NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. Dollars, except share and per share data, unless indicated otherwise)
Note 1 - Summary of Significant Accounting Policies and Related Information
Corporate Overview
When used in these notes, unless otherwise indicated or the context suggests otherwise, references to “the Company”, “our Company”, “Helen of Troy”, “we”, “us”, or “our” refer to Helen of Troy Limited and its subsidiaries, which are all wholly-owned. We refer to our common shares, par value $0.10 per share, as “common stock.” References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to accounting principles generally accepted in the United States of America (the “U.S.”). References to “ASU” refer to the codification of GAAP in the Accounting Standards Updates issued by the FASB. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.
We incorporated as Helen of Troy Corporation in Texas in 1968 and were reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading consumer products company offering creative products and solutions for our customers through a diversified portfolio of brands. As of February 28, 2021, we operated three segments: Housewares, Health & Home, and Beauty. Our Housewares segment provides a broad range of innovative consumer products for the home and on the go to help with food preparation, cooking, cleaning, organization, beverage service, and other tasks to ease everyday living for families. The Health & Home segment provides healthcare and home environment products including health care devices, water filtration systems, and small home appliances. Our Beauty segment provides mass and prestige market beauty appliance and personal care products including hair styling appliances, grooming tools, decorative haircare accessories, and liquid-, solid- and powder-based personal care and grooming products.
Our business is seasonal due to different calendar events, holidays and seasonal weather patterns. Our fiscal reporting period ends on the last day in February. Historically, our highest sales volume and operating income occur in our third fiscal quarter ending November 30th. We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the U.S.
On December 20, 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries to Direct Digital, LLC. The results of the Nutritional Supplements operations and the related loss on sale have been reported as discontinued operations for all periods presented in the consolidated financial statements (see Note 5). All other footnotes present results from continuing operations.
On January 23, 2020, we completed the acquisition of Drybar Products, for approximately $255.9 million in cash. Drybar is an innovative, trendsetting prestige hair care and styling brand in the multibillion-dollar beauty industry (see Note 8).
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Beauty segment's mass channel personal care business (“Personal Care”). The assets to be disposed of include intangible assets, inventory, certain net trade receivables and fixed assets relating to our mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. Accordingly, we classified the identified assets of the disposal group as held for sale. We expect the divestiture to occur during the first quarter of fiscal 2022. See Note 4 for additional information.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) to be a pandemic. COVID-19 continues to spread throughout the U.S. and the world, with the continued potential for catastrophic impact. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores or limited hours of operation, and materially lower store traffic. COVID-19 has disrupted certain parts of our supply chain, which in certain cases has limited our ability to fulfill demand. Additionally, surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in higher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill some orders on a timely basis.
COVID-19 has favorably impacted the demand for our product lines that are more defensive, meet certain healthcare or healthy living needs, or meet the needs of consumers that are spending more time at home as a result of the pandemic. COVID-19 has also favorably impacted our online channel, as brick and mortar shopping options have been limited or considered unsafe by consumers. Although the favorable impacts of COVID-19 outweighed the unfavorable impacts for fiscal 2021, this situation continues to change rapidly, and additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Additionally, the extent of COVID-19’s impact on the demand for certain of our product lines in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to source and distribute our products, as well as any future government actions affecting consumers and the economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Principles of Consolidation
The accompanying consolidated financial statements are prepared in accordance with GAAP and include all of our subsidiaries. Our consolidated financial statements are prepared in U.S. Dollars. All intercompany balances and transactions are eliminated in consolidation.
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results may differ materially from those estimates.
Reclassifications
We have reclassified, combined or separately disclosed certain amounts in the prior years’ consolidated financial statements and accompanying footnotes to conform to the current year’s presentation.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with an original maturity of three months or less. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts. We consider money market accounts to be cash equivalents.
Receivables
Our receivables are principally comprised of trade receivables from customers, primarily in the retail industry, offset by an allowance for credit losses. Our allowance for credit losses reflects our best estimate of expected credit losses over the receivables' term, determined principally based on historical experience, specific allowances for known at-risk accounts, and consideration of current economic conditions and management’s expectations of future economic conditions. Our policy is to write off
receivables when we have determined they will no longer be collectible. Write-offs are applied as a reduction to the allowance for credit losses and any recoveries of previous write-offs are netted against bad debt expense in the period recovered.
We have a significant concentration of credit risk with three major customers at February 28, 2021 representing approximately 18%, 16%, and 15% of our gross trade receivables, respectively. As of February 29, 2020, our significant concentration of credit risk with three major customers represented approximately 18%, 14%, and 13% of our gross trade receivables, respectively. In addition, as of February 28, 2021 and February 29, 2020, approximately 58% and 54%, respectively, of our gross trade receivables were due from our five top customers.
Foreign Currency Transactions and Related Derivative Financial Instruments
The U.S. Dollar is the functional currency for the Company and all of its subsidiaries and is also the reporting currency for the Company; therefore, we do not have a translation adjustment recorded through accumulated other comprehensive income. All our non-U.S. subsidiaries' transactions denominated in other currencies have been remeasured into U.S. Dollars using exchange rates in effect on the date each transaction occurred. In our consolidated statements of income, foreign currency exchange rate gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines and all other foreign currency exchange rate gains and losses are recognized in SG&A.
In order to manage our exposure to changes in foreign currency exchange rates, we use forward contracts, zero-cost collars and cross-currency debt swaps to exchange foreign currencies for U.S. Dollars at specified rates. Derivatives for which we have elected and qualify for hedge accounting include our forward contracts and zero-cost collars (“foreign currency contracts”). Our foreign currency contracts are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in Other Comprehensive (Loss) Income (“OCI”) until the hedged forecasted transaction affects earnings, at which point amounts are reclassified from Accumulated Other Comprehensive (Loss) Income (“AOCI”) to our consolidated statements of income. Derivatives for which we have not elected or do not qualify for hedge accounting include our cross-currency debt swaps and any changes in the fair value of the derivatives are recorded in our consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any material ineffectiveness is recorded in our consolidated statements of income. We do not enter into any derivatives or similar instruments for trading or other speculative purposes.
Inventory and Cost of Goods Sold
Our inventory consists almost entirely of finished goods. Inventories are stated at the lower of average cost or net realizable value. We write down a portion of our inventory to net realizable value based on the historical success of product lines and estimates about future demand and market conditions, among other factors. Our average costs include the amounts we pay manufacturers 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 acquiring inventory, as applicable.
General and administrative expenses directly attributable to acquiring inventory include all the expenses of operating our sourcing activities and expenses incurred for packaging. We capitalized $33.9 million, $44.6 million, and $47.7 million of such general and administrative expenses into inventory during fiscal 2021, 2020 and 2019, respectively. We estimate that $15.1 million and $16.0 million of general and administrative expenses directly attributable to the procurement of inventory were included in our inventory balances on hand at February 28, 2021 and February 29, 2020, respectively.
The “Cost of goods sold” line item in the consolidated statements of income is comprised of the book value of inventory sold to customers during the reporting period. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices less expected disposal costs.
For fiscal 2021, 2020 and 2019, finished goods purchased from vendors in the geographic markets of Asia Pacific (“Far East”), comprised approximately 80%, 76%, and 74%, respectively, of total finished goods purchased. During fiscal 2021, we had one vendor (located in China) who fulfilled approximately 11% of our product requirements compared to 7% and 9% for fiscal 2020 and 2019, respectively. Additionally, during fiscal 2021 and fiscal 2020, we had one vendor (located in Mexico) who fulfilled approximately 9% of our product requirements compared to 11% for fiscal 2019. For fiscal 2021, 2020 and 2019, our top two manufacturers combined fulfilled approximately 20%, 18%, and 20% of our product requirements, respectively. Over the same periods, our top five suppliers fulfilled approximately 38%, 39%, and 38% of our product requirements, respectively.
Property and Equipment
These assets are recorded at cost. Depreciation is recorded 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 where allowed by tax laws.
License Agreements, Trademarks, Patents, and Other Intangible Assets
A significant portion of our sales are made subject to trademark license agreements with various licensors. Our license agreements are reported on our consolidated balance sheets at cost, less accumulated amortization. The cost of our license agreements represent 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. Certain licenses have extension terms that may require additional payments to the licensor as part of the terms of renewal. We capitalize costs incurred to renew or extend the term of a license agreement and amortize such costs on a straight-line basis over the remaining term or economic life of the agreement, whichever is shorter. Royalty payments are not included in the cost of license agreements. Royalty expense under our license agreements is recognized as incurred and is included in our consolidated statements of income in SG&A. Net sales revenue subject to trademark license agreements requiring royalty payments comprised approximately 41%, 43%, and 41% of consolidated net sales revenue for fiscal 2021, 2020 and 2019, respectively. During fiscal 2021, two license agreements accounted for net sales revenue subject to royalty payments of approximately 15% and 12% of consolidated net sales revenue. No other license agreements had associated net sales revenue subject to royalty payments that accounted for 10% or more of consolidated net sales revenue.
We also sell products under trademarks and brand assets that we own. Trademarks and brand assets that we acquire through acquisition from other entities are generally recorded on our consolidated balance sheets based upon the appraised fair value of the acquired asset, net of any accumulated amortization and impairment charges. Costs associated with developing trademarks internally are recorded as expenses in the period incurred. In certain instances where trademarks or brand assets have readily determinable useful lives, we amortize their costs on a straight-line basis over such lives. In some instances, we have determined that such acquired assets have an indefinite useful life. In these cases, no amortization is recorded. Patents acquired through acquisition, if material, are recorded on our consolidated balance sheets based upon the appraised value of the acquired patents and amortized over the remaining life of the patent. Additionally, we incur certain costs in connection with the design and development of products to be covered by patents, which are capitalized as incurred and amortized on a straight-line basis over the life of the patent in the jurisdiction filed, typically 12 to 14 years.
Other intangible assets include customer lists, distribution rights, patent rights, and non-compete agreements that we acquired. These are recorded on our consolidated balance sheets based upon the fair value of the acquired asset and amortized on a straight-line basis over the remaining life of the asset as determined either by a third-party appraisal or the term of any controlling agreements.
Goodwill, Intangible and Other Long-Lived Assets and Related Impairment Testing
Goodwill is recorded as the difference, if any, between the aggregate consideration paid and the fair value of the net tangible and intangible assets received in the acquisition of a business. The estimates of the fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation techniques that consider a number of factors, and when appropriate, valuations performed by independent third-party appraisers.
We review goodwill and indefinite-lived intangible assets for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We consider whether circumstances or conditions exist which suggest that the carrying value of our goodwill and indefinite-lived intangible assets might be impaired. If such circumstances or conditions exist, we perform a qualitative assessment to determine whether it is more likely than not that the assets are impaired. We evaluate goodwill at the reporting unit level (operating segment or one level below an operating segment). If the results of the qualitative assessment indicate that it is more likely than not that the assets are impaired, further steps are required in order to determine whether the carrying value of each reporting unit and indefinite-lived intangible assets exceeds its fair market value. An impairment charge is recognized to the extent the goodwill or indefinite-lived intangible asset recorded exceeds the reporting unit’s or asset's fair value. We perform our annual impairment testing for goodwill and indefinite-lived intangible assets as of the beginning of the fourth quarter of our fiscal year (see Note 9).
We review intangible assets with definite lives and long-lived assets held and used if a triggering event occurs during the reporting period. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of each of the individual assets exceeds its fair market value. If our analysis indicates that an individual asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the individual asset’s carrying value over its fair value. We evaluate long-lived assets held for sale quarterly to determine if estimated fair value less cost to sell has changed during the reporting period. See Note 4 for additional information on our assets held for sale impairment analysis.
The assumptions and estimates used in our impairment testing involve significant elements of subjective judgment and analysis. While we believe that the assumptions we use are reasonable at the time made, changes in business conditions or other unanticipated events and circumstances may occur that cause actual results to differ materially from projected results and this could potentially require future adjustments to our asset valuations.
Economic Useful Lives and Amortization of Intangible Assets
Intangible assets consist primarily of license agreements, trademarks, brand assets, customer lists, distribution rights, patents, patent rights, and non-compete agreements. We amortize intangible assets over their economic useful lives, unless those assets' economic useful lives are indefinite. If an intangible asset’s economic useful life is deemed 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
complete our analysis of the remaining useful economic lives of our intangible assets during the fourth quarter of each fiscal year or when a triggering event occurs. For certain intangible assets subject to amortization, we use the straight-line method over appropriate periods ranging from 5 to 40 years for licenses, 15 to 30 years for trademarks and 5 to 24 years for other definite-lived intangible assets (see Note 9).
Sales Returns
We allow for sales returns for defects in material and workmanship for periods ranging from two to five years. We recognize an allowance for sales returns to reduce sales to reflect our best estimate of future customer returns, determined principally based on historical experience and specific allowances for known pending returns.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts payable, accrued expenses and other current liabilities, and income taxes payable approximate fair value because of the short maturity of these items. The carrying amounts of receivables approximate fair value due to the effect of the related allowance for credit losses. The carrying amount of our floating rate long-term debt approximates its fair value.
We use derivatives to manage our exposure to changes in foreign currency exchange rates, which include foreign currency forward contracts, zero cost collars and cross-currency debt swaps. In addition, we use interest rate swaps to manage our exposure to changes in interest rates. All of our derivative assets and liabilities are recorded at fair value. See Notes 16, 17 and 18 for more information on our fair value measurements and derivatives.
Income Taxes and Uncertain Tax Positions
The provision for income tax expense is calculated on reported income before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.
Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized. The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.
We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on its technical merits assuming the tax authority has full knowledge of all relevant information. For positions meeting this recognition threshold, the benefit is measured as the largest
amount that has greater than a 50 percent likelihood of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, historical experience with similar tax matters, guidance from our tax advisors, and new audit activity. For tax positions that do not meet the threshold requirement, we record liabilities for unrecognized tax benefits as a tax expense or benefit in the period recognized or reversed and disclose as a separate liability in our financial statements, including related accrued interest and penalties.
Revenue Recognition
We adopted the provisions of ASU 2014-09 in the first quarter of fiscal 2019, and we elected to adopt the standard using the retrospective method. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our revenue is primarily generated from the sale of non-customized consumer products to customers. These products are promised goods that are distinct performance obligations. Revenue is recognized when control of, and title to, the product sold transfers to the customer in accordance with applicable shipping terms, which can occur on the date of shipment or the date of receipt by the customer, depending on the customer and the agreed upon shipping terms. Payment terms from the sale of our products are typically due to us in thirty to ninety days after the date of sale.
We measure revenue as the amount of consideration for which we expect to be entitled, in exchange for transferring goods. Certain customers may receive cash incentives such as customer discounts (including volume or trade discounts), advertising discounts and other customer-related programs which are accounted for as variable consideration. In some cases, we apply judgment, such as contractual rates and historical payment trends, when estimating variable consideration. In accordance with the guidance, most variable consideration is classified as a reduction to net sales. In instances when we purchase a distinct good or service from our customer and fair value can be reasonably estimated, these amounts are expensed in our consolidated statements of income in SG&A. The amount of consideration granted to customers recorded in SG&A was $27.1 million, $20.9 million, and $17.0 million for fiscal 2021, 2020 and 2019, respectively.
Sales taxes and other similar taxes are excluded from revenue. We have elected to account for shipping and handling activities as a fulfillment cost as permitted by the guidance. We do not have unsatisfied performance obligations since our performance obligations are satisfied at a single point in time.
Advertising
Advertising costs include cooperative retail advertising with our customers, traditional and digital media advertising and production expenses, and expenses associated with other promotional product messaging and consumer awareness programs. Advertising costs are expensed in the period in which they are incurred and included in our consolidated statements of income in SG&A. We incurred total advertising costs of $110.7 million, $71.4 million, and $62.4 million during fiscal 2021, 2020 and 2019, respectively.
Research and Development Expense
Research and development expenses consist primarily of salary and employee benefit expenses and contracted development efforts and expenses associated with development of products. Expenditures for research activities relating to product design, engineering, development and improvement are generally charged to expense as incurred and are included in our consolidated statements of income in SG&A. We
incurred total research and development expenses of $30.6 million, $17.8 million, and $13.0 million during fiscal 2021, 2020 and 2019, respectively.
Shipping and Handling Revenue and Expense
Shipping and handling revenue and expense are included in our consolidated statements of income in SG&A. This includes distribution center costs, third-party logistics costs and outbound transportation costs we incur. Our net expense for shipping and handling was $140.1 million, $102.7 million, and $89.4 million during fiscal 2021, 2020 and 2019, respectively.
Share-Based Compensation Plans
We grant share-based compensation awards to non-employee directors and certain employees under our equity plans. We measure the cost of services received in exchange for equity awards, which include grants of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock awards (“PSAs”), and performance stock units (“PSUs”), based on the fair value of the awards on the grant date. Share-based compensation expense is recognized over the requisite service period during which the employee is required to provide service in exchange for the award, unless the awards are subject to performance conditions, in which case we recognize compensation expense over the requisite service period to the extent performance conditions are considered probable. The estimated number of PSAs and PSUs that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. All share-based compensation expense is recorded net of forfeitures in our consolidated statements of income.
The grant date fair value of RSAs, RSUs, PSAs, and PSUs are determined using the closing price of our common stock on the date of grant. We determine the grant date fair value of stock options using a Black-Scholes option-pricing model, which requires various judgmental assumptions including volatility, forfeiture rates and expected option life. See Note 10 for further information on our share-based compensation plans.
Note 2 - New Accounting Pronouncements
There have been no accounting pronouncements issued but not yet adopted that are expected to have a material impact on our consolidated financial statements.
Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients to the U.S. GAAP guidance on contract modifications and hedge accounting and other transactions affected by reference rate reform to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU was effective upon issuance, on March 12, 2020, and may be applied through December 31, 2022. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which provides for certain updates to reduce complexity in the accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted this
ASU during the fourth quarter of fiscal 2021 and the adoption did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (with subsequent targeted amendments), which modifies the measurements of expected credit losses for certain financial instruments and financial assets, including trade receivables. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU was effective for us in the first quarter of fiscal 2021, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
Note 3 - Leases
We determine if an arrangement is or contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We primarily have leases for office space, which are classified as operating leases. Operating leases are included in operating lease assets, accrued expenses and other current liabilities, and lease liabilities, non-current in our consolidated balance sheets. Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our lease contracts do not provide an explicit interest rate, we use an estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
We include options to extend or terminate the lease in the lease term for accounting considerations, when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of less than 1 year to 12 years. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We do not recognize leases with an initial term of twelve months or less on the balance sheet and instead recognize the related lease payments as expense in the consolidated statements of income on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for all asset classes. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense recognized within SG&A in the consolidated statements of income was $7.0 million and $6.4 million, for fiscal 2021 and 2020, respectively. Short-term lease expense is excluded from this amount and is not material. Rent expense related to all our operating leases was $9.5 million, $7.8 million, and $7.9 million for fiscal 2021, 2020 and 2019, respectively. The non-cash component of lease expense is included as an adjustment to reconcile income from continuing operations to net cash provided by operating activities in the consolidated statements of cash flows.
A summary of supplemental lease information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021
|
|
February 29, 2020
|
Weighted average remaining lease term (years)
|
9.6
|
|
10.8
|
Weighted average discount rate
|
6.03%
|
|
6.13%
|
Year-to-date cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
6,951
|
|
$
|
4,579
|
Operating lease assets obtained in exchange for operating lease liabilities
|
$
|
4,163
|
|
$
|
166
|
|
|
|
|
A summary of our estimated lease payments, imputed interest and liabilities are as follows:
|
|
|
|
|
|
(in thousands)
|
February 28, 2021
|
Fiscal 2022
|
$
|
8,365
|
|
Fiscal 2023
|
6,363
|
|
Fiscal 2024
|
5,332
|
|
Fiscal 2025
|
5,762
|
|
Fiscal 2026
|
5,035
|
|
Thereafter
|
29,335
|
|
Total future lease payments
|
60,192
|
|
Less: imputed interest
|
(15,868)
|
|
Present value of lease liability
|
$
|
44,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 28, 2021
|
|
February 29, 2020
|
Lease liabilities, current (1)
|
$
|
5,972
|
|
|
$
|
3,641
|
|
Lease liabilities, non-current
|
38,352
|
|
|
40,861
|
|
Total lease liability
|
$
|
44,324
|
|
|
$
|
44,502
|
|
(1)Included as part of “Accrued expenses and other current liabilities” on the consolidated balance sheet.
Note 4 - Assets Held for Sale
We record assets held for sale in accordance with ASC 360 “Property, Plant, and Equipment,” and present them as single asset amounts in our consolidated financial statements. Assets held for sale consist of assets that we expect to sell within the next year. The assets are reported at the lower of carrying amount or fair value less costs to sell. We cease recording depreciation on assets that are classified as held for sale. If the determination is made that we no longer expect to sell an asset within the next year, the asset is reclassified out of held for sale. We review assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to estimated fair values less costs to sell.
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care business. The assets to be disposed of include intangible assets, inventory, certain net trade receivables and fixed assets relating to our mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. Accordingly, we classified the identified assets of the disposal group as held for sale during the fourth quarter of fiscal 2020. During the fourth quarter of fiscal 2020, we recorded non-cash asset impairment charges of $41.0 million ($36.4 million after tax) related to goodwill and intangible assets.
During the fourth quarter of fiscal 2021, our quarterly impairment evaluation of long-lived assets held for sale resulted in a non-cash asset impairment charge of $8.5 million ($7.4 million after tax) to reduce the goodwill of our Personal Care business to reflect the disposal group at fair value less cost to sell. We expect the divestiture to occur during the first quarter of fiscal 2022.
The carrying amounts of the major classes of assets for our Personal Care business that were classified as held for sale are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 28, 2021
|
|
February 29, 2020
|
|
|
|
|
|
|
|
|
Receivables, net of allowance of $30
|
$
|
7,979
|
|
|
$
|
—
|
|
|
|
Inventory
|
12,667
|
|
|
17,150
|
|
|
|
Property and equipment, net of accumulated depreciation of $403
|
100
|
|
|
83
|
|
|
|
Goodwill, net of accumulated impairment of $80,445 and $71,993
|
1,397
|
|
|
9,849
|
|
|
|
Other intangible assets, net of accumulated amortization of $4,474
|
17,724
|
|
|
17,724
|
|
|
|
Assets held for sale
|
$
|
39,867
|
|
|
$
|
44,806
|
|
|
|
The following table summarizes income (loss) before income tax for our Personal Care business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
Income (loss) before income tax
|
$
|
8,705
|
|
|
$
|
(29,760)
|
|
|
$
|
23,190
|
|
Income (loss) before income taxes includes non-cash asset impairment charges of $8.5 million and $41.0 million for fiscal 2021 and 2020, respectively, and amortization of intangible assets of $7.8 million and $1.0 million for fiscal 2020 and 2019, respectively. No asset impairment charges were recorded in fiscal 2019 and no amortization of intangible assets was recorded in fiscal 2021 for our Personal Care business. Income (loss) before income taxes also includes corporate overhead expenses that are allocable to the business.
Note 5 - Discontinued Operations
In December 2017, we completed the divestiture of the Nutritional Supplements segment through the sale of Healthy Directions LLC and its subsidiaries (“Healthy Directions”) to Direct Digital, LLC. The purchase price from the sale was comprised of $46.0 million in cash, which was paid at closing, and a supplemental payment with a target value of $25.0 million, payable on or before August 1, 2019. During fiscal 2019, the final amount of the supplemental payment was adjusted to $10.8 million based on a settlement with respect to the calculation of the performance of Healthy Directions through February 28, 2018. The adjustment resulted in a corresponding pre-tax charge of $5.8 million ($4.4 million after tax) to discontinued operations in fiscal 2019. The supplemental payment of $10.8 million was received during the second quarter of fiscal 2020. Also, during fiscal 2019, we recorded an additional pre-tax charge of $1.5 million ($1.3 million after tax) to discontinued operations, resulting from the resolution of certain contingencies. In conjunction with the sale of the business, we provided certain transition services that ceased during the second quarter of fiscal 2020. There were no balance sheet amounts related to discontinued operations at either balance sheet date presented. Additionally, there was no investing activities for discontinued operations for any period presented in the consolidated statements of cash flows.
Note 6 - Property and Equipment
A summary of property and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives (Years)
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
|
|
2021
|
|
2020
|
Land
|
|
—
|
|
|
$
|
12,644
|
|
|
$
|
12,644
|
|
Building and improvements
|
3
|
—
|
40
|
|
116,652
|
|
|
115,592
|
|
Computer, furniture and other equipment
|
3
|
—
|
15
|
|
97,810
|
|
|
89,257
|
|
Tools, molds and other production equipment
|
3
|
—
|
7
|
|
42,729
|
|
|
37,652
|
|
Construction in progress
|
|
—
|
|
|
7,079
|
|
|
9,302
|
|
Property and equipment, gross
|
|
|
|
|
276,914
|
|
|
264,447
|
|
Less: accumulated depreciation
|
|
|
|
|
(140,379)
|
|
|
(132,340)
|
|
Property and equipment, net
|
|
|
|
|
$
|
136,535
|
|
|
$
|
132,107
|
|
We recorded $20.1 million, $16.1 million and $15.7 million of depreciation expense including $6.8 million, $4.3 million and $4.1 million in cost of goods sold and $13.3 million, $11.8 million and $11.6 million in SG&A in the consolidated statements of income for fiscal 2021, 2020 and 2019, respectively.
Note 7 - Accrued Expenses and Other Current Liabilities
A summary of accrued expenses and other current liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
Accrued compensation, benefits and payroll taxes
|
$
|
66,385
|
|
|
$
|
49,624
|
|
Accrued sales discounts and allowances
|
59,426
|
|
|
34,176
|
|
Accrued sales returns
|
29,434
|
|
|
22,972
|
|
Accrued advertising
|
50,923
|
|
|
31,351
|
|
|
|
|
|
Other
|
65,011
|
|
|
45,034
|
|
Total accrued expenses and other current liabilities
|
$
|
271,179
|
|
|
$
|
183,157
|
|
Note 8 - Acquisition of Drybar Products
On January 23, 2020, we completed the acquisition of Drybar Products LLC (“Drybar Products”) for approximately $255.9 million in cash. Acquisition-related expenses incurred during fiscal 2020 were approximately $2.5 million before tax. The purchase price was funded by borrowings under the Company's revolving credit agreement.
Drybar is an innovative, trend setting prestige hair care and styling brand in the multibillion-dollar beauty industry. As part of the transaction, we granted a worldwide license to Drybar Holdings LLC, which has subsequently been assumed by WellBiz Brands, Inc., as successor owner of Drybar blowout salons, to use the Drybar trademark in relation to the franchising and operation of Drybar salons. The salons exclusively use, promote, and sell Drybar products globally.
We accounted for the acquisition as a purchase of a business and recorded the excess purchase price as goodwill. We completed our analysis of the economic lives of the assets acquired and determined the appropriate fair values of the acquired assets. We assigned $30.0 million to trade names and are amortizing over a 15 year expected life. We assigned $17.0 million to customer relationships and are amortizing over a 14.5 year expected life. We used historical attrition rates to assign the expected life. We assigned $10.0 million to a consulting agreement and $6.0 million to a non-compete provision, and we are amortizing these assets over expected lives of 5 and 10 years, respectively.
The following table presents the net assets recorded upon acquisition of Drybar Products at January 23, 2020:
|
|
|
|
|
|
(in thousands)
|
|
Assets:
|
|
Receivables
|
$
|
7,710
|
|
Inventory
|
16,603
|
|
Prepaid expenses and other current assets
|
190
|
|
Property and equipment
|
1,472
|
|
Goodwill
|
172,933
|
|
Trade names - definite
|
30,000
|
|
Other intangible assets - definite
|
33,000
|
|
Subtotal - assets
|
261,908
|
|
Liabilities:
|
|
Accounts payable
|
1,948
|
|
Accrued expenses
|
4,099
|
|
Subtotal - liabilities
|
6,047
|
|
Net assets recorded
|
$
|
255,861
|
|
The fair values of the above assets acquired and liabilities assumed were estimated by applying income and market approaches. Key assumptions include various discount rates based upon a 12.6% weighted average cost of capital; royalty rates used in the determination of trade names and customer relationship asset values of 5.0% and 3.0%, respectively; and a customer attrition rate used in the determination of customer relationship values of 6.7% per year.
The impact of the acquisition of Drybar Products on our consolidated statements of income for fiscal 2020 is as follows:
|
|
|
|
|
|
January 23, 2020 (acquisition date) through February 29, 2020
(in thousands, except earnings per share data)
|
Fiscal Year Ended February 29, 2020
|
Sales revenue, net
|
$
|
6,039
|
|
Income from continuing operations
|
1,483
|
|
|
|
EPS from continuing operations:
|
|
Basic
|
$
|
0.06
|
|
Diluted
|
$
|
0.06
|
|
The following supplemental unaudited pro forma information presents our financial results as if the acquisition of Drybar Products had occurred on March 1, 2018. This supplemental pro forma information has been prepared for comparative purposes and would not necessarily indicate what may have occurred as if the acquisition had been completed on March 1, 2018, and this information is not intended to be indicative of future results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended the Last Day of February,
|
(in thousands, except earnings per share data)
|
2020
|
|
2019
|
Sales revenue, net
|
$
|
1,773,592
|
|
|
$
|
1,621,117
|
|
Income from continuing operations
|
162,114
|
|
|
179,550
|
|
|
|
|
|
EPS from continuing operations:
|
|
|
|
Basic
|
$
|
6.45
|
|
|
$
|
6.89
|
|
Diluted
|
$
|
6.40
|
|
|
$
|
6.83
|
|
|
|
|
|
|
|
|
|
Note 9 - Goodwill and Intangibles
We do not record amortization expense for goodwill or other intangible assets that have indefinite useful lives. Amortization expense is recorded for intangible assets with definite useful lives and is reported within SG&A in our consolidated statements of income. Some of our goodwill is held in jurisdictions that allow deductions for tax purposes, however, in some of those jurisdictions we have no tax basis for the associated goodwill recorded for book purposes. Accordingly, the majority of our goodwill is not deductible for tax purposes. We perform annual impairment testing each fiscal year and interim impairment testing, if necessary. We write down any asset deemed to be impaired to its fair value.
Impairment Testing in Fiscal 2021 - During the fourth quarter of fiscal 2021, our quarterly impairment evaluation of long-lived assets held for sale resulted in a non-cash asset impairment charge of $8.5 million ($7.4 million after tax) to reduce the goodwill of our Personal Care business to reflect the disposal group at fair value less cost to sell. See Note 4 for additional information.
Impairment Testing in Fiscal 2020 - We recorded non-cash asset impairment charges related to goodwill and intangible assets of $41.0 million ($36.4 million after tax). The charges were related to Personal Care, which was written down to its estimated fair value, and classified as held for sale.
Impairment Testing in Fiscal 2019 - We did not record any impairment charges.
The following table summarizes the changes in our goodwill by segment for fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Housewares
|
|
Health & Home
|
|
Beauty
|
|
Total
|
Gross carrying amount as of February 28, 2019
|
$
|
282,056
|
|
|
$
|
284,913
|
|
|
$
|
81,841
|
|
|
$
|
648,810
|
|
Accumulated impairment as of February 28, 2019
|
—
|
|
|
—
|
|
|
(46,490)
|
|
|
(46,490)
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
172,933
|
|
|
172,933
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
(25,503)
|
|
|
(25,503)
|
|
Reclassification to held for sale (1)
|
—
|
|
|
—
|
|
|
(9,849)
|
|
|
(9,849)
|
|
Gross carrying amount as of February 29, 2020
|
282,056
|
|
|
284,913
|
|
|
172,932
|
|
|
739,901
|
|
Accumulated impairment as of February 29, 2020
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount as of February 29, 2020
|
$
|
282,056
|
|
|
$
|
284,913
|
|
|
$
|
172,932
|
|
|
$
|
739,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)In fiscal 2020, we reclassified the remaining goodwill associated with our Personal Care business of $9.8 million, including the related accumulated impairment of $72.0 million to assets held for sale. See Note 4 for additional information.
There were no changes to the gross carrying amount or accumulated impairment of our goodwill associated with our assets held and used during fiscal 2021.
The following table summarizes the components of our other intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021
|
|
February 29, 2020
|
(in thousands)
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
$
|
7,400
|
|
|
$
|
—
|
|
|
$
|
7,400
|
|
|
$
|
7,400
|
|
|
$
|
—
|
|
|
$
|
7,400
|
|
Trademarks
|
|
|
188,200
|
|
|
—
|
|
|
188,200
|
|
|
188,200
|
|
|
—
|
|
|
188,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
87,946
|
|
|
(14,800)
|
|
|
73,146
|
|
|
30,747
|
|
|
(28,552)
|
|
|
2,195
|
|
Trademarks
|
|
|
30,150
|
|
|
(2,327)
|
|
|
27,823
|
|
|
30,150
|
|
|
(322)
|
|
|
29,828
|
|
Other Intangibles
|
|
|
194,808
|
|
|
(134,113)
|
|
|
60,695
|
|
|
193,346
|
|
|
(120,017)
|
|
|
73,329
|
|
Total
|
|
|
$
|
508,504
|
|
|
$
|
(151,240)
|
|
|
$
|
357,264
|
|
|
$
|
449,843
|
|
|
$
|
(148,891)
|
|
|
$
|
300,952
|
|
On December 22, 2020, we entered into an amended and extended Trademark License Agreement with Revlon to license Revlon’s trademark for hair care appliances and tools (the “Revlon License”). The Revlon License grants us an exclusive, global, fully paid-up license to use the licensed trademark to manufacture, sell and distribute licensed merchandise in accordance with the terms of the agreement. The Revlon License has an initial term of 40 years, which will automatically renew at the end of the initial term for three consecutive additional 20-year periods unless we give notice of non-renewal. The Revlon License amends and restates the existing Revlon trademark licensing agreements entirely, and eliminates ongoing royalties we have historically paid and recognized as expense within SG&A in accordance with such agreements. In exchange for this exclusive global license, we paid a one-time, up-front license fee of $72.5 million, which was recorded as an intangible asset at cost and is being amortized on a straight-line basis over a useful life of 40 years, representing the initial term.
The following tables summarize amortization expense related to intangible assets as follows:
|
|
|
|
|
|
Aggregate Amortization Expense (in thousands)
|
|
Fiscal 2021
|
$
|
17,643
|
|
Fiscal 2020
|
21,271
|
|
Fiscal 2019
|
14,204
|
|
|
|
|
|
|
|
Estimated Amortization Expense (in thousands)
|
|
Fiscal 2022
|
$
|
11,881
|
|
Fiscal 2023
|
11,860
|
|
Fiscal 2024
|
11,739
|
|
Fiscal 2025
|
11,134
|
|
Fiscal 2026
|
9,086
|
|
Note 10 - Share-Based Compensation Plans
During the fiscal year, we had equity activity under one expired and two active share-based compensation plans. The expired plan consists of the 2008 Stock Incentive Plan (the “2008 Plan”). The active plans consist of the 2018 Stock Incentive Plan (the “2018 Plan”) and the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). The plans are administered by the Compensation Committee of the Board of Directors, which consists of non-employee directors who are independent under the applicable listing standards for companies traded on the NASDAQ Stock Market LLC.
2018 Plan
On August 22, 2018, our shareholders approved the 2018 Plan. The 2018 Plan permits the granting of stock options, stock appreciation rights, RSAs, RSUs, PSAs, PSUs, and other stock-based awards. The aggregate number of shares for issuance under the 2018 Plan will not exceed 2,000,000 shares.
A summary of shares available for issue under the 2018 Plan follows:
|
|
|
|
|
|
|
|
Shares originally authorized
|
2,000,000
|
|
Less share awards issued
|
(10,083)
|
|
Plus forfeitures
|
105,611
|
|
Less share awards previously vested and settled
|
—
|
|
Subtotal
|
2,095,528
|
|
Less RSUs, RSAs, PSUs and PSAs issuable upon vesting
|
(444,973)
|
|
Less maximum PSUs and PSAs issuable upon vesting (1)
|
(208,406)
|
|
Shares available for issuance at February 28, 2021
|
1,442,149
|
|
(1)Reflects incremental PSUs and PSAs issuable upon vesting between achievement of plan target at 100% and maximum achievement of 200% of plan target, adjusted for actual forfeitures to date.
2018 ESPP
On August 22, 2018, our shareholders approved the 2018 ESPP. The aggregate number of shares of common stock that may be purchased under the 2018 ESPP will not exceed 750,000 shares. Under the terms of the plan, employees may authorize the withholding of up to 15% of their wages or salaries to purchase our shares of common stock, not to exceed $25,000 of the fair market value of such shares for any calendar year. The purchase price for shares acquired under the 2018 ESPP is equal to the lower of 85% of the share's fair market value on either the first day of each option period or the last day of each period. The plan will expire by its terms on September 1, 2028. Shares of common stock purchased under the 2018 ESPP 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. During fiscal 2021, there were 26,830 shares purchased under the plan.
Share-Based Compensation Expense
We recorded share-based compensation expense in SG&A as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
Stock options
|
$
|
19
|
|
|
$
|
189
|
|
|
$
|
829
|
|
Directors stock compensation
|
685
|
|
|
604
|
|
|
526
|
|
Performance based and other stock awards
|
24,737
|
|
|
21,351
|
|
|
20,047
|
|
Employee stock purchase plan
|
977
|
|
|
785
|
|
|
651
|
|
Share-based compensation expense
|
26,418
|
|
|
22,929
|
|
|
22,053
|
|
Less: income tax benefits
|
(1,926)
|
|
|
(1,803)
|
|
|
(1,395)
|
|
Share-based compensation expense, net of income tax benefits
|
$
|
24,492
|
|
|
$
|
21,126
|
|
|
$
|
20,658
|
|
Stock Options
There have been no new grants of options since fiscal 2017. A summary of stock option activity under our expired plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except contractual term and per share data)
|
Options
|
|
Weighted
Average
Exercise
Price
(per share)
|
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2020
|
69
|
|
|
$
|
71.78
|
|
|
|
|
3.2
|
|
$
|
6,333
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
(21)
|
|
|
74.76
|
|
|
|
|
|
|
2,782
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2021
|
48
|
|
|
$
|
70.42
|
|
|
|
|
2.5
|
|
$
|
6,866
|
|
Exercisable at February 28, 2021
|
48
|
|
|
$
|
70.42
|
|
|
|
|
2.5
|
|
$
|
6,866
|
|
During fiscal 2021, two thousand options vested with a weighted average grant date fair value of $90.51. The total intrinsic value of options exercised during fiscal 2021, 2020, and 2019, was $2.8 million, $9.1 million, and $6.4 million, respectively.
Director Restricted Stock Awards
During fiscal 2021 we issued under the 2018 Plan, 3,619 RSAs to non-employee members of the Board of Directors with a total grant date fair value of $0.7 million or $189.18 per share. The RSAs vested immediately, and accordingly, were expensed immediately. The total fair value of RSAs granted to our non-employee members of the Board of Directors that vested immediately on grant dates in fiscal 2020 and 2019 was $0.6 million and $0.5 million, respectively.
Restricted Share Awards
We grant RSAs and RSUs to employees, which primarily vest ratably over four years or have specified graded vesting terms over 3 years. For the purpose of our disclosures, the term “Restricted Share Awards” applies to RSAs and RSUs collectively. A summary of Restricted Share Award activity during fiscal 2021 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
Number of
Restricted Share Awards
|
|
Weighted Average
Grant Date Fair Value
(per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2020
|
168
|
|
|
$
|
106.17
|
|
|
|
|
|
|
|
Granted
|
50
|
|
|
179.30
|
|
|
|
|
|
|
|
Vested
|
(78)
|
|
|
110.50
|
|
|
|
|
|
|
|
Forfeited
|
(14)
|
|
|
132.69
|
|
|
|
|
|
|
|
Outstanding at February 28, 2021
|
126
|
|
|
$
|
129.52
|
|
|
|
|
|
|
|
The total fair value of Restricted Share Awards that vested in fiscal 2021, 2020, and 2019 was $14.0 million, $10.8 million, and $3.9 million, respectively. The weighted average grant date fair value of Restricted Share Awards granted during fiscal 2021, 2020 and 2019 was $179.30, $118.76 and $106.28, respectively.
Performance Share Awards
We grant performance-based awards (PSAs and PSUs) to certain officers and employees, collectively “Performance Share Awards”, which cliff vest after three years. The vesting of these awards is contingent upon meeting one or more defined performance metrics over a three year performance period. The quantity of shares ultimately awarded can range from 0% to 200% of “Target”, as defined in the award
agreement as 100%, based on the level of achievement against the defined performance metrics. A summary of Performance Share Award activity during fiscal 2021 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
Number of Performance Share Awards
|
|
Weighted Average
Grant Date Fair Value
(per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2020 (1)
|
370
|
|
|
$
|
104.82
|
|
|
|
|
|
|
Granted (1)
|
221
|
|
|
170.27
|
|
|
|
|
|
|
Vested (2)
|
(56)
|
|
|
97.05
|
|
|
|
|
|
|
Forfeited
|
(65)
|
|
|
155.62
|
|
|
|
|
|
|
Outstanding at February 28, 2021
|
470
|
|
|
$
|
129.53
|
|
|
|
|
|
|
(1)Includes PSUs granted during fiscal 2019 at Target and PSAs granted during fiscal 2020 and fiscal 2021 at maximum achievement of 200% of Target.
(2)Excludes the vesting of an additional 56 shares, which resulted from the performance of the fiscal 2018 awards exceeding Target.
The total fair value of Performance Share Awards that vested in fiscal 2021, 2020, and 2019 was $18.6 million, $15.0 million, and $9.1 million, respectively. The weighted average grant date fair value of Performance Share Awards granted during fiscal 2021, 2020 and 2019 was $170.27, $111.98 and $86.97, respectively.
Unrecognized Share-Based Compensation Expense
As of February 28, 2021, our total unrecognized share-based compensation for restricted stock (RSUs, RSAs, PSUs and PSAs) was $20.7 million, which will be recognized over a weighted average amortization period of 1.9 years This unrecognized share-based compensation for PSUs and PSAs estimates target achievement for the awards granted in fiscal 2021 and fiscal 2020.
Note 11 - Defined Contribution Plans
We sponsor defined contribution savings plans in the U.S. and other countries where we have employees. Total company matching contributions made to these plans for fiscal 2021, 2020 and 2019 were $5.0 million, $4.3 million and $4.0 million, respectively.
Note 12 - Repurchases of Common Stock
In May 2019, our Board of Directors authorized the repurchase of up to $400 million of our outstanding common stock. The authorization is effective until May 2022 and replaced our former repurchase authorization, of which approximately $107.4 million was outstanding at the time the new authorization was approved. These repurchases may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. As of February 28, 2021, our repurchase authorization allowed for the purchase of $189.7 million of common stock.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of share-settled awards by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the equity holder can be settled by having the holder tender back to us a number of shares at fair value equal to the amounts due. Net exercises are treated as purchases and retirements of shares.
The following table summarizes our share repurchase activity for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands, except share and per share data)
|
2021
|
|
2020
|
|
2019
|
Common stock repurchased on the open market:
|
|
|
|
|
|
Number of shares
|
960,829
|
|
|
—
|
|
|
1,875,469
|
|
Aggregate value of shares
|
$
|
191,606
|
|
|
$
|
—
|
|
|
$
|
212,080
|
|
Average price per share
|
$
|
199.42
|
|
|
$
|
—
|
|
|
$
|
113.08
|
|
|
|
|
|
|
|
Common stock received in connection with share-based compensation:
|
|
|
|
|
|
Number of shares
|
69,194
|
|
|
77,272
|
|
|
59,024
|
|
Aggregate value of shares
|
$
|
11,688
|
|
|
$
|
10,169
|
|
|
$
|
5,413
|
|
Average price per share
|
$
|
168.92
|
|
|
$
|
131.61
|
|
|
$
|
91.70
|
|
Note 13 - Restructuring Plan
In October 2017, we announced a restructuring plan (referred to as “Project Refuel”) intended to enhance the performance primarily in the Beauty and former Nutritional Supplements segments. Project Refuel includes charges for a reduction-in-force and the elimination of certain contracts. During the first quarter of fiscal 2019, we expanded Project Refuel to include the realignment and streamlining of our supply chain structure. We are targeting total annualized profit improvements of approximately $10.5 million to $12.5 million over the duration of the plan. We estimate the plan to be completed during fiscal 2022, and expect to incur total restructuring charges of approximately $10.3 million over the duration of the plan, of which $9.2 million have been incurred through the end of fiscal 2021. Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management and are revised periodically.
We incurred $0.4 million, $3.3 million and $3.6 million of pre-tax restructuring costs related to employee severance and termination benefits and contract termination costs during fiscal 2021, 2020 and 2019, respectively, which are included in “Restructuring charges” in the consolidated statements of income. During fiscal 2021, we made total cash restructuring payments of $1.1 million and had a remaining liability of $0.1 million as of February 28, 2021. Since implementing Project Refuel, we have made total cash restructuring payments of $9.1 million as of February 28, 2021.
Note 14 - 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 actions 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 consolidated financial statements.
Legal Matters
In May 2018, we settled a patent infringement dispute related to two forehead thermometer models sold by our subsidiary, Kaz USA, Inc., in the U.S. and made a settlement payment of $15.0 million, which was accrued in prior periods along with related legal fees and other costs.
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.
Commitments
We sell certain of our products under trademarks licensed from third parties. Some of these trademark license agreements require us to pay minimum royalties. As of February 28, 2021, we estimate future minimum annual royalty payments over the noncancelable term of these arrangements to be approximately $6.4 million, $6.2 million, $6.2 million, $5.6 million, and $2.9 million per year, during the next five fiscal years.
Note 15 - Long-Term Debt
A summary of our long-term debt follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 28, 2021
|
|
February 29, 2020
|
Mississippi Business Finance Corporation Loan (the “MBFC Loan”) (1)
|
$
|
18,607
|
|
|
$
|
20,507
|
|
Credit Agreement (2)
|
329,000
|
|
|
320,000
|
|
Subtotal
|
347,607
|
|
|
340,507
|
|
Unamortized prepaid financing fees
|
(3,977)
|
|
|
(1,202)
|
|
Total long-term debt
|
343,630
|
|
|
339,305
|
|
Less: current maturities of long-term debt
|
(1,884)
|
|
|
(1,884)
|
|
Long-term debt, excluding current maturities
|
$
|
341,746
|
|
|
$
|
337,421
|
|
(1)The MBFC Loan is unsecured and bears floating interest based on either LIBOR plus a margin of up to 2.0%, or a Base Rate plus a margin of up to 1.0%, as determined by the interest rate elected and the Net Leverage Ratio defined in the Indenture.
(2)The Credit Agreement (defined below) is unsecured and bears floating interest at either the Base Rate or LIBOR, plus a margin based on the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and 1.0% to 2.0% for Base Rate and LIBOR borrowings, respectively. These floating interest rates are hedged with interest rate swaps to effectively fix interest rates on $225 million of the outstanding principal balance under the Credit Agreement (see Notes 16, 17, and 18 for additional information regarding interest rate swaps).
Aggregate annual maturities of our long-term debt as of February 28, 2021 are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Fiscal 2022
|
$
|
1,900
|
|
Fiscal 2023
|
1,900
|
|
Fiscal 2024
|
14,807
|
|
Fiscal 2025
|
—
|
|
Fiscal 2026
|
329,000
|
|
Thereafter
|
—
|
|
Total
|
$
|
347,607
|
|
Credit Agreement
We have a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and other lenders that provided for an unsecured total revolving commitment of $1.0 billion. Borrowings accrued interest under one of two alternative methods (based upon a Base Rate or LIBOR) as described in the Credit Agreement. With each borrowing against our credit line, we could elect the interest rate method based on our funding needs at the time. We also incurred loan commitment and letter of credit fees under the Credit Agreement.
On March 13, 2020, we entered into an amendment to the Credit Agreement. The amendment extended the maturity of the commitment under the Credit Agreement from December 7, 2021 to March 13, 2025. Further, the amendment increased the unsecured revolving commitment from $1.0 billion to $1.25 billion. The accordion was amended to increase it from $200 million to $300 million and to include the ability to use it for term loan commitments. The accordion permits the Company to request to increase its borrowing capacity, not to exceed the $300 million commitment in the aggregate, provided certain conditions are met, including lender approval. Any increase to term loan commitments and revolving loan commitments must be made on terms identical to the revolving loans under the Credit Agreement and must have a maturity date of no earlier than March 13, 2025. Outstanding letters of credit reduce the borrowing availability under the Credit Agreement on a dollar-for-dollar basis. We are able to repay amounts borrowed at any time without penalty.
As of February 28, 2021, the outstanding revolving loan principal balance was $329.0 million (excluding prepaid financing fees) and the balance of outstanding letters of credit was $19.2 million. As of February 28, 2021, the amount available for borrowings under the Credit Agreement was $901.8 million. Covenants in the Credit Agreement limit the amount of total indebtedness we can incur. As of February 28, 2021, these covenants effectively limited our ability to incur more than $874.4 million of additional debt from all sources, including the Credit Agreement, or $901.8 million in the event a qualified acquisition is consummated.
Other Debt Agreements
As of February 28, 2021, we have an aggregate principal balance of $18.6 million (excluding prepaid financing fees) under an unsecured loan agreement with the Mississippi Business Finance Corporation (the “MBFC”), which was entered into in connection with the issuance by MBFC of taxable industrial development revenue bonds (the “Bonds”). The borrowings were used to fund construction of our Olive Branch, Mississippi distribution facility. Since March 2018, the MBFC Loan can be called by the holder at any time. The loan can be prepaid without penalty. The remaining loan principal balance is payable as follows: $1.9 million annually on March 1, 2021 and March 1, 2022; and $14.8 million on March 1, 2023. Any remaining outstanding principal and interest is due upon maturity on March 1, 2023.
On May 14, 2020, Helen of Troy Limited and certain of its subsidiaries entered into the Sixth Amendment to Guaranty Agreement (the “Amended Guaranty”) in favor of Bank of America, N.A. The Amended Guaranty amends the Guaranty Agreement (as amended, the “Guaranty Agreement”), dated March 1, 2013, made by the Company and certain of its subsidiaries in favor of Bank of America, N.A. and other lenders. Certain of the representations and warranties, and covenants in the Guaranty Agreement were amended by the Amended Guaranty to include or modify certain baskets, exceptions and other customary provisions.
The Bonds were issued under a Trust Indenture, dated as of March 1, 2013 (as supplemented, the “Indenture”), by and between MBFC and U.S. Bank National Association, as trustee (the “Trustee”). On May 14, 2020, MBFC and U.S. Bank National Association, as Trustee, entered into the Fifth Supplemental Trust Indenture, effective May 14, 2020 (the “Fifth Supplemental Indenture”), with the consent of Kaz USA, Inc. (“Kaz USA”) and Bank of America, N.A., the purchaser of the Bonds. As amended by the Fifth Supplemental Indenture, the Bonds and the related loans to Kaz USA will bear interest at a Base Rate or LIBOR plus a margin based on the Net Leverage Ratio (as defined in the Fifth Supplemental Indenture). The Fifth Supplemental Indenture amended the pricing grid for the LIBOR and Base Rate margins.
Debt Covenants
All of our debt is unconditionally guaranteed, on a joint and several basis, by the Company and certain of its subsidiaries. Our debt agreements require the maintenance of certain key financial covenants defined
in the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Credit Agreement and Other Debt Agreements. Our debt agreements also contain other customary covenants, including, among other things, covenants restricting or limiting us, except under certain conditions set forth therein, from (1) incurring debt, (2) incurring liens on our properties, (3) making certain types of investments, (4) selling certain assets or making other fundamental changes relating to mergers and consolidations, and (5) repurchasing shares of our common stock and paying dividends. Our debt agreements also contain customary events of default, including failure to pay principal or interest when due, among others. Our debt agreements are cross-defaulted to each other. Upon an event of default under our debt agreements, the holders or lenders may, among other things, accelerate the maturity of any amounts outstanding under our debt agreements. The commitments of the lenders to make loans to us under the Credit Agreement are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the Credit Agreement.
As of February 28, 2021, we were in compliance with all covenants as defined under the terms of the Credit Agreement and our other debt agreements.
The following table contains information about interest rates and the related weighted average borrowings outstanding under our Credit Agreement and the MBFC Loan for the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
Credit Agreement:
|
|
|
|
|
|
Average borrowings outstanding (1)
|
$
|
334,400
|
|
$
|
286,640
|
|
$
|
290,860
|
Average effective interest rate (2)
|
1.7%
|
|
3.2%
|
|
3.2%
|
Interest rate range
|
1.1% - 4.8%
|
|
2.6% - 5.5%
|
|
2.8% - 5.5%
|
Weighted average interest rates on borrowings outstanding at year end
|
1.1%
|
|
2.7%
|
|
3.6%
|
|
|
|
|
|
|
MBFC Loan:
|
|
|
|
|
|
Average borrowings outstanding (1)
|
$
|
18,987
|
|
$
|
20,887
|
|
$
|
22,787
|
Average effective interest rate (2)
|
1.4%
|
|
3.1%
|
|
3.2%
|
Interest rate range
|
1.1% - 2.6%
|
|
2.6% - 3.5%
|
|
2.9% - 3.5%
|
Weighted average interest rates on borrowings outstanding at year end
|
1.1%
|
|
2.6%
|
|
3.5%
|
(1)Average borrowings outstanding is computed as the average of the current and four prior quarters ending balances outstanding.
(2)The average effective interest rate during each year is computed by dividing the total interest expense associated with the borrowing for a fiscal year by the average borrowings outstanding for the same fiscal year.
Note 16 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. These inputs are classified into the following hierarchy:
Level 1:Quoted prices for identical assets or liabilities in active markets;
Level 2:Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3:Unobservable inputs that reflect the reporting entity's own assumptions.
When circumstances dictate the transfer of an asset or liability to a different level, we report the transfer at the beginning of the reporting period in which the facts and circumstances resulting in the transfer occurred. There were no transfers between the fair value hierarchy levels during the periods presented.
Our financial assets and liabilities are classified as Level 2 because their valuation is dependent on observable inputs and other quoted prices for similar assets or liabilities, or model-derived valuations whose significant value drivers are observable. The following tables present the carrying amount and fair value of our financial assets and liabilities measured and recorded at fair value on a recurring basis and classified as Level 2 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount and Fair Value
|
(in thousands)
|
February 28, 2021
|
|
February 29, 2020
|
Assets:
|
|
|
|
Cash equivalents (money market accounts)
|
$
|
1,631
|
|
|
$
|
2,648
|
|
|
|
|
|
Foreign currency derivatives
|
33
|
|
|
2,083
|
|
Total assets
|
$
|
1,664
|
|
|
$
|
4,731
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
9,941
|
|
|
$
|
10,717
|
|
Foreign currency derivatives
|
6,550
|
|
|
159
|
|
Total liabilities
|
$
|
16,491
|
|
|
$
|
10,876
|
|
The carrying amounts of cash, accounts payable, accrued expenses and other current liabilities and income taxes payable approximate fair value because of the short maturity of these items. The carrying amounts of receivables approximate fair value due to the effect of the related allowance for credit losses. The carrying amount of our floating rate debt approximates its fair value.
We use derivatives to manage our exposure to changes in foreign currency exchange rates, which include foreign currency forward contracts, zero cost collars and cross-currency debt swaps. In addition, we use interest rate swaps to manage our exposure to changes in interest rates. All of our derivative assets and liabilities are recorded at fair value. See Notes 1, 17 and 18 for more information on our derivatives.
Assets remeasured to fair value on a non-recurring basis during fiscal 2021 and fiscal 2020 represent long-lived assets held for sale related to our Personal Care business, which were impaired.
During the fourth quarter of fiscal 2020, we committed to a plan to divest certain assets within our Personal Care business. The assets to be disposed of include intangible assets, inventory, certain net trade receivables and fixed assets relating to our mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. During the fourth quarter of fiscal 2020, we recorded non-cash asset impairment charges related to goodwill and intangible assets.
During the fourth quarter of fiscal 2021, our quarterly impairment evaluation of long-lived assets held for sale resulted in a non-cash asset impairment charge to reduce the goodwill of our Personal Care business to reflect the disposal group at fair value less cost to sell.
The fair value of the long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values less costs to sell. Refer to Note 4 for additional information on assets held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fiscal 2021 Asset Impairment Charges
|
(in thousands)
|
February 28, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Held for sale
|
$
|
39,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,867
|
|
|
$
|
(8,452)
|
|
Total
|
$
|
39,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,867
|
|
|
$
|
(8,452)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fiscal 2020 Asset Impairment Charges
|
(in thousands)
|
February 29, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Held for sale
|
$
|
44,806
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,806
|
|
|
$
|
(41,000)
|
|
Total
|
$
|
44,806
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,806
|
|
|
$
|
(41,000)
|
|
Note 17 - Financial Instruments and Risk Management
Foreign Currency Risk
The U.S. Dollar is the functional currency for the Company and all of its subsidiaries and is also the reporting currency for the Company. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. Approximately 12%, 14%, and 13% of our net sales revenue was denominated in foreign currencies during fiscal 2021, 2020 and 2019, respectively. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. We make most of our inventory purchases from the Far East and primarily use the U.S. Dollar for such purchases.
In our consolidated statements of income, foreign currency exchange rate gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines, and all other foreign currency exchange rate gains and losses are recognized in SG&A. We recorded foreign currency exchange rate net losses in SG&A, including the impact of our foreign currency contracts and cross-currency debt swaps of $0.6 million during fiscal 2021 and net gains of $2.2 million and $1.3 million during fiscal 2020 and 2019, respectively.
We mitigate certain foreign currency exchange rate risk by using a series of foreign currency contracts, which include forward contracts and zero-cost collars, designated as cash flow hedges, and mark-to-market cross-currency debt swaps to protect against the foreign currency exchange rate risk inherent in our forecasted transactions denominated in foreign currencies. We do not enter into any derivatives or similar instruments for trading or other speculative purposes. Our foreign currency contracts are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in OCI until the hedge transaction is settled, at which point amounts are reclassified from AOCI to our consolidated statements of income. Derivatives for which we have not elected hedge accounting consist of our cross-currency debt swaps, and any changes in the fair value of the derivatives are recorded in our consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any year presented, is immediately recognized in our consolidated statements of income.
Interest Rate Risk
Interest on our outstanding debt as of February 28, 2021 is based on floating interest rates. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of
floating rate debt. Floating interest rates are hedged with interest rate swaps to effectively fix interest rates on $225.0 million of the outstanding principal balance under the Credit Agreement, which totaled $329.0 million as of February 28, 2021. Our interest rate swaps are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in OCI until the hedge transaction is settled, at which point amounts are reclassified from AOCI to our consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any year presented, is immediately recognized in our consolidated statements of income.
The following tables summarize the fair values of our derivative instruments at the end of fiscal 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 28, 2021
|
Derivatives designated as hedging instruments
|
Hedge
Type
|
|
Final
Settlement
Date
|
|
Notional Amount
|
|
Prepaid
Expenses
and Other
Current
Assets
|
|
Other
Assets
|
|
Accrued
Expenses
and Other
Current
Liabilities
|
|
Other
Liabilities
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts - sell Euro
|
Cash flow
|
|
2/2022
|
|
€39,000
|
|
—
|
|
|
—
|
|
|
1,851
|
|
|
—
|
|
Forward contracts - sell Canadian Dollars
|
Cash flow
|
|
2/2023
|
|
$34,000
|
|
—
|
|
|
33
|
|
|
1,061
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts - sell Pounds
|
Cash flow
|
|
2/2023
|
|
£34,500
|
|
—
|
|
|
—
|
|
|
2,026
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts - sell Australian Dollars
|
Cash flow
|
|
11/2021
|
|
A$4,000
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Interest rate swaps
|
Cash flow
|
|
1/2024
|
|
$225,000
|
|
—
|
|
|
—
|
|
|
4,407
|
|
|
5,534
|
|
Subtotal
|
|
|
|
|
|
|
—
|
|
|
33
|
|
|
9,363
|
|
|
5,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated under hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency debt swaps - Euro
|
(1)
|
|
04/2022
|
|
€6,000
|
|
—
|
|
|
—
|
|
|
—
|
|
|
817
|
|
Cross-currency debt swaps - Pounds
|
(1)
|
|
04/2022
|
|
£4,500
|
|
—
|
|
|
—
|
|
|
—
|
|
|
756
|
|
Subtotal
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,573
|
|
Total fair value
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
9,363
|
|
|
$
|
7,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 29, 2020
|
Derivatives designated as hedging instruments
|
Hedge
Type
|
|
Final
Settlement Date
|
|
Notional Amount
|
|
Prepaid
Expenses
and Other
Current
Assets
|
|
Other
Assets
|
|
Accrued
Expenses
and Other
Current
Liabilities
|
|
Other
Liabilities
Non-current
|
Zero-cost collar - Euro
|
Cash flow
|
|
2/2021
|
|
€8,000
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward contracts - sell Euro
|
Cash flow
|
|
5/2021
|
|
€25,875
|
|
837
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Forward contracts - sell Canadian Dollars
|
Cash flow
|
|
2/2021
|
|
$14,000
|
|
202
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Zero-cost collar - Pounds
|
Cash flow
|
|
2/2021
|
|
£6,500
|
|
—
|
|
|
—
|
|
|
144
|
|
|
—
|
|
Forward contracts - sell Pounds
|
Cash flow
|
|
5/2021
|
|
£13,000
|
|
435
|
|
|
23
|
|
|
—
|
|
|
—
|
|
Forward contracts - sell Mexican Pesos
|
Cash flow
|
|
5/2020
|
|
$10,000
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
Cash flow
|
|
1/2024
|
|
$225,000
|
|
—
|
|
|
—
|
|
|
3,489
|
|
|
7,228
|
|
Subtotal
|
|
|
|
|
|
|
1,560
|
|
|
23
|
|
|
3,633
|
|
|
7,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated under hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency debt swaps - Euro
|
(1)
|
|
04/2020
|
|
€4,400
|
|
473
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cross-currency debt swaps - Pounds
|
(1)
|
|
04/2020
|
|
£5,000
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
|
|
|
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total fair value
|
|
|
|
|
|
|
$
|
2,060
|
|
|
$
|
23
|
|
|
$
|
3,633
|
|
|
$
|
7,243
|
|
(1)These cross-currency debt swaps, for which we have not elected hedge accounting, adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound, as applicable, for the notional amounts reported, creating an economic hedge against currency movements.
The pre-tax effects of derivative instruments designated as cash flow hedges for fiscal 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
|
|
Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Reclassified from AOCI into Income
|
(in thousands)
|
|
2021
|
|
2020
|
|
Location
|
|
2021
|
|
2020
|
Foreign currency contracts - cash flow hedges
|
|
$
|
(7,932)
|
|
|
$
|
3,198
|
|
|
SG&A
|
|
$
|
(1,564)
|
|
|
$
|
2,977
|
|
Interest rate swaps - cash flow hedges
|
|
(3,673)
|
|
|
(11,152)
|
|
|
Interest expense
|
|
(4,449)
|
|
|
(262)
|
|
Total
|
|
$
|
(11,605)
|
|
|
$
|
(7,954)
|
|
|
|
|
$
|
(6,013)
|
|
|
$
|
2,715
|
|
The pre-tax effects of derivative instruments not designated under hedge accounting for fiscal 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
|
|
Gain (Loss)
Recognized in Income
|
(in thousands)
|
|
Location
|
|
2021
|
|
2020
|
Cross-currency debt swaps - principal
|
|
SG&A
|
|
$
|
(1,432)
|
|
|
$
|
574
|
|
Cross-currency debt swaps - interest
|
|
Interest Expense
|
|
72
|
|
|
147
|
|
Total
|
|
|
|
$
|
(1,360)
|
|
|
$
|
721
|
|
We expect a net loss of $9.3 million associated with foreign currency contracts and interest rate swaps currently recorded in AOCI, to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle. See Notes 1, 16 and 18 to these consolidated financial statements for more information.
Counterparty Credit Risk
Financial instruments, including foreign currency contracts, cross-currency debt swaps and interest rate swaps, expose us to counterparty credit risk for non-performance. We manage our exposure to counterparty credit risk by only dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. We believe that the risk of incurring credit losses is remote.
Risks Inherent in Cash and Cash Equivalents
As the levels of our cash and cash equivalents change, they can become more subject to foreign currency exchange rate risk, interest rate risk, credit risk, and liquidity risk. Cash consists of interest-bearing, non-interest-bearing and short-term investment accounts. We consider money market accounts to be cash equivalents.
The following table summarizes our cash and cash equivalents at the end of fiscal 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February
|
|
2021
|
|
2020
|
(in thousands)
|
Carrying
Amount
|
|
Range of
Interest Rates
|
|
Carrying
Amount
|
|
Range of
Interest Rates
|
Cash, interest and non-interest-bearing accounts
|
$
|
43,489
|
|
|
0.00% to 0.30%
|
|
$
|
21,819
|
|
|
0.00% to 0.30%
|
Money market accounts
|
1,631
|
|
|
0.01% to 2.47%
|
|
2,648
|
|
|
0.15% to 5.39%
|
Total cash and cash equivalents
|
$
|
45,120
|
|
|
|
|
$
|
24,467
|
|
|
|
Note 18 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCI by component and related tax effects for fiscal 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Interest
Rate Swaps
|
|
Foreign
Currency
Contracts
|
|
Total
|
Balance at February 28, 2019
|
$
|
132
|
|
|
$
|
1,059
|
|
|
$
|
1,191
|
|
Other comprehensive (loss) income before reclassification
|
(11,152)
|
|
|
3,198
|
|
|
(7,954)
|
|
Amounts reclassified out of AOCI
|
262
|
|
|
(2,977)
|
|
|
(2,715)
|
|
Tax effects
|
2,559
|
|
|
(86)
|
|
|
2,473
|
|
Other comprehensive (loss) income
|
(8,331)
|
|
|
135
|
|
|
(8,196)
|
|
Balance at February 29, 2020
|
$
|
(8,199)
|
|
|
$
|
1,194
|
|
|
$
|
(7,005)
|
|
Other comprehensive loss before reclassification
|
(3,673)
|
|
|
(7,932)
|
|
|
(11,605)
|
|
Amounts reclassified out of AOCI
|
4,449
|
|
|
1,564
|
|
|
6,013
|
|
Tax effects
|
(153)
|
|
|
1,094
|
|
|
941
|
|
Other comprehensive income (loss)
|
623
|
|
|
(5,274)
|
|
|
(4,651)
|
|
Balance at February 28, 2021
|
$
|
(7,576)
|
|
|
$
|
(4,080)
|
|
|
$
|
(11,656)
|
|
See Notes 1, 16 and 17 to these consolidated financial statements for additional information regarding our cash flow hedges.
Note 19 - Segment and Geographic Information
Segment Information
The following tables summarize segment information included in continuing operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28, 2021
|
(in thousands)
|
Housewares
|
|
Health & Home
|
|
Beauty (1)
|
|
Total
|
Sales revenue, net
|
$
|
727,354
|
|
|
$
|
890,191
|
|
|
$
|
481,254
|
|
|
$
|
2,098,799
|
|
Asset impairment charges
|
—
|
|
|
—
|
|
|
8,452
|
|
|
8,452
|
|
Restructuring charges
|
249
|
|
|
(6)
|
|
|
107
|
|
|
350
|
|
Operating income
|
122,487
|
|
|
94,103
|
|
|
64,898
|
|
|
281,488
|
|
|
|
|
|
|
|
|
|
Capital and intangible asset expenditures
|
10,369
|
|
|
12,854
|
|
|
75,445
|
|
|
98,668
|
|
Depreciation and amortization
|
9,333
|
|
|
15,453
|
|
|
12,932
|
|
|
37,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 29, 2020
|
(in thousands)
|
Housewares
|
|
Health & Home
|
|
Beauty (1)
|
|
Total
|
Sales revenue, net
|
$
|
640,965
|
|
|
$
|
685,397
|
|
|
$
|
381,070
|
|
|
$
|
1,707,432
|
|
Asset impairment charges
|
—
|
|
|
—
|
|
|
41,000
|
|
|
41,000
|
|
Restructuring charges
|
1,351
|
|
|
93
|
|
|
1,869
|
|
|
3,313
|
|
Operating income (loss)
|
123,135
|
|
|
68,166
|
|
|
(13,050)
|
|
|
178,251
|
|
|
|
|
|
|
|
|
|
Capital and intangible asset expenditures
|
10,602
|
|
|
5,853
|
|
|
1,304
|
|
|
17,759
|
|
Depreciation and amortization
|
7,298
|
|
|
16,113
|
|
|
13,998
|
|
|
37,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28, 2019
|
(in thousands)
|
Housewares
|
|
Health & Home
|
|
Beauty
|
|
Total
|
Sales revenue, net
|
$
|
523,807
|
|
|
$
|
695,217
|
|
|
$
|
345,127
|
|
|
1,564,151
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
926
|
|
|
686
|
|
|
1,974
|
|
|
3,586
|
|
Operating income
|
100,743
|
|
|
68,448
|
|
|
30,188
|
|
|
199,379
|
|
|
|
|
|
|
|
|
|
Capital and intangible asset expenditures
|
16,023
|
|
|
8,508
|
|
|
1,854
|
|
|
26,385
|
|
Depreciation and amortization
|
6,048
|
|
|
17,058
|
|
|
6,821
|
|
|
29,927
|
|
(1)Fiscal 2020 includes approximately five weeks of operating results from Drybar Products, acquired on January 23, 2020, and fiscal 2021 includes a full year of operating results. For additional information see Note 8 to the accompanying consolidated financial statements.
We compute segment operating income (loss) based on net sales revenue, less cost of goods sold, SG&A, restructuring charges, and any asset impairment charges associated with the segment. The SG&A used to compute each segment’s operating income is directly associated with the segment, plus shared service and corporate overhead expenses that are allocable to the segment. We do not allocate non-operating income and expense, including interest or income taxes, to operating segments. Our chief operating decision maker reviews balance sheet information at a consolidated level.
Geographic Information
The following table presents net sales revenue by geographic region, in U.S. Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
|
|
|
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
U.S.
|
$
|
1,666,324
|
|
|
79.4
|
%
|
|
$
|
1,357,345
|
|
|
79.5
|
%
|
|
$
|
1,221,806
|
|
|
78.1
|
%
|
|
|
|
|
|
|
|
Canada
|
92,150
|
|
|
4.4
|
%
|
|
71,417
|
|
|
4.2
|
%
|
|
66,855
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
EMEA
|
183,398
|
|
|
8.7
|
%
|
|
138,858
|
|
|
8.1
|
%
|
|
143,024
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
Asia Pacific
|
118,000
|
|
|
5.6
|
%
|
|
99,378
|
|
|
5.8
|
%
|
|
90,073
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
Latin America
|
38,927
|
|
|
1.9
|
%
|
|
40,434
|
|
|
2.4
|
%
|
|
42,393
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
Total sales revenue, net
|
$
|
2,098,799
|
|
|
100.0
|
%
|
|
$
|
1,707,432
|
|
|
100.0
|
%
|
|
$
|
1,564,151
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Worldwide sales to our largest customer, Amazon.com Inc., accounted for approximately 20%, 18% and 16% of our consolidated net sales revenue in fiscal 2021, 2020 and 2019, respectively. Sales to our second largest customer, Walmart, Inc. (including worldwide affiliates) accounted for approximately 13%, 14% and 16% of our consolidated net sales revenue in fiscal 2021, 2020 and 2019, respectively. Sales to our third largest customer, Target Corporation, accounted for approximately 11%, 9% and 10% of our consolidated net sales revenue in fiscal 2021, 2020, and 2019, respectively. No other customers accounted for 10% or more of consolidated net sales revenue during these fiscal years. Sales to our top five customers accounted for approximately 52%, 50% and 51% of our consolidated net sales revenue in fiscal 2021, 2020 and 2019, respectively. Sales to these largest customers include sales across all of our business segments.
Our domestic and international long-lived assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
145,798
|
|
|
$
|
147,806
|
|
|
$
|
117,572
|
|
International:
|
|
|
|
|
|
Barbados
|
18,254
|
|
|
11,969
|
|
|
9,019
|
|
Other international
|
5,016
|
|
|
4,977
|
|
|
3,747
|
|
Subtotal
|
23,270
|
|
|
16,946
|
|
|
12,766
|
|
Total
|
$
|
169,068
|
|
|
$
|
164,752
|
|
|
$
|
130,338
|
|
The table above classifies assets based upon the country where we hold legal title. Long-lived assets included in the table above include property and equipment and operating lease assets.
Note 20 - Income Taxes
We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results, and transfer pricing and tax regulations in the related jurisdictions.
On March 11, 2021, the American Rescue Plan Act (the “ARM”) was enacted and signed into law. The ARM is an economic stimulus package in response to the COVID-19 outbreak, which contains tax provisions that are not expected to have a material impact to our consolidated financial statements. In accordance with accounting standards for income taxes, the impact of this new tax legislation will be taken into account in our first quarter of fiscal 2022, the period in which it was enacted.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.
Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.
The Tax Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company elected to account for the tax on GILTI as a period cost and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries.
In connection with the Tax Act, we repatriated $48.3 million of cash held in our U.S. owned foreign subsidiaries without such funds being subject to further U.S. federal income tax. As of February 28, 2021, we had approximately $23.0 million of undistributed earnings in U.S. owned foreign subsidiaries. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized.
No deferred taxes have been provided on the undistributed earnings of our subsidiaries since these earnings will continue to be permanently reinvested. Due to the number of legal entities and jurisdictions involved, our legal entity structure, and the tax laws in the relevant jurisdictions, we believe it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings.
Our components of income before income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
U.S.
|
$
|
48,693
|
|
|
$
|
40,146
|
|
|
$
|
32,135
|
|
Non-U.S.
|
220,737
|
|
|
125,794
|
|
|
155,865
|
|
Total
|
$
|
269,430
|
|
|
$
|
165,940
|
|
|
$
|
188,000
|
|
Our components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
|
2019
|
U.S.
|
|
|
|
|
|
Current
|
$
|
10,232
|
|
|
$
|
16,732
|
|
|
$
|
2,460
|
|
Deferred
|
(5,623)
|
|
|
(4,789)
|
|
|
10,480
|
|
|
4,609
|
|
|
11,943
|
|
|
12,940
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
|
|
|
Current
|
9,652
|
|
|
2,571
|
|
|
2,102
|
|
Deferred
|
1,223
|
|
|
(907)
|
|
|
(1,266)
|
|
|
10,875
|
|
|
1,664
|
|
|
836
|
|
Total
|
$
|
15,484
|
|
|
$
|
13,607
|
|
|
$
|
13,776
|
|
Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. An income tax rate reconciliation of these differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
|
2021
|
|
2020
|
|
2019
|
Effective income tax rate at the U.S. statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Impact of U.S. state income taxes
|
0.6
|
%
|
|
1.6
|
%
|
|
1.2
|
%
|
Effect of statutory tax rate in Macau
|
(3.4)
|
%
|
|
(13.6)
|
%
|
|
(10.3)
|
%
|
Effect of statutory tax rate in Barbados
|
(15.4)
|
%
|
|
(5.5)
|
%
|
|
(5.9)
|
%
|
Effect of statutory tax rate in Switzerland
|
(1.5)
|
%
|
|
(0.4)
|
%
|
|
(1.9)
|
%
|
Effect of income from other non-U.S. operations subject to varying rates
|
3.8
|
%
|
|
2.3
|
%
|
|
1.8
|
%
|
Effect of foreign exchange fluctuations
|
(0.1)
|
%
|
|
0.7
|
%
|
|
0.2
|
%
|
Effect of asset impairment charges
|
0.3
|
%
|
|
2.4
|
%
|
|
—
|
%
|
Effect of U.S. tax reform
|
(3.5)
|
%
|
|
—
|
%
|
|
(0.1)
|
%
|
Effect of uncertain tax positions
|
3.2
|
%
|
|
(1.7)
|
%
|
|
(0.6)
|
%
|
Effect of non-deductible executive compensation
|
1.0
|
%
|
|
1.4
|
%
|
|
0.9
|
%
|
Effect of base erosion and anti-abuse tax
|
(0.6)
|
%
|
|
—
|
%
|
|
1.0
|
%
|
Other items
|
0.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Effective income tax rate
|
5.7
|
%
|
|
8.2
|
%
|
|
7.3
|
%
|
Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We previously had an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain
employment and investment thresholds. The Macau Offshore Law and its supplementary regulations that grant tax incentives to approved offshore institutions was abolished on January 1, 2021. Existing approved offshore institutions such as ours continued to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, our Macau subsidiary transitioned to onshore status and is now subject to a statutory corporate income tax of approximately 12%. We expect the impact of this change to increase our overall effective tax rate by 1.5 to 2.0 percentage points on an annual basis, beginning with our fiscal year 2022. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.
Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
Deferred tax assets, gross:
|
|
|
|
Operating loss carryforwards
|
$
|
14,785
|
|
|
$
|
13,908
|
|
Accounts receivable
|
8,905
|
|
|
5,467
|
|
Inventories
|
12,432
|
|
|
8,751
|
|
Operating lease liabilities
|
10,388
|
|
|
10,451
|
|
Accrued expenses and other
|
10,731
|
|
|
7,692
|
|
Total gross deferred tax assets
|
57,241
|
|
|
46,269
|
|
Valuation allowance
|
(15,021)
|
|
|
(14,073)
|
|
Deferred tax liabilities:
|
|
|
|
Operating lease assets
|
(7,500)
|
|
|
(7,573)
|
|
Depreciation and amortization
|
(18,707)
|
|
|
(14,212)
|
|
Total deferred tax assets, net
|
$
|
16,013
|
|
|
$
|
10,411
|
|
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of 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 be recoverable. In fiscal 2021, the $0.9 million net increase in our valuation allowance was principally due to changes in estimates of the operating loss carryforwards to be used in the future.
The composition of our operating loss carryforwards at the end of fiscal 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021
|
(in thousands)
|
Tax Year
Expiration
Date Range
|
Deferred
Tax
Assets
|
|
Operating
Loss
Carryforward
|
|
|
|
|
|
U.S. state operating loss carryforward
|
2030-2038
|
$
|
334
|
|
|
$
|
4,550
|
|
Non-U.S. operating loss carryforwards with definite carryover periods
|
2022-2038
|
1,899
|
|
|
7,387
|
|
Non-U.S. operating loss carryforwards with indefinite carryover periods
|
Indefinite
|
12,552
|
|
|
46,066
|
|
Subtotal
|
|
14,785
|
|
|
$
|
58,003
|
|
Less portion of valuation allowance established for operating loss carryforwards
|
|
(14,257)
|
|
|
|
Total
|
|
$
|
528
|
|
|
|
Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced.
During fiscal 2021 and 2020, changes in the total amount of unrecognized tax benefits (excluding interest and penalties) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
2021
|
|
2020
|
Total unrecognized tax benefits, beginning balance
|
$
|
113
|
|
|
$
|
3,205
|
|
Tax positions taken during the current period
|
1,542
|
|
|
—
|
|
|
|
|
|
Changes in tax positions taken during a prior period
|
4,280
|
|
|
(2,819)
|
|
|
|
|
|
|
|
|
|
Settlements
|
(499)
|
|
|
(273)
|
|
Total unrecognized tax benefits, ending balance
|
5,436
|
|
|
113
|
|
Less current unrecognized tax benefits
|
—
|
|
|
—
|
|
Non-current unrecognized tax benefits
|
$
|
5,436
|
|
|
$
|
113
|
|
If we are able to sustain our positions with the relevant taxing authorities, approximately $5.4 million (excluding interest and penalties) of uncertain tax position liabilities as of February 28, 2021 would favorably impact our effective tax rate in future periods. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.
We classify interest and penalties on uncertain tax positions as income tax expense. At the end of fiscal 2021 and 2020, the liability for tax-related interest and penalties included in unrecognized tax benefits was $2.9 million and $0.1 million, respectively. Additionally, during fiscal 2021, we recognized tax expense from tax-related interest and penalties of $2.9 million and tax benefits of $0.5 million and $0.5 million during fiscal 2020 and 2019, respectively, in the consolidated statements of income.
We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. We do not expect that any proposed adjustments from these tax jurisdictions will have a material impact on our consolidated financial statements.
As of February 28, 2021, tax years under examination or still subject to examination by material tax jurisdictions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction
|
Tax Years Under Examination
|
Open Tax Years
|
United Kingdom
|
- None -
|
2020
|
—
|
2021
|
U.S.
|
- None -
|
2017
|
—
|
2021
|
Switzerland
|
- None -
|
2017
|
—
|
2021
|
Hong Kong
|
- None -
|
2014
|
—
|
2021
|
China
|
2009-2018
|
2009
|
—
|
2021
|
During fiscal 2017 we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. During the time the dispute was ongoing, we believed we accurately reported our taxable income and vigorously protested the assessment through administrative processes with the state. During fiscal 2021, we reached an agreement to settle the $6.0 million assessment in dispute for $0.5 million.
Note 21 - Earnings Per Share
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities. Dilutive securities at any given point in time may consist of outstanding options to purchase common stock and issued and contingently issuable unvested RSUs, PSUs, RSAs, PSAs and other stock-based awards (see Note 10). Anti-dilutive securities are not included in the computation of diluted earnings per share under the treasury stock method.
The following table presents our weighted average basic and diluted shares outstanding for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended Last Day of February,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2019
|
Weighted average shares outstanding, basic
|
|
24,985
|
|
|
25,118
|
|
|
26,073
|
|
Incremental shares from share-based compensation arrangements
|
|
211
|
|
|
204
|
|
|
230
|
|
Weighted average shares outstanding, diluted
|
|
25,196
|
|
|
25,322
|
|
|
26,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities
|
|
112
|
|
|
197
|
|
|
262
|
|