomas J. Benson
Thomas J. Benson
Senior Vice President, Chief Financial Officer
May 14, 2007
/s/ Richard J. Oppenheim
Richard J. Oppenheim
Financial Controller and Principal Accounting
Officer
May 14, 2007
/s/ Stanlee N. Rubin
Stanlee N. Rubin
Director
May 14, 2007
/s/ Byron H. Rubin
Byron H. Rubin
Director
May 14, 2007
/s/ John B. Butterworth
John B. Butterworth
Director
May 14, 2007
/s/ Darren G. Woody
Darren G. Woody
Director
May 14, 2007
/s/ Gary B. Abromovitz
Gary B. Abromovitz
Director, Deputy Chairman of the Board
May 14, 2007
/s/ Adolpho R. Telles
Adolpho R. Telles
Director
May 14, 2007
/s/ Timothy F. Meeker
Timothy F. Meeker
Director
May 14, 2007
101
INDEX TO EXHIBITS
The exhibit numbers preceded by an asterisk (*) indicate exhibits physically filed with this 2007 Form 10-K. All other
exhibit numbers indicate exhibits filed by incorporation by reference. Exhibits preceded by a cross (†) are management
contracts or compensatory plans or arrangements.
3.1
3.2
4.1
10.1†
10.2†
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12†
10.13†
10.14†
10.15
Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on
December 30, 1993 (the "1993 S-4")).
Bye-Laws, as Amended (incorporated by reference to Exhibit 4.2 to Helen of Troy Limited's Registration
Statement on Form S-8, File Number 333-128832, filed with the Securities and Exchange Commission on
October 10, 2005).
Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust and
Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Registrant's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on December 4, 1998).
Form of Directors' and Executive Officers' Indemnity Agreement (incorporated by reference to Exhibit 10.2
to the 1993 S-4).
1994 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the 1993 S-4).
Revlon Consumer Products Corporation (RCPC) North American Appliances License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.31 to Helen of Troy Corporation's
Quarterly Report on Form 10-Q for the period ending November 30, 1992 (the "November 1992 10-Q")).
Revlon Consumer Products Corporation (RCPC) International Appliances License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.32 to the November 1992
10-Q).
Revlon Consumer Products Corporation (RCPC) North American Comb and Brush License Agreement
dated September 30, 1992 (incorporated by reference to Exhibit 10.33 to the November
1992 10-Q).
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November
1992 10-Q).
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated
September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November
1992 10-Q).
First Amendment to RCPC North America Comb and Brush License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.27 to the 1993 10-K).
First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.28 to the 1993 10-K).
First Amendment to RCPC International Comb and Brush License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.29 to the 1993 10-K).
Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility (incorporated by reference to
Exhibit 10.23 to Helen of Troy Limited's Quarterly Report on Form 10-Q for the period ending November
30, 1996).
Helen of Troy Limited 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.3 to
Helen of Troy Limited's Registration Statement on Form S-8, File Number 333-67369, filed with the
Securities and Exchange Commission on November 17, 1998).
Amended and Restated Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated
March 1, 1999 (incorporated by reference to Exhibit 10.29 to Helen of Troy Limited's Quarterly Report on
Form 10-Q for the period ending August 31, 1999 (the “August 1999 10-Q”)).
Amended and Restated Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.30 to the August 1999 10-Q).
Master License Agreement dated October 21, 2002, between The Procter & Gamble Company and Helen of
Troy Limited (Barbados) (Confidential treatment has been requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the Commission).
102
10.16†
10.18
10.19
10.20†
10.21
10.22†
10.23†
10.24†
10.25
10.26
21*
23*
31.1*
31.2*
32.1*
32.2*
Amended and Restated Helen of Troy 1997 Cash Bonus Performance Plan, dated August 26, 2003
(incorporated by reference to Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form 10-Q for
the period ended August 31, 2003 (the “August 2003 10-Q”)).
Guaranty, dated as of June 1, 2004, made by Helen of Troy Limited (Bermuda), Helen of Troy Limited
(Barbados), Hot Nevada, Inc., Helen of Troy Nevada Corporation, Helen of Troy Texas Corporation, Idelle
Labs Ltd. and OXO International Ltd., in favor of Bank of America, N.A. and other lenders, pursuant to the
Credit Agreement, dated June 1, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K, filed on June 3, 2004).
Note Purchase Agreement, dated June 29, 2004, by and among Helen of Troy Limited (Bermuda), Helen of
Troy L.P., Helen of Troy Limited (Barbados) and the purchasers listed in Schedule A thereto (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 2, 2004).
Amendment to Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated March
1, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on
April 26, 2005).
Second Amendment to Credit Agreement, dated as of September 23, 2005, among Helen of Troy L.P.,
Helen of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated by reference to
Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form 10-Q for the period ended November 30,
2005 (the “November 2006 10-Q”)).
Amended and Restated Helen of Troy Limited 1998 Stock Option and Restricted Stock Plan (incorporated
by reference to Appendix A of Helen of Troy Limited’s Definitive Proxy Statement on Schedule 14A, File
Number 001-14669, filed with the Securities and Exchange Commission on June 15, 2005).
Form of Helen of Troy Limited Nonstatutory Stock Option Agreement.
Form of Helen of Troy Limited Incentive Stock Option Agreement.
Third Amendment to Credit Agreement, dated as of November 15, 2005, among Helen of Troy L.P., Helen
of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated by reference to
Exhibit 10.2 to the November 2006 10-Q).
First Amendment to Guarantee Agreement, dated as of November 15, 2005, among Helen of Troy Limited
(Bermuda), Helen of Troy Limited (Barbados), HOT Nevada, Inc., Helen of Troy Nevada Corporation,
Helen of Troy Texas Corporation, Idelle Labs Ltd., OXO International Ltd. and Bank of America, N.A. (as
Guaranteed party) (incorporated by reference to Exhibit 10.3 to the November 2006 10-Q).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
103
SUBSIDIARIES OF THE REGISTRANT
Name
Incorporation
Costa Rica
France
Germany
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hungary
Jamaica
Luxembourg
Barbados
Helen of Troy Limited
Barbados
HOT International Marketing Limited
Brazil
Helen of Troy do Brasil Ltda.
Cayman Islands
H.O.T. Cayman Holding
Cayman Islands
Helen of Troy (Cayman) Limited
Helen of Troy Chile, S.A.
Chile
Helen of Troy Consulting (Shenzhen) Company Limited China
Helen of Troy Costa Rica, S.A.
Helen of Troy SARL
Helen of Troy GmbH
Asia Pacific Liaison Services Limited
Helen of Troy (Far East) Limited
Helen of Troy Manufacturing Limited
Helen of Troy Services Limited
Helen of Troy Szolgaltato KFT
HOT (Jamaica) Limited
H.O.T. (Luxembourg) SARL
Helen of Troy Comercial Offshore de Macau Limitada Macao
Mexico
Helen of Troy de Mexico S.de R.L. de C.V.
Mexico
Helen of Troy Servicios S.de R.L. de C.V.
Nevada
Helen of Troy Canada, Inc.
Nevada
Helen of Troy Nevada Corporation
Nevada
Helen of Troy, LLC
Nevada
HOT Latin America, LLC
Nevada
HOT Nevada Inc.
Nevada
Idelle Management Company
Nevada
OXO International Inc.
New Jersey
Karina, Inc.
Texas
DCNL, Inc.
Texas
Helen of Troy Texas Corporation
Texas Limited Partnership
Helen of Troy L.P.
Texas Limited Partnership
Idelle Labs, Ltd.
Texas Limited Partnership
OXO International Ltd.
The Netherlands
Helen of Troy International B.V.
United Kingdom
HOT (UK) Limited
Uruguay
Fontelux Trading, S.A.
Venezuela
Helen of Troy Venezuela, S.A.
104
EXHIBIT 21
Doing
Business as
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
The Board of Directors
Helen of Troy Limited:
We consent to the incorporation by reference in the registration statements No. 33-75832, No. 333-11181, No.
333-67349, No. 333-67369, No. 333-90776, No. 333-103825, and No. 333-128832 on Form S-8, of Helen of Troy
Limited and subsidiaries of our reports dated May 14, 2007, with respect to the consolidated balance sheets of Helen of
Troy Limited and subsidiaries as of February 28, 2007 and 2006, and the related consolidated statements of income,
shareholders’ equity and comprehensive income, and cash flows and related financial statement schedule for each of the
years in the three-year period ended February 28, 2007, management’s assessment of the effectiveness of internal control
over financial reporting as of February 28, 2007 and the effectiveness of internal control over financial reporting as of
February 28, 2007, which reports appear in the February 28, 2007 annual report on Form 10-K of Helen of Troy Limited.
/s/ KPMG LLP
Houston, Texas
May 14, 2007
105
Exhibit 31.1
I, Gerald J. Rubin, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Helen of Troy Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects, the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 14, 2007
/s/ Gerald J. Rubin
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
106
Exhibit 31.2
I, Thomas J. Benson, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Helen of Troy Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects, the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 14, 2007
/s/ Thomas J. Benson
Thomas J. Benson
Senior Vice President and Chief Financial Officer
107
CERTIFICATION
Exhibit 32.1
I, Gerald J. Rubin hereby certify, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as Chairman of the Board, Chief
Executive Officer, President, Director and Principal Executive Officer of Helen of Troy Limited (the "Company"), that, to
my knowledge, the Annual Report of Helen of Troy Limited on Form 10-K for the period ended February 28, 2007, fully
complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the financial condition and results of operation of the
Company.
Date: May 14, 2007
/s/ Gerald J. Rubin
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
108
CERTIFICATION
Exhibit 32.2
I, Thomas J. Benson hereby certify, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as Senior Vice President and Chief
Financial Officer of Helen of Troy Limited (the "Company"), that, to my knowledge, the Annual Report of Helen of Troy
Limited on Form 10-K for the period ended February 28, 2007, fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Date: May 14, 2007
/s/ Thomas J. Benson
Thomas J. Benson
Senior Vice President and Chief Financial Officer
109