NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
|
General Information and Summary of Significant Accounting Policies
|
Organization and Business Activity
. Elizabeth Arden, Inc. (the Company or our) is a global prestige beauty products company that sells fragrances, skin care and
cosmetic products to retailers in the United States and approximately 120 countries internationally.
Basis of
Consolidation.
The consolidated financial statements include the accounts of the Companys wholly-owned domestic and international subsidiaries as well as variable interest entities (VIEs) of which the Company is the
primary beneficiary in accordance with consolidation accounting guidance. See Note 12 for information on the consolidated VIEs. All significant intercompany accounts and transactions have been eliminated in consolidation.
Liquidity.
Since fiscal 2014, the Company has identified and undertaken several initiatives to reduce the size and complexity
of its overhead structure and to exit low-return businesses, customers and brands, in order to improve gross margins and profitability in the long term. There are risks and uncertainties associated with the execution of the Companys business
plans, including the general economic and retail environment. The Companys ability to fund operations and capital expenditures in the future is dependent upon the ability to generate cash from operations, maintain or improve margins and to
borrow funds available under its credit facilities. As further described in Note 9 (Short Term Debt), the Company maintains a revolving bank credit facility (the Credit Facility) that was amended and restated in July 2016 (the
Amended Credit Facility) and a second lien credit agreement (the Second Lien Credit Agreement) with its lenders.
The Amended Credit Facility has only one financial covenant, a debt service coverage ratio that applies only if the Company does not have the requisite average borrowing base capacity and borrowing
availability. The debt service coverage ratio did not apply during the fiscal year ended June 30, 2016. The Companys debt service coverage ratio was less than 1.1 to 1.0 for the fiscal year ended June 30, 2016.
Based upon its business strategies and initiatives for fiscal 2017, the Company does not anticipate that its borrowing base capacity
and/or borrowing availability will fall below the applicable thresholds in its Amended Credit Facility. If the Company requires additional liquidity to fund operations, the Company believes it has the ability to postpone or reduce certain
expenditures, such as capital expenditures, in a manner that the Company believes is sufficient to create the liquidity necessary to fund operations.
Deterioration in the economic and retail environment or continued challenges in the Companys operating performance, however, could cause the Company to default under its Credit Facility if it does
not have the requisite average borrowing base capacity or borrowing availability and also fails to meet the financial maintenance covenant set forth in the Amended Credit Facility. In such an event, the Company would not be allowed to borrow under
these facilities and may not have access to the capital necessary to meet its operating and investing needs. In addition, a default under its Amended Credit Facility or Second Lien Credit Agreement that causes acceleration of the debt under either
facility could trigger a default under the Companys outstanding 7 3/8% Senior Notes due March 2021 (the 7 3/8% Senior Notes). In the event the Company is not able to borrow under either credit facility, it would be required to
develop an alternative source of liquidity. There is no assurance that the Company could obtain replacement financing or what the terms of such financing, if available, would be.
Investments and Variable Interest Entities.
During fiscal 2013, 2014 and 2015, the Company, through a subsidiary, invested an
aggregate of $13.7 million for a minority investment in Elizabeth Arden Salon-Holdings, Inc., an unrelated party whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons (Salon Holdings). The
investment in Elizabeth Arden Salon-Holdings, Inc., which is in the form of a collateralized convertible note bearing interest at 2%, has been accounted for using the cost method and at June 30, 2016, is included in other assets on the
consolidated balance sheet.
During fiscal 2014 and 2015, the Company, through a subsidiary (the EA USC
Subsidiary), invested an aggregate of $9.0 million in US Cosmeceutechs, LLC (USC), a skin care company that develops and sells skin care products for the professional dermatology and spa channels, and separately purchased a 30%
equity interest in USC from the sole equity member for $3.6 million. The investment, which is in the form of a collateralized convertible note (the Convertible Note), bears interest at 1.5%. Upon conversion of the Convertible Note, the
Company will own 85.45% of the fully diluted equity interests in USC (inclusive of EA USCs current equity interest). The Company expects that the Convertible Note will convert into 85.45% of the fully diluted equity interests of USC by
September 1, 2016. The Company has a put/call agreement with the other USC equity member with respect to the remaining 14.55% interest in USC. Based on the investment in USC and the EA USC Subsidiarys controlling rights under the
operating agreement, the Company has determined that USC is a VIE, of which the Company is the primary beneficiary, requiring consolidation of USCs financial statements in accordance with Topic 810, Consolidation. See Note 12 for additional
information on this investment and the consolidated VIE.
- 68 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal 2015, the Company, through a subsidiary, entered into a joint venture in
the United Arab Emirates (the UAE Joint Venture) with an unrelated third party for the sale, promotion and distribution of the Companys products primarily in the Middle East. Based on its equity interests and controlling rights in
the Middle East joint venture, the Company has determined that the UAE Joint Venture is a VIE, requiring consolidation of such joint ventures financial statements in accordance with Topic 810, Consolidation. The unrelated third partys
interest in the UAE Joint Venture is classified as a noncontrolling interest in the shareholders equity section of the Companys consolidated balance sheet. See Note 12 for additional information on this investment and the
consolidated VIE.
During fiscal 2016, the Company, through a subsidiary, entered into a joint venture with an unrelated third
party for the sale, promotion and distribution of the Companys products in Southeast Asia and, effective January 1, 2016, in Hong Kong (the Southeast Asia Joint Venture). Based on its equity interests and controlling rights in
the Southeast Asia joint venture, the Company has determined that the Southeast Asia Joint Venture is a VIE, requiring consolidation of such joint ventures financial statements in accordance with Topic 810, Consolidation. The unrelated third
partys interest in the joint venture is classified as a noncontrolling interest in the shareholders equity section of the Companys consolidated balance sheet. See Note 12 for additional information on this investment
and the consolidated VIE.
Use of Estimates.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include expected useful lives of brand licenses, trademarks, other intangible
assets and property, plant and equipment, allowances for sales returns and markdowns, share-based compensation, fair value of long-lived assets, allowances for doubtful accounts receivable, provisions for inventory obsolescence, and income taxes and
valuation reserves. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.
Revenue Recognition.
Sales are recognized when title and the risk of loss transfers to the customer, the sale price is fixed or determinable and collectability of the resulting receivable is
probable. Sales are recorded net of estimated returns, markdowns and other allowances, which are granted to certain of the Companys customers and are subject to the Companys authorization and approval. The provision for sales returns and
markdowns represents managements estimate of future returns and markdowns based on historical and projected experience and considering current external factors and market conditions. During each of the years ended June 30, 2016, 2015 and
2014, one customer of its North America segment accounted for an aggregate of 12% of the Companys net sales.
Foreign
Currency Translation
. All assets and liabilities of foreign subsidiaries and affiliates that do not utilize the U.S. dollar as their functional currency are translated at year-end rates of exchange, while sales and expenses are translated
at weighted average rates of exchange. Unrealized translation gains or losses are reported as foreign currency translation adjustments through other accumulated comprehensive loss or income included in shareholders equity. Such adjustments
resulted in net unrealized losses of $3.5 million and $13.9 million for the years ended June 30, 2016 and 2015, respectively, and net unrealized gains of $2.4 million for the year ended June 30, 2014. Gains or losses resulting from foreign
currency transactions are recorded in the foreign subsidiaries statements of operations. Such amounts resulted in net losses of $3.9 million, $6.7 million and $0.8 million for the years ended June 30, 2016, 2015 and 2014, respectively.
Cash and Cash Equivalents.
Cash and cash equivalents include cash and interest-bearing deposits at banks with an
original maturity date of three months or less.
Allowances for Doubtful Accounts Receivable.
The Company
maintains allowances for doubtful accounts to cover uncollectible accounts receivable and evaluates its accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an
analysis of receivables aging and a customer-by-customer review for large accounts. If, for example, the financial condition of the Companys customers deteriorates resulting in an impairment of their ability to pay, additional allowances may
be required, resulting in a charge to income in the period in which the determination was made.
Inventories.
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. See
Note 6.
Property and Equipment, and Depreciation.
Property and equipment are stated at cost. Expenditures for
major improvements and additions are recorded to the asset accounts, while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are charged to expense. Depreciation is provided over the estimated
useful lives of the assets using the straight-line method. When fixed assets are sold or otherwise disposed of, the accounts are relieved of the original cost of the assets and the related accumulated depreciation and any resulting profit or loss is
credited or charged to income. See Note 7.
- 69 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Exclusive Brand Licenses, Trademarks, and Intangibles.
The Companys
definite lived intangible assets are being amortized using the straight-line method over their estimated useful lives. Intangible assets that have indefinite useful lives are not being amortized. See Note 8.
Indefinite-Lived and Long-Lived Assets.
Goodwill and intangible assets with indefinite lives are not amortized, but rather
assessed for impairment at least annually. An annual impairment assessment is performed during the Companys fourth fiscal quarter or more frequently if events or changes in circumstances indicate the carrying value of goodwill and
indefinite-lived intangible assets may not fully be recoverable. The Company follows the guidance in Topic 350, Intangibles-Goodwill and Other, which simplifies how an entity assesses goodwill for impairment and allows an entity to first assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment assessment. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a
qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Should a goodwill impairment assessment be necessary, there is a two step process for assessing impairment of goodwill. The first step used
to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment by comparing the estimated fair value of the goodwill and
intangible assets to their respective carrying values. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value.
Long-lived assets are reviewed for impairment upon the occurrence of specific triggering events. The impairment assessment is based on a comparison of the carrying value of such assets against the
undiscounted future cash flows expected to be generated by such assets. If an impairment is identified, the carrying value of the asset is adjusted to estimated fair value. During the second quarter of fiscal 2015, net sales of Justin Bieber and
Nicki Minaj fragrances fell significantly below expectations. The Company reviewed these license agreements for potential impairment. Given the significant decline in net sales during the second quarter of fiscal 2015, and the expectation for a
continued decline of sales in future periods, the Company determined that these intangible assets were fully impaired. As a result, the Company recorded a total impairment charge of approximately $39.6 million during the second quarter of fiscal
2015 to write off the carrying values of both the Justin Bieber and Nicki Minaj licenses.
During the fourth quarter of fiscal
2014, the Company decided (i) not to renew the True Religion license agreement which expired on June 30, 2014, and (ii) not to renew the BCBGMAXAZRIA license agreement once it expires in January 2017. At the time of the acquisition of
the licenses from New Wave Fragrances LLC in May 2012, the Company assumed it would exercise its renewal options for both licenses and estimated the useful lives to be approximately six years for the True Religion license and 9.5 years for the
BCBGMAXAZRIA license. The decision not to exercise the renewal options for both licenses triggered an impairment analysis for each license. As a result, the Company recorded an impairment charge of approximately $5.8 million during the fourth
quarter of fiscal 2014, to reduce the carrying values for both the True Religion and BCBGMAXAZRIA licenses.
The Company will
continue to monitor and evaluate the expected future cash flows of its reporting units and the long-term trends of its market capitalization for the purposes of assessing the carrying value of its goodwill and indefinite-lived Elizabeth Arden
trademarks, other trademarks and intangible assets. There were no triggering events identified, and therefore no such adjustments were recorded for the year ended June 30, 2016. See Note 8.
Leases.
The Company leases distribution equipment, office and computer equipment, and vehicles. The Company also has
operating leases for office and retail space, as well as capital leases for computer equipment and software. The Company reviews all of its leases to determine whether they qualify as operating or capital leases. Leasehold improvements are
capitalized and amortized over the lesser of the useful life of the asset or current lease term. The Company accounts for free rent periods and scheduled rent increases on a straight-line basis over the lease term. Landlord allowances and incentives
are recorded as deferred rent and are amortized as a reduction to rent expense over the lease term.
Debt Issuance Costs
and Debt Premium
. Debt issuance costs, transaction fees and debt premium, which are associated with the issuance of the senior notes, the Amended Credit Facility and the Second Lien Credit Agreement (see Note 9), are being amortized and
charged to interest expense, or in the case of debt premium recorded as interest income, over the term of the related notes or the term of the applicable credit facility. In any period in which the senior notes are redeemed, the unamortized debt
issuance costs and transaction fees relating to the notes being redeemed are expensed and the unamortized debt premium relating to the notes being redeemed is recorded as a reduction in interest expense. See Note 10.
Cost of Sales.
Included in cost of sales are the cost of products sold, the cost of gift with purchase items provided to
customers, royalty costs related to patented technology or formulations, warehousing, distribution and supply chain costs. The major components of warehousing, distribution and supply chain costs include salary and related benefit costs for
employees in the warehousing, distribution and supply chain functions and facility-related costs in these areas.
- 70 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Selling, General and Administrative Costs.
Included in selling, general and
administrative expenses are advertising, creative development and promotion costs not paid directly to the Companys customers, royalty costs related to trademarks, salary and related benefit costs of the Companys employees in the
finance, human resources, information technology, legal, sales and marketing functions, facility-related costs of the Companys administrative functions, and costs paid to consultants and third party providers for related services.
Advertising and Promotional Costs.
Advertising and promotional costs that are paid directly to customers for goods and
services provided (primarily co-op advertising and certain direct selling costs) are expensed as incurred and are recorded as a reduction of sales. Advertising and promotional costs that are not paid directly to the Companys customers are
expensed as incurred and recorded as a component of cost of goods sold (in the case of free goods given to customers) or selling, general and administrative expenses. Advertising and promotional costs include promotions, direct selling, co-op
advertising and media placement. Advertising and promotional costs for the years ended June 30, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Advertising and promotional costs
|
|
$
|
289.4
|
|
|
$
|
297.5
|
|
|
$
|
367.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes.
The provision for income taxes is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and liabilities and certain other adjustments. The Company provides for deferred taxes under the liability method. Under such method, deferred taxes are adjusted for tax rate changes
as they occur. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the
Company is able to realize their benefit, or, that future deductibility is uncertain. Commencing with the fourth quarter of fiscal 2014, the Company began recording valuation allowances against its U.S. deferred tax assets as a non-cash charge to
income tax expense. Also, commencing in fiscal 2015, for certain foreign operations, the Company began recording valuation allowances against our deferred tax assets in such foreign operations as non-cash charges to income tax expense. The valuation
allowances for net deferred tax assets will prevent the Company from recording tax benefits on future losses in the affected operations unless sufficient future taxable income is generated in such operations to support the realization of the
deferred tax assets. See Note 14.
During the fourth quarter of fiscal 2015, the Company finalized an intercompany loan
agreement between a foreign subsidiary, incorporated in Switzerland, and a U.S. subsidiary. Under the terms of the intercompany loan agreement, the foreign subsidiary loaned $42 million to the U.S. subsidiary. The intercompany loan is payable on or
before June 30, 2020. For income tax purposes, the entire loan was included in computing taxable income in fiscal 2015 and 2016 as a foreign investment in U.S. property, but no tax provision was included as a result of the Companys
valuation allowance. The Company has accrued a net provision of $2.1 million for estimated deferred taxes on a portion of unremitted foreign earnings that may be considered for repatriation in the future. The Company has not provided for taxes on
the remaining undistributed earnings of foreign subsidiaries, as these earnings are deemed to be permanently reinvested. If in the future these earnings are repatriated to the United States, or if the Company determines such earnings will be
remitted in the foreseeable future, additional tax provisions may be required. See Note 14.
The Company recognizes in its
consolidated financial statements the impact of a tax position if it is more likely than not that such position will be sustained on audit based on its technical merits. While the Company believes that its assessments of whether its tax positions
are more likely than not to be sustained are reasonable, each assessment is subjective and requires the use of significant judgments. As a result, one or more of such assessments may be challenged by the relevant tax authorities, which could result
in a change to net income if such position is not sustained.
Hedge Contracts.
The Company has designated each
foreign currency contract entered into as of June 30, 2016, as a cash flow hedge. Unrealized gains or losses, net of taxes, associated with these contracts are included in accumulated other comprehensive (loss) income on the consolidated
balance sheet. Gains and losses will be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be
ineffective would be recognized in earnings immediately.
- 71 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other Payables and Accrued Expenses.
A summary of the Companys other
payables and accrued expenses as of June 30, 2016 and 2015, is as follows:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Accrued advertising, promotion and royalties
|
|
$
|
23,284
|
|
|
$
|
30,279
|
|
Accrued employee-related benefits
|
|
|
29,874
|
|
|
|
28,116
|
|
Accrued value added taxes
|
|
|
4,511
|
|
|
|
4,083
|
|
Accrued interest
|
|
|
7,871
|
|
|
|
7,855
|
|
Freight
|
|
|
2,760
|
|
|
|
2,815
|
|
Other accruals
|
|
|
36,220
|
|
|
|
41,830
|
|
|
|
|
|
|
|
|
|
|
Total other payables and accrued expenses
|
|
$
|
104,520
|
|
|
$
|
114,978
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive (Loss) Income.
Accumulated other comprehensive (loss) income
includes, in addition to net income or net loss, unrealized gains and losses excluded from the consolidated statements of operations and recorded directly into a separate section of shareholders equity on the consolidated balance sheet. These
unrealized gains and losses are referred to as other comprehensive (loss) income items. The Companys accumulated other comprehensive (loss) income shown on the consolidated balance sheets at June 30, 2016 and June 30, 2015, consists
of foreign currency translation adjustments, which are not adjusted for income taxes as such amounts relate to indefinite investments in non-U.S. subsidiaries, and the unrealized gains (losses), net of taxes, related to the Companys foreign
currency contracts, respectively.
The components of accumulated other comprehensive loss as of June 30, 2016, 2015 and
2014, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cumulative foreign currency translation adjustments
|
|
$
|
(20,038
|
)
|
|
$
|
(16,540
|
)
|
|
$
|
(2,622
|
)
|
Unrealized hedging loss, net of taxes
|
|
|
(750
|
)
|
|
|
(46
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(20,788
|
)
|
|
$
|
(16,586
|
)
|
|
$
|
(4,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments.
The Companys financial instruments include
accounts receivable, accounts payable, currency forward contracts, short-term debt and long-term debt. The Company follows the guidance under Topic 820, Fair Value Measurements and Disclosures. See Note 17.
Share-Based Compensation
. All share-based payments to employees, including the grants of employee stock options, are
recognized in the consolidated financial statements based on their fair values, but only to the extent that vesting is considered probable. Compensation cost for awards that vest will not be reversed if the awards expire without being exercised. The
fair value of stock options is determined using the Black-Scholes option-pricing model and the fair value of restricted stock and restricted stock unit awards is based on the closing price of the Companys common stock, $.01 par value per share
(Common Stock), on the date of grant. Compensation costs for awards are amortized using the straight-line method. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the
fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions
are based on or determined from external data and other assumptions may be derived from the Companys historical experience with share-based arrangements. The appropriate weight to place on historical experience is a matter of judgment, based
on relevant facts and circumstances.
The Company relies on its historical experience and post-vested termination activity to
provide data for estimating expected term for use in determining the fair value of its stock options. The Company currently estimates its stock volatility by considering historical stock volatility experience and other key factors. The risk-free
interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model. The Company estimates forfeitures using its historical
experience, which will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it
is reasonably likely that circumstances may cause the estimate to change. If, for example, actual forfeitures are lower than the Companys estimate, additional charges to net income may be required.
Out-Of-Period Adjustments
. During the year ended June 30, 2014, the Company recorded two out-of-period adjustments to
correct errors for deferred taxes and taxes recoverable in one of our foreign affiliates. For the year ended June 30, 2014, income before income taxes decreased by $0.5 million, income tax expense decreased by $0.8 million, and net income
attributable to Elizabeth Arden shareholders increased by $0.3 million. The Company did not adjust the prior periods as it concluded that such adjustments were not material to the then current or prior period consolidated financial statements.
- 72 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2.
|
Net Loss Per Share attributable to Elizabeth Arden shareholders
|
Basic net loss per share attributable to Elizabeth Arden common shareholders is computed by dividing the net loss attributable to Elizabeth Arden common shareholders by the weighted average shares of the
Companys outstanding Common Stock. The calculation of net loss attributable to Elizabeth Arden common shareholders per diluted share is similar to basic net loss per share attributable to Elizabeth Arden common shareholders except that the
denominator includes potentially dilutive Common Stock, such as stock options, non-vested restricted stock units, and warrants to purchase common stock. For the years ended June 30, 2016, 2015 and 2014, diluted net loss per share equals basic
net loss per share as the assumed exercise of stock options, warrants and vesting of restricted stock units and, in the case of the fiscal year ended June 30, 2014, the assumed purchases under the employee stock purchase plan would have an
anti-dilutive effect.
The following table represents the computation of net loss per share attributable to Elizabeth Arden
common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Elizabeth Arden common shareholders
|
|
$
|
(74,371
|
)
|
|
$
|
(246,326
|
)
|
|
$
|
(145,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
29,884
|
|
|
|
29,804
|
|
|
|
29,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per basic share attributable to Elizabeth Arden common shareholders
|
|
$
|
(2.49
|
)
|
|
$
|
(8.26
|
)
|
|
$
|
(4.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Elizabeth Arden common shareholders
|
|
$
|
(74,371
|
)
|
|
$
|
(246,326
|
)
|
|
$
|
(145,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
29,884
|
|
|
|
29,804
|
|
|
|
29,720
|
|
Potential common shares treasury method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and potential diluted shares
|
|
|
29,884
|
|
|
|
29,804
|
|
|
|
29,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per diluted share attributable to Elizabeth Arden common shareholders
|
|
$
|
(2.49
|
)
|
|
$
|
(8.26
|
)
|
|
$
|
(4.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the number of common stock equivalents that were outstanding for the years
ended June 30, 2016, 2015 and 2014, which were not included in the net income per diluted share attributable to Elizabeth Arden common shareholders calculation because to do so would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Number of shares
|
|
|
3,475,234
|
|
|
|
3,555,917
|
|
|
|
623,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3.
|
Pending Revlon Merger
|
On
June 16, 2016, the Company announced that it entered into an agreement and plan of merger (referred to as the Merger Agreement) with Revlon, Inc., Revlon Consumer Products Corporation, a wholly-owned subsidiary of Revlon, Inc.
(referred to as RCPC, and together with Revlon, Inc., Revlon) and RR Transaction Corp., a Florida corporation and a wholly owned direct subsidiary of Revlon Consumer Products Corporation (referred to as the Revlon
Sub). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions as described below, the Revlon Sub will merge with and into the Company. As a result of the Revlon Merger, the Revlon Sub will cease to
exist and the Company will survive as a wholly-owned subsidiary of RCPC. This pending transaction is referred to as the Revlon Merger.
Under the terms of the Merger Agreement, Revlon will acquire all of the outstanding shares of the Companys Common Stock for $14.00 per share in cash (the Merger Consideration). Upon the
closing of the Revlon Merger (i) each option to purchase shares of Common Stock (each, a Company Option) that is outstanding and unexercised (whether vested or unvested) immediately prior to the closing will be canceled and
exchanged for the right to receive a cash payment equal to the product of (x) the number of shares of Common Stock subject to such Company Option and (y) the excess, if any, of the Merger Consideration over the exercise price per share of
Common Stock subject to such Company Option, and (ii) each restricted share unit award under any of the Companys stock plans that is outstanding immediately prior to the closing will become fully vested and be converted into the right to
receive an amount in cash equal to the Merger Consideration, in each case, less any required withholding taxes and without interest. In addition, pursuant to a Preferred Stock Repurchase and Warrant Cancellation Agreement entered into by the
Company, Revlon, Revlon Sub and the Purchasers (as such term is defined in Note 13, upon the closing of the Revlon Merger, all of the Companys outstanding Series A Serial Preferred Stock, par value $0.01 per share (the Preferred
Stock), will be redeemed (with funds to be provided to, or paid on behalf of, us by Revlon) for a cash purchase price equal to 110% of face value of the Preferred Stock (corresponding to $55.0 million, plus accrued and unpaid dividends) and
all outstanding Warrants, (as such term is defined in Note 13), owned by the Purchasers will be canceled. In addition, the existing Shareholders Agreement between the Purchasers and the Company will terminate. See Note 13.
- 73 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Upon the closing of the Revlon Merger, all outstanding amounts due under the
Companys Amended Credit Facility and the Second Lien Credit Agreement will become payable and the holders of the 7 3/8% Senior Notes will have the right to require the repurchase of the Senior Notes.
The consummation of the Revlon Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the
adoption and approval of the Merger Agreement by the holders of a majority of the Common Stock and the Preferred Stock entitled to vote thereon (voting together and voting as separate classes), (ii) the receipt of certain foreign antitrust
approvals and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of a material adverse effect with respect to the Company, (iv) the
absence of a court or regulatory authority order prohibiting the closing of the Revlon Merger, and (v) other customary closing conditions, including (x) the accuracy of the representations and warranties of the other party (subject to
certain specified standards) and (y) the performance in all material respects by the other party of its obligations under the Merger Agreement. The Merger is not conditioned upon Revlons receipt of financing. The Company currently expects
the Merger to be completed by the end of 2016.
During the fourth quarter of fiscal 2016, the Company recorded
approximately $2.0 million in selling, general and administrative expenses for costs incurred related to the pending Revlon Merger.
NOTE 4.
|
2016 Business Transformation Program and Other Restructuring
|
During the fourth quarter of fiscal 2015, the Company identified certain restructuring and cost savings initiatives that it expected to implement during fiscal 2016 (the 2016 Business Transformation
Program). The 2016 Business Transformation Program was intended to further align the Companys organizational structure and distribution arrangements with the current needs and demands of its business in order to improve the
Companys go-to-market capability and execution and to streamline its organization.
The Company expects to incur
approximately $25 million to $26 million in pre-tax charges under the 2016 Business Transformation Program. From inception through June 30, 2016, the Company has incurred approximately $24.3 million, of pre-tax charges under the 2016 Business
Transformation Program, including $21.9 million of pre-tax charges during the year ended June 30, 2016. The remaining charges under the 2016 Business Transformation Program are expected to be incurred in fiscal year 2017. The pre-tax charges
for the year ended June 30, 2016 and since inception consisted of the following:
Year Ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Cost of
Goods
Sold
|
|
|
Selling,
General and
Administrative
|
|
|
Depreciation
|
|
|
Total
|
|
Inventory Costs
(1)
|
|
$
|
6,524
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,524
|
|
Severance and other employee-related costs
(2)
|
|
|
|
|
|
|
6,145
|
|
|
|
|
|
|
|
6,145
|
|
Other
(3)
|
|
|
|
|
|
|
8,748
|
|
|
|
|
|
|
|
8,748
|
|
Depreciation
(4)
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,524
|
|
|
$
|
14,893
|
|
|
$
|
457
|
|
|
$
|
21,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since Inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Cost of
Goods
Sold
|
|
|
Selling,
General and
Administrative
|
|
|
Depreciation
|
|
|
Total
|
|
Inventory Costs
(1)
|
|
$
|
6,524
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,524
|
|
Severance and other employee-related costs
(2)
|
|
|
|
|
|
|
7,719
|
|
|
|
|
|
|
|
7,719
|
|
Other
(3)
|
|
|
|
|
|
|
9,579
|
|
|
|
|
|
|
|
9,579
|
|
Depreciation
(4)
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,524
|
|
|
$
|
17,298
|
|
|
$
|
457
|
|
|
$
|
24,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists of inventory costs related to the closing of the Companys Brazilian affiliate, as well as changes in certain distribution and customer arrangements.
|
(2)
|
Severance and other employee-related costs associated with reduction in global headcount positions.
|
(3)
|
Consists primarily of transition expenses, including salaries for terminated employees during their remaining service period, and exit costs and rent expense related to
leased space being vacated.
|
(4)
|
Consists of accelerated depreciation expense for leasehold improvements related to vacated leased space.
|
- 74 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of June 30, 2016, the related liability balance and activity for costs
associated with the 2016 Business Transformation Program are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Severance and
Other Employee-
Related Costs
|
|
|
Other
|
|
|
Total
|
|
Liability balance at June 30, 2015
|
|
$
|
1,415
|
|
|
$
|
832
|
|
|
$
|
2,247
|
|
Accruals
(1)
|
|
|
2,084
|
|
|
|
3,059
|
|
|
|
5,143
|
|
Cash payments
|
|
|
(2,680
|
)
|
|
|
(3,059
|
)
|
|
|
(5,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at September 30, 2015
|
|
|
819
|
|
|
|
832
|
|
|
|
1,651
|
|
Accruals
(1)
|
|
|
3,169
|
|
|
|
2,798
|
|
|
|
5,967
|
|
Cash payments
|
|
|
(1,763
|
)
|
|
|
(3,287
|
)
|
|
|
(5,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at December 31, 2015
|
|
|
2,225
|
|
|
|
343
|
|
|
|
2,568
|
|
Accruals
(1)
|
|
|
236
|
|
|
|
1,578
|
|
|
|
1,814
|
|
Cash payments
|
|
|
(1,923
|
)
|
|
|
(1,578
|
)
|
|
|
(3,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at March 31, 2016
|
|
|
538
|
|
|
|
343
|
|
|
|
881
|
|
Accruals
(1)
|
|
|
656
|
|
|
|
1,314
|
|
|
|
1,970
|
|
Cash payments
|
|
|
(1,082
|
)
|
|
|
(1,314
|
)
|
|
|
(2,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at June 30, 2016
(2)
|
|
$
|
112
|
|
|
$
|
343
|
|
|
$
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in selling, general and administrative expenses in the Companys consolidated statements of operations.
|
(2)
|
The Company expects to pay the balance of these liabilities during fiscal 2017.
|
During fiscal 2014, the Company began a comprehensive review of our entire business model and cost structure to identify initiatives to reduce the size and complexity of its overhead structure and to exit
low-return businesses, customers and brands, in order to improve gross margins and profitability in the long term. As a result of this review, the Company implemented several restructuring and cost savings initiatives at the end of fiscal 2014 and
during fiscal 2015 referred to as its 2014 Performance Improvement Plan. From inception through June 30, 2015, the Company recorded a total of approximately $150.5 million of pre-tax charges in connection with the 2014 Performance Improvement
Plan, including $94.6 million of pre-tax charges during the fiscal year ended June 30, 2015. No additional charges in connection with the 2014 Performance Improvement Plan were recorded subsequent to June 30, 2015 and all liabilities
associated with the 2014 Performance Improvement Plan have been paid.
In August 2013, the Company separately announced that
it expected to incur approximately $5 million in severance and other employee-related expenses, and related transition costs and expenses in fiscal 2014 due to the Companys decision to eliminate certain sales and other positions across various
business units that were being eliminated to derive expense savings and additional operating efficiencies (the Fall 2013 Staff Reduction). In the third quarter of fiscal 2014, the Company increased its estimate of the expenses to be
incurred in connection with the Fall 2013 Staff Reduction from $5 million to $6 million. During the fiscal year ended June 30, 2014, the Company incurred a total of $6.0 million of severance and other employee-related expenses, and related
transition costs and expenses with respect to the Fall 2013 Staff Reduction. All restructuring expenses with respect to the Fall 2013 Staff Reduction 2013 were paid as of June 30, 2014.
As described in Note 20, none of the expenses discussed above have been attributed to any of the Companys reportable segments and
are included in unallocated corporate expenses.
NOTE 5.
|
Accounts Receivable, Net
|
The following table details the provisions and allowances established for potential losses from uncollectible accounts receivable and
estimated sales returns in the ordinary course of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Allowance for Bad Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,580
|
|
|
$
|
3,148
|
|
|
$
|
3,481
|
|
Provision (Recovery)
|
|
|
190
|
|
|
|
879
|
|
|
|
(191
|
)
|
Write-offs, net of recoveries
|
|
|
(561
|
)
|
|
|
(1,447
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,209
|
|
|
$
|
2,580
|
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
20,476
|
|
|
$
|
26,566
|
|
|
$
|
19,533
|
|
Provision
(1)
|
|
|
33,722
|
|
|
|
68,328
|
|
|
|
91,826
|
|
Actual returns
(1)
|
|
|
(41,885
|
)
|
|
|
(74,418
|
)
|
|
|
(84,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,313
|
|
|
$
|
20,476
|
|
|
$
|
26,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The decrease in fiscal 2016 compared to fiscal 2015 was primarily due to the overall decrease in sales to specialty beauty store customers and North America prestige
retailers that have return rights. The decrease in fiscal 2015 compared to fiscal 2014 was primarily due to the overall decrease in sales including lower sales to North America prestige retailers and specialty beauty store customers that have return
rights.
|
- 75 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The
components of inventory were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
Raw and packaging materials
|
|
$
|
12,012
|
|
|
$
|
19,943
|
|
Work in progress
|
|
|
20,993
|
|
|
|
13,915
|
|
Finished goods
|
|
|
208,404
|
|
|
|
206,882
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
241,409
|
|
|
$
|
240,740
|
|
|
|
|
|
|
|
|
|
|
NOTE 7.
|
Property and Equipment
|
Property and equipment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Estimated
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
Life
|
|
Leasehold improvements
|
|
$
|
27,454
|
|
|
$
|
28,302
|
|
|
|
2 - 10
|
|
Machinery, equipment, furniture and fixtures and vehicles
|
|
|
14,959
|
|
|
|
16,549
|
|
|
|
5 - 14
|
|
Computer equipment and software
|
|
|
84,339
|
|
|
|
84,753
|
|
|
|
3 - 10
|
|
Counters and trade fixtures
|
|
|
71,197
|
|
|
|
69,769
|
|
|
|
3 - 5
|
|
Tools and molds
|
|
|
32,748
|
|
|
|
30,862
|
|
|
|
1 - 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,697
|
|
|
|
230,235
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(146,869
|
)
|
|
|
(128,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,828
|
|
|
|
101,406
|
|
|
|
|
|
Projects in progress
|
|
|
4,493
|
|
|
|
4,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
88,321
|
|
|
$
|
105,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, the gross value of property and equipment under capital leases was approximately
$561,000, or $216,000 net of accumulated depreciation, and consists of computer equipment and software. Total depreciation expense, including depreciation recorded in cost of goods sold, for the years ended June 30, 2016, 2015 and 2014, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Depreciation expense
|
|
$
|
30,925
|
|
|
$
|
33,293
|
|
|
$
|
32,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8.
|
Exclusive Brand Licenses, Trademarks and Intangibles, Net and Goodwill
|
The following summarizes the cost basis, amortization and weighted average estimated life associated with the Companys intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
June 30,
2016
|
|
|
Weighted
Average
Estimated
Life
|
|
|
June 30,
2015
|
|
|
Weighted
Average
Estimated
Life
|
|
Elizabeth Arden brand trademarks
|
|
$
|
122,415
|
|
|
|
Indefinite
|
|
|
$
|
122,415
|
|
|
|
Indefinite
|
|
Exclusive brand licenses and related trademarks
|
|
|
107,832
|
|
|
|
16
|
|
|
|
107,748
|
|
|
|
16
|
|
Exclusive brand trademarks and patents
|
|
|
118,298
|
|
|
|
15
|
|
|
|
106,458
|
|
|
|
16
|
|
Other intangibles
(1)
|
|
|
18,588
|
|
|
|
18
|
|
|
|
18,588
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive brand licenses, trademarks and intangibles, gross
|
|
|
367,133
|
|
|
|
|
|
|
|
355,209
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive brand licenses and related trademarks
|
|
|
(73,265
|
)
|
|
|
|
|
|
|
(66,658
|
)
|
|
|
|
|
Exclusive brand trademarks and patents
|
|
|
(60,017
|
)
|
|
|
|
|
|
|
(55,894
|
)
|
|
|
|
|
Other intangibles
|
|
|
(8,805
|
)
|
|
|
|
|
|
|
(7,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive brand licenses, trademarks and intangibles, net
|
|
$
|
225,046
|
|
|
|
|
|
|
$
|
224,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily consists of customer relationships, customer lists and non-compete agreements.
|
- 76 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At June 30, 2016, the Company had goodwill of $31.6 million recorded on its
consolidated balance sheet. The entire amount of the goodwill in all periods presented relates to the North America segment.
Goodwill and intangible assets with indefinite lives, such as the Companys Elizabeth Arden trademarks, are not amortized, but
rather assessed for impairment at least annually. An annual impairment assessment is performed during the fourth quarter of the Companys fiscal year or more frequently if events or changes in circumstances indicate the carrying value of
goodwill and indefinite-lived intangibles may not fully be recoverable. The Company follows the guidance in Topic 350, Intangibles-Goodwill and Other, which simplifies how an entity assesses goodwill for impairment and allows an entity to first
assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment assessment. During the quarter ended June 30, 2016, the Company completed the Companys annual impairment assessment
of goodwill using the guidance under Topic 350 and the analysis indicated that no impairment adjustment was required. Similarly, no such adjustments for impairment of goodwill were recorded for the fiscal years ended June 30, 2015 or 2014.
The Company also follows the guidance in Topic 350 for testing impairment of indefinite-lived intangible assets other than
goodwill. Examples of intangible assets subject to the guidance include indefinite-lived trademarks, licenses, and distribution rights. Companies are given the option to first assess qualitative factors to determine whether it is necessary to
perform the quantitative impairment test. A company electing to perform a qualitative assessment is not required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on such qualitative assessment,
that it is more likely than not that the asset is impaired.
The Company has determined that the Elizabeth Arden
trademarks have indefinite useful lives, as cash flows from the use of the trademarks are expected to be generated indefinitely. During the quarter ended June 30, 2016, the Company completed its annual impairment assessment of the Elizabeth
Arden trademarks, with the assistance of a third party valuation firm. In assessing the fair value of these assets, the Company considered the income approach for the Elizabeth Arden trademarks. Under the income approach, the fair value is based on
the present value of estimated future cash flows. The analysis indicated that no impairment adjustment was required as the estimated fair value exceeded the recorded carrying value. Similarly, no such adjustments for impairment of the Elizabeth
Arden trademarks were recorded for the fiscal years ended June 30, 2015 or 2014.
During fiscal 2016, the Company
acquired the U.S. and international trademarks for the Giorgio of Beverly Hills fragrance brands from The Procter & Gamble Company and certain of its affiliates for $10.5 million. Prior to the acquisition of the trademarks, the Company
manufactured and sold the Giorgio Beverly Hills fragrances under a license agreement with The Procter & Gamble Company.
During fiscal 2016, the Company entered into an agreement to acquire the global license and certain related assets, including inventory, for the Christina Aguilera fragrance business from
Procter & Gamble International Operations S.A. for approximately $16 million. The transaction closed in July 2016.
During fiscal 2015, net sales of Justin Bieber and Nicki Minaj fragrances fell significantly below expectations. The Company reviewed
these license agreements for potential impairment. Given the significant decline in net sales during the second quarter of fiscal 2015, and the expectation for a continued decline of sales in future periods, the Company determined that these
intangible assets were fully impaired. As a result, the Company recorded a total impairment charge of approximately $39.6 million during fiscal 2015 to write off the carrying values of both the Justin Bieber and Nicki Minaj licenses.
During fiscal 2014, the Company decided (i) not to renew its True Religion license agreement which expired on June 30, 2014,
and (ii) that it will not renew its BCBGMAXAZRIA license agreement once it expires in January 2017. At the time of the acquisition of the licenses from New Wave Fragrances LLC in May 2012, the Company assumed it would exercise its renewal
options for both licenses and estimated the useful lives to be approximately six years for the True Religion license and 9.5 years for the BCBGMAXAZRIA license. The decision not to exercise the renewal options for both licenses triggered an
impairment analysis for each license. As a result, the Company recorded an impairment charge of approximately $5.8 million during fiscal 2014, to reduce the carrying values for both the True Religion and BCBGMAXAZRIA licenses.
- 77 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company will continue to monitor and evaluate the expected future cash flows of its
reporting units and the long term trends of its market capitalization for the purposes of assessing the carrying value of its goodwill and indefinite-lived Elizabeth Arden trademarks, other trademarks, licenses and other intangible assets.
Amortization expense for the years ended June 30, 2016, 2015 and 2014, was $11.8 million, $15.2 million and $19.5
million, respectively. At June 30, 2016, the Company estimated annual amortization expense for each of the next five fiscal years as shown in the following table. Future acquisitions, renewals or impairment events could cause these amounts to
change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Amortization expense
|
|
$
|
10.8
|
|
|
$
|
10.7
|
|
|
$
|
10.6
|
|
|
$
|
10.5
|
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2016, the Company had a $300 million revolving Credit Facility with a syndicate of banks, for which JPMorgan Chase Bank is the administrative agent, which generally provides for borrowings on a revolving basis, with a sub-limit of $25
million for letters of credit. On July 26, 2016, the Company entered into the Amended Credit Facility in order to permit certain of its foreign subsidiaries to make borrowings under the Amended Credit Facility and to secure such borrowings with
certain assets of such subsidiaries. Under the terms of the Amended Credit Facility, the Company may, at any time, increase the size of the Amended Credit Facility up to $375 million without entering into a formal amendment requiring the consent of
all of the banks, subject to the Companys satisfaction of certain conditions. The Amended Credit Facility matures in December 2019.
The Amended Credit Facility now provides for:
|
|
|
a Canadian senior secured revolving credit sub-facility in an aggregate amount of up to US$15 million, secured by a first perfected security interest
in the accounts receivable and certain other assets of the Companys Canadian subsidiary, Elizabeth Arden (Canada) Limited (EA Canada) and the outstanding equity interests of EA Canada;
|
|
|
|
a European senior secured revolving credit sub-facility in an aggregate amount of up to US$100 million, secured by (a) a first perfected security
interest in the accounts receivable and certain other assets of the Companys Swiss operating and United Kingdom subsidiaries, Elizabeth Arden International Sarl (EAISA) and Elizabeth Arden (UK) Ltd. (EA UK),
respectively, (b) a floating charge over all assets of EA UK, (c) the inventory of EAISA located in the Netherlands and the U.S., and (d) the outstanding equity interests of EAISA, EA UK, Elizabeth Arden (Netherlands) Holding B.V.
(which we call EA Netherlands Holding) and Elizabeth Arden (Switzerland) Holding Sarl (EA Swiss Holding) (subject to certain limitations as described in the Amended Credit Facility);
|
|
|
|
the ability to add the Companys German subsidiary, Elizabeth Arden GmbH (EA Germany), as a borrower under the Amended Credit Facility
and to include EA Germanys accounts receivable in the applicable borrowing base for the European sub-facility referred to above, subject to a first perfected security interest in EA Germanys accounts receivable;
|
|
|
|
guarantees of the borrowings of EA Canada by the Company, all of the Companys material U.S. subsidiaries, and subject to local law restrictions,
EA Swiss Holding, EA Netherlands Holding, EA UK, and EAISA; and
|
|
|
|
guarantees of the borrowings of EA UK and EAISA, by the Company, all of the Companys material U.S. subsidiaries, and subject to local law
restrictions, EA Swiss Holding, EA Netherlands Holding, and EA Canada.
|
U.S. borrowings under the Amended
Credit Facility continue to be guaranteed by all of the Companys material U.S. subsidiaries and are collateralized by a first priority lien on all of the Companys U.S. accounts receivable and inventory. No assets of any of the
Companys foreign subsidiaries secure any U.S. borrowings under the Amended Credit Facility. Borrowings under the Amended Credit Facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of the
applicable inventory, as determined pursuant to the terms of the Amended Credit Facility; provided, however, that from August 15 to October 31 of each year the Companys borrowing base may be temporarily increased by up to $25
million. The borrowing bases under the Amended Credit Facility are subject to certain reserves, including, after March 31, 2017, an aggregate reserve against the borrowing bases of EAISA, EA UK and, if added as a borrower under the Amended
Credit Facility, EA Germany, in an amount of US$15 million; provided that in the event that the Company has a debt service pricing ratio under the Amended Credit Facility as of the end of any fiscal quarter ending on or after June 30, 2017
equal to or greater than 1.00 to 1.00, such reserve shall fall to $0.
The Amended Credit Facility continues to have only one
financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1.0 if (a) average borrowing base capacity (calculated on a rolling three-day basis) is equal to or less than ten percent
(10%) of total borrowing availability under the Amended Credit Facility, or (b) the Companys borrowing availability under the Amended Credit Facility, plus domestic cash and cash equivalents, is less than $20 million at any time. The
Companys average borrowing base capacity and borrowing availability for each of the quarters during fiscal 2016 did not fall below the applicable thresholds in the Credit Facility. Accordingly, the debt service coverage ratio did not apply
during the year ended June 30, 2016. The Companys debt service coverage ratio was less than 1.1 to 1.0 for the fiscal year ended June 30, 2016.
- 78 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the terms of the Amended Credit Facility, the Company continues to be permitted to
pay dividends or repurchase common stock if (a) it maintains a debt service coverage ratio of not less than 1.1 to 1.0 and maintains borrowing base capacity plus domestic cash and cash equivalents, in each case after giving effect to the
applicable payment, of (i) at least $30 million from February 1 to August 31, and (ii) at least $35 million from September 1 to January 31, or (b) it maintains borrowing base capacity plus domestic cash and cash
equivalents of (i) at least $40 million from February 1 to August 31, and (ii) at least $45 million from September 1 to January 31. The Amended Credit Facility continues to restrict the Company from incurring additional
non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).
Borrowings under the credit
portion of the Amended Credit Facility bear interest at a floating rate based on an Applicable Margin that is determined by reference to a debt service pricing ratio. At the Companys option, (i) the London InterBank Offered
Rate (LIBOR) or the Canadian Deposit Offered Rate (CDOR), or (ii) the base rate or the Canadian prime rate. The Applicable Margin charged on LIBOR and CDOR loans ranges from 1.50% to 2.50% and ranges from 0% to 1.0% for base rate and Canadian
loans. The Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in the Companys borrowing base is in effect, is 1.0% higher. The unused commitment fee under
the Amended Credit Facility rate is 0.375% per annum and is based on quarterly average utilization.
At June 30,
2016, the Applicable Margin was 2.50% for LIBOR loans and 1.00% for base rate loans. For the fiscal years ended June 30, 2016 and 2015, the weighted average annual interest rate on borrowings under the Credit Facility was 2.9% and 2.7%,
respectively.
During fiscal 2016, the Company entered into two amendments to the Second Lien Credit Agreement (the
Amendments), to, among other things, extend the maturity date of the Second Lien Credit Agreement from January 2016 to October 16, 2017. On October 2, 2015 and as required by one of the Amendments, the Company borrowed $25
million in a single advance and used the proceeds to reduce outstanding borrowings under the Credit Facility.
The Second Lien
Credit Agreement is collateralized by a second priority lien on all of the Companys U.S. accounts receivable and inventories. In October 2015, the Company also entered into security agreements (the Security Agreements) in favor of
JP Morgan Chase Bank, N.A. and the lenders under the Companys Amended Credit Facility, granting a lien against the Companys U.S. trademarks relating to its Curve fragrance brand and certain related assets to secure the Companys
obligations under both the Second Lien Credit Agreement and the Amended Credit Facility (collectively, the Curve Security Interest). With respect to the Amended Credit Facility, the Curve Security Interest will be released upon payment
in full of the Companys obligations under the Second Lien Credit Agreement, provided that the Companys minimum debt service coverage ratio (as calculated pursuant to the Amended Credit Facility) as of the end of the most recently ended
fiscal quarter for the preceding twelve months is greater than 1.0 to 1.0 and no default or event of default exists immediately prior to or after giving effect to the release of such Curve Security Interest.
The Second Lien Credit Agreement provides that borrowings will bear interest at a floating rate based on an Applicable Margin
that is determined by reference to a debt service pricing ratio. At the Companys option, the Applicable Margin may be applied to either the LIBOR or the base rate. As amended, the Applicable Margin charged on LIBOR loans ranges from 3.00% to
5.00% and for base rate loans ranges from 1.5% to 3.5%. At June 30, 2016, the Applicable Margin under the Second Lien Credit Agreement was 5% for LIBOR loans and 3.5% for base rate loans.
During fiscal 2016, the Company incurred approximately $0.9 million of bank related costs related to the Amendments, and such amounts
have been capitalized and are reflected in debt financing costs, net, on the consolidated balance sheet.
At June 30,
2016, the Company had $42 million in borrowings and $3.2 million in letters of credit outstanding under the Credit Facility, compared with $8.3 million in borrowings and $3.1 million in letters of credit outstanding under the Credit Facility at
June 30, 2015. At June 30, 2016, the Company had $25 million in borrowings under the Second Lien Credit Agreement, compared with no outstanding borrowings at June 30, 2015. At June 30, 2016, based on eligible accounts receivable
and inventory available as collateral, the aggregate borrowing availability under the Credit Facility and Second Lien Credit Agreement was $65.2 million. In periods when there are outstanding borrowings, the Company classifies the Credit Facility
and Second Lien Credit Agreement as short term debt on its balance sheet because it expects to reduce outstanding borrowings over the next twelve months.
- 79 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The
Companys long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
7 3/8% Senior Notes due March 2021
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
Unamortized premium on long-term debt
|
|
|
4,785
|
|
|
|
5,634
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
354,785
|
|
|
$
|
355,634
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016, the Company had $350 million aggregate principal amount of 7 3/8% Senior Notes
outstanding. Interest on the 7 3/8% Senior Notes accrues at a rate of 7.375% per annum and is payable semi-annually on March 15 and September 15 of every year. The 7 3/8% Senior Notes rank pari passu in right of payment to
indebtedness under the Amended Credit Facility and any other senior debt, and will rank senior to any future subordinated indebtedness provided, however, that the 7 3/8% Senior Notes are effectively subordinated to the Amended Credit Facility and
the Second Lien Credit Agreement to the extent of the collateral securing the Amended Credit Facility and the Second Lien Credit Agreement. The indenture applicable to the 7 3/8% Senior Notes (the Indenture) generally permits the Company
(subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness, pay dividends, purchase or redeem its Common Stock or redeem subordinated indebtedness. The Indenture
generally limits the Companys ability to create liens, merge or transfer or sell assets. The Indenture also provides that the holders of the 7 3/8% Senior Notes have the option to require the Company to repurchase their notes in the event of a
change of control involving the Company (as defined in the Indenture). The 7 3/8% Senior Notes are not currently guaranteed by any of the Companys subsidiaries but could become guaranteed in the future by any domestic subsidiary of the Company
that guarantees or incurs certain indebtedness in excess of $10 million. In addition, as part of the offering of the 7 3/8% Senior Notes, the Company incurred and capitalized approximately $6.0 million of related debt financing costs on the
consolidated balance sheet, which will be amortized over the life of the 7 3/8% Senior Notes.
The scheduled maturities and
redemptions of long-term debt at June 30, 2016 were as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
Year Ended June 30,
|
|
Amount
|
|
2017 through 2020
|
|
$
|
|
|
2021
|
|
|
350,000
|
|
After 2021
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
350,000
|
|
|
|
|
|
|
NOTE 11.
|
Commitments and Contingencies
|
The Company has lease agreements for all of the real property it uses. The Companys leased office facilities are located in Pembroke Pines, Florida, Stamford, Connecticut, Bentonville, Arkansas,
Minneapolis, Minnesota and New York, New York in the United States, and in Australia, Canada, China, Denmark, France, Germany, New Zealand, Russia, Singapore, South Africa, South Korea, Spain, Switzerland, Taiwan and the United Kingdom. The Company
reviews all of its leases to determine whether they qualify as operating or capital leases. As of June 30, 2016, the Company has both operating and capital leases. The Company has a leased distribution and office facility in Roanoke, Virginia
and a leased warehouse and returns processing facility in Salem, Virginia. The Company also has retail outlet stores that are located in Florida, New York, Texas, Virginia, Nevada, Pennsylvania and Massachusetts, and a retail location in New York
City that is used for an Elizabeth Arden Red Door spa and retail store. The Companys rent expense for operating leases for the years ended June 30, 2016, 2015 and 2014, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Rent expense
|
|
$
|
22.6
|
|
|
$
|
23.8
|
|
|
$
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, the Companys long-term debt and financial obligations and commitments by due
dates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Long-term
Debt,
including
Current
Portion
|
|
|
Interest
Payments
on Long-
term Debt
(1)
|
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
|
Purchase
Obligations
(2)
|
|
|
Other
Long-term
Obligations
(3)
|
|
|
Total
|
|
2017
|
|
$
|
|
|
|
$
|
25,813
|
|
|
$
|
16,159
|
|
|
$
|
117
|
|
|
$
|
267,077
|
|
|
$
|
|
|
|
$
|
309,166
|
|
2018
|
|
|
|
|
|
|
25,813
|
|
|
|
13,588
|
|
|
|
99
|
|
|
|
15,111
|
|
|
|
4,111
|
|
|
|
58,722
|
|
2019
|
|
|
|
|
|
|
25,813
|
|
|
|
11,318
|
|
|
|
|
|
|
|
4,795
|
|
|
|
4,111
|
|
|
|
46,037
|
|
2020
|
|
|
|
|
|
|
25,813
|
|
|
|
9,475
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
37,748
|
|
2021
|
|
|
350,000
|
|
|
|
19,359
|
|
|
|
9,008
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
378,667
|
|
and thereafter
|
|
|
|
|
|
|
|
|
|
|
26,442
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
26,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
350,000
|
|
|
$
|
122,611
|
|
|
$
|
85,990
|
|
|
$
|
216
|
|
|
$
|
290,193
|
|
|
$
|
8,222
|
|
|
$
|
857,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 80 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1)
|
Consists of interest at the rate of 7 3/8% per annum on the $350 million aggregate principal amount of 7 3/8% Senior Notes.
|
(2)
|
Consists of obligations incurred in the ordinary course of business related to purchase commitments for finished goods, raw materials, components, advertising,
promotional items, minimum royalty guarantees, insurance, services pursuant to legally binding obligations, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions.
|
(3)
|
Excludes $24.0 million of gross unrecognized tax benefits recorded net of certain tax attributes in non-current deferred tax assets that, if not realized, would
ultimately result in cash payments. The Company cannot currently estimate when, or if, any of the gross unrecognized tax benefits will be due. See Note 14.
|
In connection with the Revlon Merger, five putative shareholder class action lawsuits (one of which is also a derivative lawsuit) have been filed in Broward County, Florida, naming the members of the
Companys board of directors, Revlon, Inc., RCPC and RR Transaction Corp. as defendants. Three of the lawsuits also name the Company as a defendant. Three of the lawsuits also name Rhône Capital L.L.C., Nightingale Onshore Holdings, L.P.
and Nightingale Offshore Holdings, L.P. as defendants. These lawsuits allege that (i) the members of the Companys board of directors breached their fiduciary duties to the Companys shareholders with respect to the Revlon Merger, by,
among other things, approving the Revlon Merger pursuant to an unfair process and at an inadequate and unfair price, and (ii) Revlon, RCPC, and Revlon Sub aided and abetted the breaches of fiduciary duty by the members of the board. Three of
the lawsuits also allege that Rhône Capital L.L.C., Nightingale Onshore Holdings, L.P. and Nightingale Offshore Holdings, L.P. breached alleged fiduciary duties owed by such entities to the holders of the Companys common stock and to the
Company. The plaintiffs in these lawsuits generally seek, among other things, injunctive relief prohibiting consummation of the Revlon Merger, compensatory damages and rescissory damages in the event the Revlon Merger is consummated, an order to
disclose all material information to the shareholders in advance of a shareholder vote and an award of attorneys fees and expenses.
For information relating to the Internal Revenue Services (IRS) audit of the Companys tax returns for the fiscal years ended June 30, 2010, 2011 and 2012, the IRS letter 950-Z
and the Companys response thereto, see Note 14.
The Company is also a party to a number of other legal actions,
proceedings, audits, tax audits, claims and disputes, arising in the ordinary course of business, including those with current and former customers over amounts owed. While any other action, proceeding, audit or claim contains an element of
uncertainty and may materially affect the Companys cash flows and results of operations in a particular quarter or year, based on current facts and circumstances, the Companys management believes that the outcome of such other actions,
proceedings, audits, tax audits, claims and disputes will not have a material adverse effect on the Companys business, prospects, results of operations, financial condition and/or cash flows.
NOTE 12.
|
Investments and Noncontrolling Interests
|
During fiscal 2013, 2014 and 2015, the Company, through a subsidiary, has invested an aggregate of $13.7 million for a minority investment in Elizabeth Arden Salon-Holdings, Inc., an unrelated party whose
subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons (Salon Holdings). The investment in Elizabeth Arden Salon-Holdings, Inc., which is in the form of a collateralized convertible note bearing interest
at 2%, has been accounted for using the cost method and at June 30, 2016, is included in other assets on the consolidated balance sheet.
During fiscal 2014 and 2015, the Company, through a subsidiary (the EA USC Subsidiary), has invested an aggregate of $9.0 million in USC, a skin care company that develops and sells skin care
products for the professional dermatology and spa channels and separately purchased a 30% equity interest in USC from the sole equity member for $3.6 million. The investment, which is in the form of the Convertible Note, bears interest at 1.5%. Upon
conversion of the Convertible Note, the Company will own 85.45% of the fully diluted equity interests in USC (inclusive of EA USCs current equity interest). The Company expects that the Convertible Note will convert into 85.45% of the fully
diluted equity interests of USC by September 1, 2016. The Company has a put/call agreement with the other USC equity member with respect to the remaining 14.55% interest in USC.
Based on the investment in USC and the EA USC Subsidiarys controlling rights under the operating agreement, the Company has
determined that USC is a VIE, of which the Company is the primary beneficiary, requiring consolidation of USCs financial statements in accordance with Topic 810, Consolidation.
- 81 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following provides an analysis of the change in the redeemable noncontrolling
interest liability for the year ended June 30, 2016:
|
|
|
|
|
(Amounts in thousands)
|
|
Amount
|
|
Beginning as of June 30, 2015
|
|
$
|
4,222
|
|
Net loss attributable to redeemable noncontrolling interests
|
|
|
(1,877
|
)
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
2,345
|
|
|
|
|
|
|
During fiscal 2015, the Company, through a subsidiary, entered into a joint venture in the United Arab
Emirates (the UAE Joint Venture) with an unrelated third party for the sale, promotion and distribution of the Companys products primarily in the Middle East. Under the terms of the joint venture agreement, the Companys
subsidiary has the option to purchase a 15% ownership interest from the third party after 15 years at a specified price based on the performance of the UAE Joint Venture and also has the option to purchase the entire ownership interest of the third
party upon the termination or expiration of the joint venture agreement at a specified price based on the performance of the UAE Joint Venture. Based on the capitalization of the UAE Joint Venture, the Companys subsidiary has a 60% ownership
interest and the third party has a 40% ownership interest and the Companys subsidiary has control of the board of managers.
Based on such equity interests and controlling rights in the Middle East joint venture, the Company has determined that the UAE Joint Venture is a VIE, requiring consolidation of such joint ventures
financial statements in accordance with Topic 810, Consolidation. The unrelated third partys interest in the UAE Joint Venture is classified as a noncontrolling interest in the shareholders equity section of the
Companys consolidated balance sheet.
During fiscal 2016, the Company, through a subsidiary, entered into a joint
venture with an unrelated third party for the sale, promotion and distribution of the Companys products in Southeast Asia and, effective January 1, 2016, in Hong Kong (theSoutheast Asia Joint Venture). Based on the
capitalization of the Southeast Asia Joint Venture, the Companys subsidiary has a 60% ownership interest and the third party has a 40% ownership interest. Under the terms of the Southeast Asia Joint Venture agreement, the Companys
subsidiary has the option to purchase the entire ownership interest of the third party upon the termination or expiration of the Southeast Asia Joint Venture agreement at a specified price based on the performance of the Southeast Asia Joint
Venture.
Based on the terms of the Southeast Asia Joint Venture agreements, the Companys subsidiary has control of the
board of managers and the power to direct activities that could have a substantial impact on the economic performance of the Southeast Asia Joint Venture, including those that could result in the obligation to absorb losses or the right to receive
benefits that could potentially be significant to the joint venture. Based on such equity interests and controlling rights in the Southeast Asia joint venture, the Company has determined that the Southeast Asia Joint Venture is a VIE, requiring
consolidation of such joint ventures financial statements in accordance with Topic 810, Consolidation. The unrelated third partys interest in the joint venture is classified as a noncontrolling interest in the
shareholders equity section of the Companys consolidated balance sheet.
NOTE 13.
|
Redeemable Preferred Stock and Warrants
|
On August 19, 2014, the Company entered into a securities purchase agreement (the Securities Purchase Agreement) with Nightingale Onshore Holdings L.P. and Nightingale Offshore Holdings
L.P. (each a Purchaser and together, the Purchasers), investment funds affiliated with Rhône Capital L.L.C. Pursuant to the Securities Purchase Agreement, for aggregate cash consideration of $50 million, the Company
issued to the Purchasers an aggregate of 50,000 shares of the Companys newly designated Series A Serial Preferred Stock, par value $0.01 per share (the Preferred Stock), with detachable warrants to purchase up to 2,452,267 shares
of the Companys Common Stock (the Warrants). Concurrently with the execution of the Securities Purchase Agreement, the Company also entered into a Shareholders Agreement with the Purchasers (the Shareholders Agreement).
The issuance and sale of the Preferred Stock and Warrants were exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. See Note 3.
Series A Serial Preferred Stock
Dividends on the Preferred Stock are due on January 1, April 1, July 1 and October 1 of each year, commencing on October 1, 2014. The Preferred Stock will also
participate in dividends declared or paid, whether in cash, securities or other property, on the shares of Common Stock for which the outstanding Warrants are exercisable. Dividends are payable at the per annum dividend rate of 5% of the liquidation
preference, which is initially $1,000 per share (the Liquidation Preference). If and to the extent that the Company does not pay the entire dividend to which holders of the Preferred Stock are entitled for a particular period in cash on
the applicable dividend payment date, preferential cash dividends will accrue on such unpaid amounts (and on any unpaid dividends in respect thereof) at 5% per annum, and will compound on each dividend payment date, until paid. No cash dividend
may be declared or paid on Common Stock or other classes of stock over which the Preferred Stock has preference unless full cumulative dividends have been or contemporaneously are declared and paid in cash on the Preferred Stock. The Preferred Stock
has an aggregate liquidation preference of $50 million, and ranks junior to all of the Companys liabilities and obligations to creditors with respect to assets available to satisfy claims against the Company and senior to all other classes of
stock over which the Preferred Stock has preference, including the Common Stock. The Preferred Stock will not be convertible into Common Stock at any time.
- 82 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to the Shareholders Agreement, each quarter the Company will declare and pay in
cash no less than fifty percent (50%) of each dividend to which holders of Preferred Stock are entitled under the articles of amendment designating the rights of the Preferred Stock (the Articles of Amendment), unless payment of
such dividend in cash (i) is prohibited by or would result in a default or event of default under the Companys indenture, credit facilities and certain other debt documents or (ii) would result in a breach of the legal or fiduciary
obligations of the Board, in which case the Company will declare and pay in cash the maximum amount permitted to be paid in cash.
The Preferred Stock is redeemable at the option of the holder at 100% of the Liquidation Preference plus an amount per share equal to accrued but unpaid dividends on the Preferred Stock up to the date of
redemption, at any time after August 19, 2022. The Preferred Stock is also redeemable at the option of the Company at the following redemption prices and times:
|
|
|
Percentage of Liquidation Preference of each share of Preferred Stock to be
redeemed *
|
|
Timing of Redemption Right
|
103%
|
|
On or after August 19, 2016 but prior to August 19, 2019
|
102%
|
|
On or after August 19, 2019 but prior to August 19, 2020
|
101%
|
|
On or after August 19, 2020 but prior to August 19, 2021
|
100%
|
|
On or after August 19, 2021
|
*
|
In each case, plus an amount per share equal to accrued but unpaid dividends on such share of Preferred Stock up to, but excluding, the earlier of the date of the
redemption or the date of constructive redemption.
|
In the event of a Change of Control of the Company (as
defined in the Companys Articles of Amendment) at a price per share of Common Stock below $24.00, the holders of the Preferred Stock will have the right to require the Company to repurchase each share of Preferred Stock held by such holder for
cash at the following prices and times (provided that doing so does not cause a default or event of default under the Companys indenture, credit facilities and certain other debt documents and there are sufficient funds legally available
therefor):
|
|
|
Percentage of Liquidation Preference of each share of Preferred Stock to be
repurchased *
|
|
Change of Control Date
|
120%
|
|
Prior to August 19, 2015
|
110%
|
|
On or after August 19, 2015 but prior to August 19, 2016
|
105%
|
|
On or after August 19, 2016 but prior to August 19, 2017
|
101%
|
|
On or after August 19, 2017
|
*
|
In each case, plus an amount per share equal to accrued but unpaid dividends on such share of Preferred Stock up to, but excluding, the earlier of the date of the
redemption or the date of constructive redemption. See Note 3.
|
So long as the Purchasers (or their affiliates)
beneficially own a majority of the outstanding shares of Preferred Stock, the holders of a majority of such outstanding shares, voting separately as a class, will have the right (the Designation Rights) to elect the following number of
directors to the Board of the Company at any meeting of shareholders of the Company (or by written consent) at which directors are to be elected, designated or appointed: (i) if the Percentage Interest (as defined in the Shareholders Agreement)
as of the record date for such meeting (or action by written consent) is equal to or more than the percentage of Common Stock represented by the shares underlying the Warrants as of the date of issuance (approximately 7.6%) but less than 20%, one
member of the Board; or (ii) if the Percentage Interest as of the record date for such meeting (or action by written consent) is equal to or greater than 20%, two members of the Board. As of June 30, 2016, the Purchasers Percentage
Interest was approximately 20.2%.
Except as required by law or otherwise provided in the Articles of Amendment, the holders
of shares of Preferred Stock will be entitled to vote together as one class with holders of the Companys Common Stock on all matters submitted to a vote of the Companys shareholders. Each share of Preferred Stock is entitled to a number
of votes (rounded down to the nearest whole number) equal to (i) the aggregate number of shares of Common Stock for which the outstanding Warrants are exercisable (regardless of whether or not such Warrants could legally be exercised at such
time and regardless of whether the holder of the Preferred Stock is also the holder of Warrants) divided by (ii) the number of outstanding shares of Preferred Stock, determined as of the record date for the determination of holders of Common
Stock entitled to vote on any such matter.
- 83 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Warrants
The exercise price for the Warrants is $20.39 per share (the Warrant Price), and they mature on August 19, 2024. The Warrant Price may be paid, at the option of the holder, in cash or by
surrendering to the Company shares of Preferred Stock having an aggregate liquidation preference plus accrued and unpaid dividends equal to the aggregate exercise price. Alternatively, subject to certain exceptions in the case of a Mandatory
Exercise (as defined below), if the market price (as determined pursuant to the Warrant) (the Market Price) of the Common Stock is greater than the Warrant Price, the holder may elect to surrender the Warrant and receive shares of Common
Stock in respect of the Warrant equal to the value, as determined pursuant to the Warrant, of the Warrant, subject to certain restrictions. See Note 3.
After August 19, 2019, the Company may require the exercise of the Warrants if the volume weighted average sale price for the Common Stock, as determined pursuant to the Warrant, exceeds 150% of the
exercise price for ten (10) consecutive trading days (a Mandatory Exercise). Payment of the exercise price in the case of a Mandatory Exercise is required to be made first by surrender of shares of Preferred Stock held by the
Warrant holder.
The exercise price of the Warrants and the number of shares issuable upon exercise of the Warrants are
subject to adjustment, as provided in the Warrants, including if the Company, on or after August 19, 2017, issues or sells Common Stock for a price lower than the Market Price of the Common Stock and the exercise price of the Warrants.
Shareholders Agreement
Under the terms of the Shareholders Agreement, from and after the date the Purchasers are no longer entitled, in their capacity as holders of Preferred Stock, to elect directors to the Board pursuant to
their Designation Rights, the Purchasers will have the right to jointly designate for election one member to the Companys Board of Directors for so long as the Purchasers Percentage Interest (as defined in the Shareholders Agreement) is
equal to or more than the percentage of Common Stock represented by the shares underlying the Warrants as of the date of issuance (approximately 7.6%) but less than 20%, and the right to designate for election an additional member to the
Companys Board if the Purchasers have an aggregate Percentage Interest equal to or exceeding 20% of the Companys outstanding Common Stock. See Note 3.
The Shareholders Agreement also imposes restrictions under certain circumstances on the Companys ability to, among other things, (i) amend the Companys articles of incorporation and
bylaws, (ii) prior to August 19, 2017, issue or sell any Common Stock at a price per share less than the Warrant Price, and (iii) make certain restricted payments under the Indenture relating to the Companys Senior Notes. In
addition, the Purchasers are entitled to preemptive rights under certain circumstances, as well as customary demand and piggyback registration rights relating to the shares of Common Stock underlying the Warrants.
Financial Statement Presentation
Upon issuance, the Preferred Stock has been classified as mezzanine equity on the consolidated balance sheet. Based on its terms, the Preferred Stock is considered contingently redeemable. The accounting
guidance under Topic 480, Distinguishing Liabilities from Equity, requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable at a fixed or determinable price on a
fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer. The Warrants have been classified as equity on the balance sheet.
Under Topic 480, if preferred shares are issued in conjunction with other securities, such as warrants, and the other securities meet the
requirements for equity classification, the sales proceeds from the issuance should be allocated to each security based on their relative fair values. The fair value of the Preferred Stock was based on the present value of the dividends expected to
be paid at the 5% annual rate over the next eight years until August 19, 2022, the first date that the preferred stock may be redeemed at the option of the holder at par, as well as the payment of the redemption amount of $50 million and any
unpaid dividends due on August 19, 2022. In determining the fair value of the Warrants, given the possibility that the Warrants may be exercised at the Companys discretion under certain circumstances after August 19, 2019, as
discussed above, the Company utilized a Monte Carlo simulation model using the assumptions below:
|
|
|
|
|
|
|
Assumptions
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected price volatility
|
|
|
43.20
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
Expected term in years
|
|
|
10
|
|
- 84 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Based on the guidance under Topic 480, the initial value of the Preferred Stock and
Warrants recorded on the consolidated balance sheet equaled the sales proceeds received from the issuance of the Preferred Stock, net of any direct issuance costs. The Company incurred approximately $6 million of costs directly associated with this
transaction. The net proceeds of approximately $44 million were allocated to the Preferred Stock and Warrants as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
Allocation of
Net Proceeds
|
|
Preferred Stock
|
|
$
|
29,849
|
|
Warrants
|
|
|
14,144
|
|
|
|
|
|
|
Total
|
|
$
|
43,993
|
|
|
|
|
|
|
Under current accounting guidance, because the Preferred Stock is not redeemable currently, but because
it is probable it will become redeemable, the Preferred Stock should be adjusted to its maximum redemption amount at each balance sheet date. In addition, the Company had the option to choose to either (i) accrete changes in the redemption
value of the Preferred Stock over the period from the date of issuance to the earliest redemption date of the security, or (ii) recognize changes in the redemption value of the Preferred Stock immediately and adjust the carrying value of the
Preferred Stock to equal the redemption value at the end of each reporting period (this method would view the end of the reporting period as if it were also the redemption date for the Preferred Stock). The Company selected the second option and
recognized the accretion immediately and recorded the full accretion in the first quarter of fiscal 2015.
Through
June 30, 2016, the Board has declared dividends of approximately $4,767,287 on the Preferred Stock of which $2,059,165 have been paid as of June 30, 2016. Accrued dividends payable as of June 30, 2016, were $2,708,122 and dividend
arrearage as of June 30, 2016, was $2,059,165. In July 2016, the Company paid 50%, or $324,478, of the dividend declared in April 2016. After giving effect to the July 2016 dividend payment, dividend arrearage was $2,383,643.
The following table sets forth the accretion and dividends on the redeemable Preferred Stock for the years ended June 30, 2016 and
2015:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Preferred stock accretion to redemption value
|
|
$
|
|
|
|
$
|
20,151
|
|
Dividends
|
|
|
2,586
|
|
|
|
2,182
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,586
|
|
|
$
|
22,333
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes consisted of the following for the fiscal years ended June 30, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic loss
|
|
$
|
(56,362
|
)
|
|
$
|
(183,351
|
)
|
|
$
|
(86,014
|
)
|
Foreign loss
|
|
|
(14,474
|
)
|
|
|
(35,639
|
)
|
|
|
(4,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss before income taxes
|
|
$
|
(70,836
|
)
|
|
$
|
(218,990
|
)
|
|
$
|
(90,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes for the fiscal years ended June 30, 2016, 2015 and
2014, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
225
|
|
|
$
|
566
|
|
|
$
|
|
|
State
|
|
|
32
|
|
|
|
(7
|
)
|
|
|
210
|
|
Foreign
|
|
|
1,318
|
|
|
|
780
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
$
|
1,575
|
|
|
$
|
1,339
|
|
|
$
|
2,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,633
|
|
|
$
|
5,225
|
|
|
$
|
54,085
|
|
State
|
|
|
219
|
|
|
|
(192
|
)
|
|
|
4,395
|
|
Foreign
|
|
|
(757
|
)
|
|
|
(75
|
)
|
|
|
(4,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
$
|
1,095
|
|
|
$
|
4,958
|
|
|
$
|
54,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,670
|
|
|
$
|
6,297
|
|
|
$
|
56,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 85 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The total income tax provision differs from the amount obtained by applying the
statutory federal income tax rate to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(Amounts in thousands, except percentages)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Income tax provision at statutory rates
|
|
$
|
(24,793
|
)
|
|
|
35.0
|
%
|
|
$
|
(76,646
|
)
|
|
|
35.0
|
%
|
|
$
|
(31,627
|
)
|
|
|
35.0
|
%
|
State taxes, net of federal benefits
|
|
|
(2,360
|
)
|
|
|
3.3
|
|
|
|
(6,795
|
)
|
|
|
3.1
|
|
|
|
(4,065
|
)
|
|
|
4.5
|
|
Tax on foreign earnings at different rates from statutory rates
|
|
|
8,840
|
|
|
|
(12.5
|
)
|
|
|
12,799
|
|
|
|
(5.8
|
)
|
|
|
1,337
|
|
|
|
(1.5
|
)
|
U.S. federal tax on foreign earnings
|
|
|
(79
|
)
|
|
|
0.1
|
|
|
|
18,086
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
Research and development and foreign tax credits
|
|
|
534
|
|
|
|
(0.7
|
)
|
|
|
118
|
|
|
|
(0.1
|
)
|
|
|
(1,472
|
)
|
|
|
1.6
|
|
Change in U.S. and foreign valuation allowances
|
|
|
18,494
|
|
|
|
(26.1
|
)
|
|
|
58,823
|
|
|
|
(26.9
|
)
|
|
|
90,160
|
|
|
|
(99.8
|
)
|
Other
|
|
|
2,034
|
|
|
|
(2.9
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
2,499
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,670
|
|
|
|
(3.8
|
)%
|
|
$
|
6,297
|
|
|
|
(2.9
|
)%
|
|
$
|
56,832
|
|
|
|
(62.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total income tax provision for the year ended June 30, 2014 in the above table includes an
out-of-period adjustment of $0.8 million to correct errors related to deferred taxes. For the year ended June 30, 2014, income before income taxes decreased by $0.5 million, income tax expense decreased by $0.8 million, and net income
attributable to Elizabeth Arden shareholders increased by $0.3 million as a result of the out-of-period adjustments. The Company did not adjust the prior periods as it concluded that such adjustments were not material to the current or prior period
consolidated financial statements.
On December 19, 2014, the Tax Increase Prevention Act of 2014 (H.R. 5771) was signed
into law extending certain expiring provisions, including the Section 41 research credit. The new legislation applies retrospectively to January 1, 2014 through December 31, 2014 and resulted in a net tax benefit of approximately
$160,000 for fiscal year 2014, which was recorded on a discrete basis in fiscal 2015. This tax benefit was fully offset by a U.S. valuation allowance.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes
plus operating loss carryforwards. The tax effects of significant items comprising the Companys net deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
44
|
|
|
$
|
303
|
|
Accrued expenses
|
|
|
14,556
|
|
|
|
17,791
|
|
Stock-based compensation
|
|
|
4,980
|
|
|
|
5,096
|
|
Net operating loss carryforwards
|
|
|
100,378
|
|
|
|
88,351
|
|
Inventory
|
|
|
17,010
|
|
|
|
16,906
|
|
Research and development expenditures
|
|
|
4,659
|
|
|
|
5,623
|
|
Research and development tax incentives, foreign tax credits, alternative minimum tax and other tax credits
|
|
|
12,858
|
|
|
|
13,182
|
|
Other
|
|
|
7,829
|
|
|
|
5,686
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
$
|
162,314
|
|
|
$
|
152,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(4,525
|
)
|
|
$
|
(3,743
|
)
|
Intangible assets
|
|
|
(35,843
|
)
|
|
|
(31,381
|
)
|
Unremitted Foreign Earnings
|
|
|
(1,317
|
)
|
|
|
(13,065
|
)
|
Other
|
|
|
(504
|
)
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(42,189
|
)
|
|
|
(48,660
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowances
|
|
|
(165,240
|
)
|
|
|
(148,236
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(45,115
|
)
|
|
$
|
(43,958
|
)
|
|
|
|
|
|
|
|
|
|
The following table represents the classification of the Companys net deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
Current net deferred tax assets (liabilities)
|
|
$
|
726
|
|
|
$
|
(6,463
|
)
|
Non-current net deferred tax liabilities
|
|
|
(45,841
|
)
|
|
|
(37,495
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(45,115
|
)
|
|
$
|
(43,958
|
)
|
|
|
|
|
|
|
|
|
|
- 86 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The accounting guidance for income taxes requires that the future realization of
deferred tax assets depends on the existence of sufficient taxable income in future periods. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets
that are more likely than not (more than 50% likely) to be realized, Company management assesses all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, expected future earnings,
carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. Significant weight is given to positive and negative evidence that is
objectively verifiable.
Commencing with the fourth quarter of 2014, the Company has recorded valuation allowances against its
U.S. deferred tax assets as a non-cash charge to income tax expense. In the fourth quarter of 2014, the Company recorded a valuation allowance of $89.5 million against its U.S. deferred tax assets and during the years ended June 30, 2016 and
2015, the Company recorded additional valuation allowances of $14.6 million and $51.9 million, respectively, against such deferred tax assets. The Company had a U.S. cumulative taxable loss for the three-year period ended June 30, 2016, the
three-year period ended June 30, 2015 and the three-year period ended June 30, 2014, which is significant negative evidence in considering whether deferred tax assets are realizable and thus, the accounting guidance restricts the amount of
reliance the Company can place on projected taxable income to support the recovery of the deferred tax assets. In addition to the cumulative three-year taxable loss, the Company considered the weaker than anticipated fiscal 2014 results, along with
the impact that the Companys announced 2014 Performance Improvement Plan had on its fiscal 2014 results, and was anticipated to have on fiscal 2015 earnings, as well as the impact of the 2016 Business Transformation Program on its fiscal 2016
earnings. In recording the valuation allowance, deferred tax liabilities associated with indefinite-lived assets generally cannot be and were not used as a source of taxable income to realize deferred tax assets with a definitive loss carryforward
period.
Commencing in fiscal 2015, for certain of its foreign operations including Canada, Australia and Switzerland, the
Company recorded valuation allowances against its deferred tax assets as non-cash charges to income tax expense. This decision was based on the projected three-year cumulative taxable loss in each of these jurisdictions for the three fiscal years
ended June 30, 2015, as well as the Companys consideration of the weight of positive and negative evidence. For the years ended June 30, 2016 and 2015, the Company has recorded a valuation allowances $3.9 million and $6.9 million
against its deferred tax assets in such foreign operations.
Recording the valuation allowances does not restrict the
Companys ability to utilize the future net operating losses associated with the deferred tax assets assuming taxable income of the appropriate character is recognized in the applicable jurisdiction in periods prior to the expiration of the
Companys net operating losses. Recording the valuation allowances for the Companys net deferred tax assets will not impact the Companys cash flow for a number of years; however, it did have a direct negative impact on net income
and shareholders equity for the fiscal years ended June 30, 2016, 2015 and 2014.
The following table represents
the beginning and ending amounts for the deferred tax valuation allowance as of June 30, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
148,236
|
|
|
$
|
90,549
|
|
|
$
|
356
|
|
Additions charged to expense
|
|
|
18,494
|
|
|
|
58,823
|
|
|
|
90,160
|
|
(Credits) additions charged to other accounts
|
|
|
(1,490
|
)
|
|
|
(1,136
|
)
|
|
|
33
|
|
Net deductions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
165,240
|
|
|
$
|
148,236
|
|
|
$
|
90,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, the Companys consolidated balance sheet includes deferred tax assets, before
valuation allowance, of $100.4 million from net operating losses, comprised of $72.7 million and $20.1 million of U.S. federal and state net operating losses, respectively, and $7.6 million of foreign net operating losses.
At June 30, 2016, the Company had U. S. federal operating loss carryforwards of $314.7 million that will begin to expire on
June 30, 2024. At June 30, 2016, Company had state and local net operating loss carryforwards of $356.0 million that will begin to expire as follows: approximately $39.5 million at June 30, 2017, approximately $5.8 million at
June 30, 2018, approximately $96.2 million during the period from 2019 to 2022, and approximately $214.5 million in 2023 and thereafter. An equivalent amount of federal and state taxable income would need to be generated in order to fully
realize the U.S. federal and state net deferred tax assets before their expiration. In contrast to the U.S. Internal Revenue Code, many U.S. states do not allow the carryback of a net operating loss in any significant amount or have suspended the
utilization of net operating losses for a specific period of time. As a result, in these states the Companys net operating loss carryforwards are significantly higher than the federal net operating loss carryforward. To the extent that the
Company does not generate sufficient state taxable income within the statutory carryforward periods to utilize the loss carryforwards in these states, the loss carryforwards will expire unused. The state and local net operating loss carryforwards
have an effective tax rate of approximately 4.4%.
- 87 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At June 30, 2016, the Companys deferred tax assets, before valuation
allowance, also included the following U.S. tax attributes with definitive lives as follows: foreign tax credits of $6.8 million that begin to expire in fiscal year 2017, federal research and development tax credits of $4.1 million that begin to
expire in fiscal year 2021, and state research and development tax credits, net of federal tax benefit, of $0.8 million that begin to expire in fiscal year 2018. In addition, the Company had U.S. deferred tax assets with indefinite lives of $0.4
million related to alternative minimum tax credits, and $0.4 million related to state research and development tax credits as of June 30, 2016.
At June 30, 2016, the Company had foreign net operating loss carryforwards of approximately $36.6 million that will begin to expire in fiscal year 2017. The Companys ability to use foreign net
operating loss carryforwards is dependent on generating sufficient future taxable income prior to their expiration. As a result, an equivalent amount of foreign taxable income would need to be generated in order to fully realize the foreign net
operating loss carryforwards. Due to the uncertainty of achieving sufficient taxable income in certain jurisdictions, and the near-term expiration of certain foreign net operating loss carryforwards, as of June 30, 2016, the Company has
recorded valuation allowances of (i) $4.0 million against its Canada deferred tax assets, (ii) $1.7 million against its Australia deferred tax assets, (iii) $3.8 million against its Swiss deferred tax assets and (iv) $2.1 million
against its Brazil deferred tax assets.
During fiscal 2015, the Company repatriated $12.4 million of undistributed foreign
earnings from three of its foreign subsidiaries, including a $2.1 million liquidating dividend resulting from the closure of its Puerto Rico affiliate, and has provided a net tax provision of $0.3 million on the repatriation of such earnings. During
the fourth quarter of fiscal 2015, the Company finalized an intercompany loan agreement between a foreign subsidiary, incorporated in Switzerland, and a U.S. subsidiary. Under the terms of the intercompany loan agreement, the foreign subsidiary
loaned $42 million to the U.S. subsidiary. The intercompany loan is payable on or before June 30, 2020. For income tax purposes, the entire loan was included in computing taxable income in fiscals 2015 and 2016 as a foreign investment in U.S.
property, but no tax provision was included as a result of the Companys valuation allowance. The Company has accrued a net provision of $2.1 million for estimated deferred taxes on a portion of unremitted foreign earnings that may be
considered for repatriation in the future. Except for the foregoing, the Company has not provided for taxes on approximately $263 million of undistributed earnings of foreign subsidiaries, as these earnings are deemed to be permanently reinvested.
If in the future these earnings are repatriated to the United States, or if the Company determines such earnings will be remitted in the foreseeable future, additional tax provisions may be required. Due to complexities in the tax laws and the
assumptions that would have to be made, it is not practicable to estimate the amounts of income tax provisions that may be required.
Deferred tax assets, before valuation allowance, relating to tax benefits of employee stock option awards have been reduced to reflect stock option exercises through the year ended June 30, 2016.
Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (windfalls). Although the additional tax benefit for the windfalls is reflected in net operating loss
carryforwards, the additional tax benefit associated with the windfalls is not recognized for financial statement purposes until the deduction reduces taxes payable. Accordingly, windfall gross tax benefits of $32.5 million are not reflected in
deferred tax assets. The deferred tax assets will be recognized with an offset to additional paid-in capital as the windfall reduces current taxes payable under the current guidance.
At June 30, 2016, the total amount of gross unrecognized tax benefits was $24.0 million. These unrecognized tax benefits could
favorably affect the effective tax rate in a future period, if and to the extent recognized. The Company does not expect changes in the amount of unrecognized tax benefits to have a significant impact on its results of operations over the next 12
months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits as of June 30, 2016, 2015
and 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
Beginning balance
|
|
$
|
17,183
|
|
|
$
|
13,220
|
|
|
$
|
11,802
|
|
Additions based on tax positions related to the current year
|
|
|
3,478
|
|
|
|
2,732
|
|
|
|
3,003
|
|
Additions for tax positions of prior years
|
|
|
3,357
|
|
|
|
1,231
|
|
|
|
1,543
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
|
|
(1,585
|
)
|
Reductions due to closure of tax audits
|
|
|
|
|
|
|
|
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross balance
|
|
|
24,018
|
|
|
|
17,183
|
|
|
|
13,220
|
|
Interest and penalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
24,018
|
|
|
$
|
17,183
|
|
|
$
|
13,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 88 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company and its domestic subsidiaries file income tax returns with federal, state
and local tax authorities within the United States. The year ended June 30, 2010, and subsequent fiscal years remain subject to examination for various state tax jurisdictions. The statute of limitations for the Companys U.S. federal tax
returns remains open for the year ended June 30, 2010 and subsequent fiscal years. The Company also files tax returns for its international affiliates in various foreign jurisdictions. The year ended June 30, 2011, and subsequent fiscal
years remain subject to examination for various foreign jurisdictions.
The IRS began an examination of the Companys
U.S. federal tax returns for the years ended June 30, 2010 (Fiscal 2010), June 30, 2011 (Fiscal 2011), and June 30, 2012 (Fiscal 2012) during fiscal year 2014 and, in March 2016, issued an IRS
letter 950-Z, known as a 30-day Letter, for Fiscal 2010, Fiscal 2011 and Fiscal 2012 relating to transfer pricing matters. In the 30-day Letter, the IRS proposes increases to the Companys U.S. taxable income for Fiscal 2010, Fiscal 2011 and
Fiscal 2012 in an amount totaling approximately $99 million. Although the Company has recorded valuation allowances of approximately $156 million against its U.S. deferred tax assets through June 30, 2016, the resolution of the 30-day Letter
could be material to the Companys deferred tax assets and potentially to its consolidated statements of operations in the period in which it is resolved, unless resolved favorably to the Company. The Company disagrees with the proposed
adjustments and intends to vigorously contest them and pursue its available remedies. While any IRS examination contains an element of uncertainty, based on current facts and circumstances, the Company believes the ultimate outcome of any protest,
appeals or judicial process will not have a material adverse effect on the Companys financial condition, business or prospects. In addition, if the examination is not resolved favorably, the Company has approximately $315 million of U.S.
federal operating loss carryforwards through June 30, 2016, which would be available to offset any cash flow impact. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its
unrecognized tax benefits, but it is not possible to determine either the magnitude or range of any increase or decrease at this time.
The IRS began an examination of the Companys U.S. federal tax returns for fiscal 2008 and fiscal 2009 during fiscal year 2011 and, in May 2013 issued an IRS Letter 950 (which we refer to as the
Prior 30-day Letter) for fiscal 2008 and fiscal 2009 relating to transfer pricing matters. In the Prior 30-day Letter, the IRS proposed adjustments that would have increased the Companys U.S. taxable income for fiscal 2008 and
fiscal 2009 by approximately $29.1 million. The Company disagreed with the proposed adjustments and pursued the appeals process to contest the proposed adjustments. During fiscal 2014, the Company reached an agreement with the IRS whereby taxable
income for fiscal 2008 and fiscal 2009 was increased by approximately $4.1 million in the aggregate, which resulted in income tax expense of approximately $1.5 million for the year ended June 30, 2014. The settlement did not impact the
Companys cash flows as the adjustment was offset by the utilization of operating loss carryforwards for U.S. federal and state purposes.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and related penalties in the provision for income taxes in the consolidated statement of operations, which
is consistent with the recognition of these items in prior reporting periods. For fiscal 2016, there were no interest or penalties recorded due to the Company having sufficient net operating losses to offset any unrecognized tax benefits that were
recorded.
NOTE 15.
|
Repurchases of Common Stock
|
The Company has an existing stock repurchase program pursuant to which the Companys Board has authorized the repurchase of $120 million of common stock and that expires on November 30, 2016.
There have been no share repurchases since December 2013. Since inception in November 2005, the Company has repurchased 4,517,309 shares of common stock on the open market under the stock repurchase program at an aggregate cost of $85.3 million,
leaving approximately $34.7 million available for additional repurchases under the program. The acquisition of these shares was accounted for under the treasury method.
At
June 30, 2016, the Company had two active stock incentive plans for the benefit of eligible employees and non-employee directors, the 2010 Stock Award and Incentive Plan and the 2014 Non-Employee Director Stock Award Plan. In addition, as of
June 30, 2016, stock options previously granted under the Companys 2004 Stock Incentive Plan and 2004 Non-Employee Director Stock Option Plan (the 2004 Director Plan) were still outstanding, and restricted stock units
previously granted under the 2004 Stock Incentive Plan were still outstanding. The 2004 Stock Incentive Plan and the 2004 Director Plan have expired by their terms and no further awards will be granted under any of these two plans. All four plans
were adopted by the Board and approved by the Companys shareholders.
The 2010 Stock Award and Incentive Plan (the
2010 Plan), as amended in 2015, authorizes the Company to grant awards with respect to a total of 5,350,000 shares of Common Stock, of which a maximum of 2,675,000 shares may be awarded as full value awards. A full value award is any
award other than a stock option or stock appreciation right, which is settled by the issuance of shares. The stock options awarded under the 2010 Plan are exercisable at any time or in any installments as determined by the compensation committee of
the Board at the time of grant and may be either incentive or non-qualified stock options under the Internal Revenue Code, as determined by the compensation committee. The exercise price for stock option grants cannot be lower than the closing price
of the Common Stock on the date of grant. No option may be exercisable after the expiration of ten years from the date of grant. At June 30, 2016, 3,259,887 shares of Common Stock remained available for grant under the 2010 Plan, of which
1,583,027 shares can be issued as full value awards.
- 89 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 2014 Non-Employee Director Stock Award Plan (the 2014 Director Plan)
authorizes the Company to grant equity awards for up to 350,000 shares of Common Stock to the Companys non-employee directors. Any stock options awarded under the 2014 Director Plan are exercisable at any time or in any installments as
determined by the compensation committee of the Board at the time of grant. The exercise price for stock option grants cannot be lower than the closing price of the Common Stock on the date of grant. No option may be exercisable after the expiration
of ten years from the date of grant. At June 30, 2016, 229,970 shares of Common Stock remained available for grant under the 2014 Director Plan.
Employee Stock Purchase Plan
. The Companys 2011 Employee Stock Purchase Plan (the 2011 ESPP) was approved by the Board in August 2011. The 2011 ESPP was approved by the
Companys shareholders at the Companys 2011 annual shareholders meeting in November 2011, and became effective on December 1, 2011. The 2011 ESPP authorizes the issuance of up to 1,000,000 shares of Common Stock under which employees
in certain countries are permitted to deposit after tax funds from their wages for purposes of purchasing Common Stock at a 15% discount from the lowest of the closing price of the Common Stock at either the start of the contribution period or the
end of the contribution period. During the fourth quarter of fiscal 2014, the Company indefinitely suspended offerings under the ESPP following the May 30, 2014 purchase. At June 30, 2016, 819,881 shares of Common Stock remained available
for purchase under the 2011 ESPP.
For the years ended June 30, 2016, 2015 and 2014, total share-based compensation
expense charged against income for all stock plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options
|
|
$
|
1.9
|
|
|
$
|
1.6
|
|
|
$
|
1.6
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
Restricted stock/restricted stock units
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
5.5
|
|
|
$
|
5.2
|
|
|
$
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to compensation cost
|
|
$
|
1.4
|
|
|
$
|
1.2
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016, there were approximately $8.6 million of unrecognized compensation costs
related to non-vested share-based arrangements granted under the Companys share-based compensation plans. These costs are expected to be recognized over a weighted-average period of approximately two years.
Stock Options
Year Ended June 30, 2016.
In August 2015 the Company granted to employees stock options to purchase 487,100 shares of Common
Stock. The stock options are due to vest in equal thirds over a three-year period on dates that are two business days after the Companys financial results for each of the fiscal years ending June 30, 2016, 2017 and 2018 are publicly
announced, but, subject to certain exceptions, only if the person receiving the grant is still employed by the Company at the time of vesting. Also, in August 2015 the Company granted to certain employees stock options to purchase 426,300 shares of
Common Stock as a special retention award. This special award of stock options will vest in full on the date that is two business days after the Companys financial results for the fiscal year ending June 30, 2018, are publicly announced,
but, subject to certain exceptions, only if the person receiving the grant is still employed by the Company at the time of vesting. The exercise price of all options granted in August 2015 is $9.63 per share, which was the closing price of the
Common Stock on the effective date of grant. The weighted-average grant date fair value of stock options granted was $3.45 per share based on the Black-Scholes option pricing model. The options expire ten years from the date of grant.
Year Ended June 30, 2015.
In August 2014 the Company granted to employees stock options to purchase 222,400 shares of Common
Stock. The stock options are due to vest in equal thirds over a three-year period on dates that are two business days after the Companys financial results for each of the fiscal years ending June 30, 2015, 2016 and 2017 are publicly
announced, but only if the person receiving the grant is still employed by the Company at the time of vesting. The exercise price of those stock options is $17.26 per share, which was the closing price of the Common Stock on the effective date of
grant. The weighted-average grant date fair value of stock options granted was $6.21 per share based on the Black-Scholes option pricing model. The options expire ten years from the date of grant.
- 90 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On December 3, 2014, the date of the Companys 2014 annual shareholders
meeting, the Company granted stock options for an aggregate of 67,200 shares of Common Stock to seven non-employee directors under the 2014 Director Plan. All of the stock options granted on December 3, 2014, are exercisable three years from
the date of grant if such persons continue to serve as a director until that date. The exercise price of those stock options is $17.46 per share, which was the closing price of the Common Stock on the date of grant. The weighted-average grant date
fair value of options granted was $6.28 per share based on the Black-Scholes option pricing model. The options expire ten years from the date of grant.
Year Ended June 30, 2014.
In August 2013 the Company granted to employees stock options for 95,300 shares of Common Stock. The stock options are due to vest in equal thirds over a three-year
period on dates that are two business days after the Companys financial results for each of the fiscal years ending June 30, 2014, 2015 and 2016, are publicly announced, but only if the person receiving the grant is still employed by the
Company at the time of vesting. The exercise price of those stock options is $35.00 per share, which was the closing price of the Common Stock on the effective date of grant. The weighted-average grant date fair value of options granted was $14.92
per share based on the Black-Scholes option pricing model. The options expire ten years from the date of grant.
On
November 6, 2013, the date of the Companys 2013 annual shareholders meeting, the Company granted stock options for an aggregate of 22,200 shares of Common Stock to six non-employee directors under the 2004 Director Plan. All of the stock
options granted on November 6, 2013, are exercisable three years from the date of grant if such persons continue to serve as a director until that date. The exercise price of those stock options is $37.44 per share, which was the closing price
of the Common Stock on the date of grant. The weighted-average grant date fair value of options granted was $16.11 per share based on the Black-Scholes option pricing model. The options expire ten years from the date of grant.
The option activities under the Companys stock option plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Beginning outstanding options
|
|
|
1,459,317
|
|
|
$
|
21.43
|
|
|
|
1,199,002
|
|
|
$
|
22.73
|
|
|
|
1,439,403
|
|
|
$
|
21.41
|
|
New grants
|
|
|
913,400
|
|
|
|
9.63
|
|
|
|
289,600
|
|
|
|
17.31
|
|
|
|
117,500
|
|
|
|
35.46
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,642
|
)
|
|
|
20.27
|
|
Canceled/Expired
|
|
|
(468,350
|
)
|
|
|
18.93
|
|
|
|
(29,285
|
)
|
|
|
34.03
|
|
|
|
(27,259
|
)
|
|
|
37.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding options
|
|
|
1,904,367
|
|
|
|
16.38
|
|
|
|
1,459,317
|
|
|
$
|
21.43
|
|
|
|
1,199,002
|
|
|
$
|
22.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
933,494
|
|
|
|
21.21
|
|
|
|
1,067,045
|
|
|
|
20.86
|
|
|
|
981,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options granted during the year
|
|
|
|
|
|
$
|
3.45
|
|
|
|
|
|
|
$
|
6.23
|
|
|
|
|
|
|
$
|
15.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise
Price
|
|
Number
Outstanding
as of
June 30,
2016
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
as of
June 30,
2016
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
$ 9.32 $17.00
|
|
|
1,104,967
|
|
|
|
7.2
|
|
|
$
|
10.71
|
|
|
|
330,767
|
|
|
|
2.5
|
|
|
$
|
13.24
|
|
$17.01 $21.00
|
|
|
450,100
|
|
|
|
5.5
|
|
|
$
|
18.11
|
|
|
|
282,764
|
|
|
|
3.8
|
|
|
$
|
18.58
|
|
$21.01 Over
|
|
|
349,300
|
|
|
|
4.0
|
|
|
$
|
32.11
|
|
|
|
319,963
|
|
|
|
3.7
|
|
|
$
|
31.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,904,367
|
|
|
|
6.2
|
|
|
$
|
16.38
|
|
|
|
933,494
|
|
|
|
3.3
|
|
|
$
|
21.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 91 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The intrinsic value of a stock option is the amount by which the current market value of
the underlying stock exceeds the exercise price of the option. The intrinsic value of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options outstanding and exercisable at end of period
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
3.5
|
|
Stock options exercised during fiscal year (based on average price during the period)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5.1
|
|
The weighted-average grant-date fair value of options granted during the years ended June 30, 2016,
2015 and 2014, was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Expected price volatility
|
|
44.0%
|
|
44.0%
|
|
55.0%
|
Risk-free interest rate
|
|
1.56%
|
|
1.65-1.66%
|
|
0.97-1.32%
|
Expected life of options in years
|
|
4
|
|
4
|
|
4
|
Restricted Stock Units
Year Ended June 30, 2016.
In August 2015 the Company granted to employees 392,800 service-based restricted stock units. The service-based restricted stock units will vest in equal thirds over
a three-year period on a date that is two business days after the Companys financial results for each of the years ending June 30, 2016, 2017 and 2018 are publicly announced, but subject to certain exceptions, only if the person receiving
the grant is still employed by the Company at the time of vesting. Also, in August 2015 the Company granted certain employees a special retention award of 101,800 service-based restricted stock units. This special award of service-based restricted
stock units will vest in full on the date that is two business days after the Companys financial results for the fiscal year ending June 30, 2018, are publicly announced, but, subject to certain exceptions, only if the person receiving
the grant is still employed by the Company at the time of vesting. The fair value of all the service-based restricted stock units granted, including those granted as a special award, was $9.63 per share, equal to the closing price of the
Companys Common Stock on the date of grant. All the service-based restricted stock units, including those granted as a special award, are recorded as additional paid-in capital in shareholders equity as amortization occurs over the
three-year vesting period.
In August 2015 the Company also granted 49,209 performance-based restricted stock units to the
chief executive officer. The vesting of these performance-based restricted stock units is subject to both performance and service criteria. The fair value of the performance-based restricted stock units granted was $9.63 per share, equal
to the closing price of the Companys common stock on the date of grant. In December 2015, the Company granted an additional 54,391 performance-based restricted stock units to the chief executive officer. Although this grant was approved
in August 2015, the issuance of the performance-based stock units was subject to shareholder approval at the Companys 2015 annual shareholders meeting held on December 2, 2015 of a proposal to amend the 2010 Plan to increase the number of
shares to be made available under the 2010 Plan. The fair value of the performance-based restricted stock units granted on December 2, 2015 was $10.52 per share, equal to the closing price of the Companys common stock on the date of
grant. The actual number of performance-based restricted stock units eligible for vesting for both the August 2015 and December 2015 grants is to be determined based on the Companys achievement of specified financial targets for the fiscal
year ending June 30, 2016 and can range from 25% to 200% of the target award. The number of performance-based restricted stock units that are determined to be eligible to vest based on the Companys achievement of such performance
criteria will then vest in three equal installments on the date that is two business days after the Companys financial results for each of the years ending June 30, 2016, June 30, 2017 and June 30, 2018 are publicly
announced, subject to the continued employment of the chief executive through the applicable vesting date (subject to certain exceptions). Based on the Companys financial performance for the fiscal year ended June 30, 2016, a total of
75,628 shares issued under both grants were determined to be eligible for vesting.
On December 2, 2015, the date of the
Companys 2015 annual shareholders meeting, the Company granted 34,200 restricted stock units to six non-employee directors under the 2014 Director Plan. The restricted stock units vest three years from the date of grant if such persons
continue to serve as a director until that date. The fair value of all of the restricted stock units granted was $10.52 per share, equal to the closing price of the Companys common stock on the date of grant.
Year Ended June 30, 2015.
In August 2014, the Company granted to employees 169,300 service-based restricted stock units. The
service-based restricted stock units will vest in equal thirds over a three-year period on a date that is two business days after the Companys financial results for each of the years ending June 30, 2015, 2016 and 2017 are publicly
announced, but only if the person receiving the grant is still employed by the Company at the time of vesting. The fair value of the service-based restricted stock units granted was $17.26 per share, equal to the closing price of the Companys
Common Stock on the date of grant. The service-based restricted stock units are recorded as additional paid-in capital in shareholders equity as amortization occurs over the three-year vesting period.
- 92 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 2014, the Company also granted 57,800 performance-based restricted stock units
to the chief executive officer. The vesting of these performance-based restricted stock units is subject to both performance and service criteria. The actual number of performance-based restricted stock units eligible for vesting was
determined based on the Companys achievement of specified financial targets for the fiscal year ending June 30, 2015. The number of performance-based restricted stock units that were determined to be eligible to vest based on the
Companys achievement of such performance criteria would then vest in three equal installments on the date that is two business days after the Companys financial results for each of the years ending June 30, 2015, June 30,
2016 and June 30, 2017 are publicly announced, subject to the continued employment of the chief executive through the applicable vesting date. The fair value of the performance-based restricted stock units granted was $17.26 per share, equal to
the closing price of the Companys common stock on the date of grant. Based on the Companys financial performance for the fiscal year ended June 30, 2015, 28,900 shares were determined to be eligible for vesting.
In December 2014, the Company granted to one employee 10,400 service-based restricted stock units. The service-based restricted stock
units will vest in equal thirds over a three-year period on a date that is two business days after the Companys financial results for each of the years ending June 30, 2015, 2016 and 2017 are publicly announced, but only if the person
receiving the grant is still employed by the Company at the time of vesting. The fair value of the service-based restricted stock units granted was $17.46 per share, equal to the closing price of the Companys Common Stock on the date of grant.
The service-based restricted stock units are recorded as additional paid-in capital in shareholders equity as amortization occurs over the three-year vesting period.
Year Ended June 30, 2014.
In August 2013 the Company granted to employees 91,200 service-based restricted stock units. The service-based restricted stock units vest in equal thirds over a
three-year period on the date that is two business days after the Companys financial results for each of the years ending June 30, 2014, 2015 and 2016 are publicly announced, but only if the person receiving the grant is still employed by
the Company at the time of vesting. Also, in August 2013 the Company granted an additional 98,600 service-based restricted stock units to certain employees as a special retention award. This special award of service-based restricted stock units will
vest in equal thirds over a three-year period on a date that is two business days after the Companys financial results for each of the years ending June 30, 2016, 2017 and 2018 are publicly announced, but only if the person receiving the
grant is still employed by the Company at the time of vesting. The fair value of all of the service-based restricted stock units granted was $35.00 per share, equal to the closing price of the Companys common stock on the date of grant. All of
these restricted stock unit grants are recorded as additional paid-in capital in shareholders equity as amortization occurs over the applicable vesting period.
In August 2013, the Company also granted 28,500 performance-based restricted stock units to the chief executive officer. The vesting of these performance-based restricted stock units was subject to
both performance and service criteria. The actual number of performance-based restricted stock units eligible for vesting was determined based on the Companys achievement of specified earnings per share and revenue targets for the fiscal
year ending June 30, 2014. The number of performance-based restricted stock units that were determined to be eligible to vest based on the Companys achievement of such performance criteria would then vest in three equal installments
on the date that is two business days after the Companys financial results for each of the years ending June 30, 2014, June 30, 2015 and June 30, 2016 are publicly announced, subject to the continued employment of the chief
executive through the applicable vesting date. The fair value of the performance-based restricted stock units granted was $35.00 per share, equal to the closing price of the Companys common stock on the date of grant. Based on the
Companys earnings per share and revenue results for the fiscal year ended June 30, 2014, none of these performance-based restricted stock units vested.
A summary of the Companys restricted stock unit activity for the year ended June 30, 2016, is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested at July 1, 2015
|
|
|
399,842
|
|
|
$
|
25.01
|
|
Granted
|
|
|
632,400
|
|
|
$
|
9.75
|
|
Vested
|
|
|
(114,136
|
)
|
|
$
|
26.10
|
|
Forfeited/Cancelled
|
|
|
(139,934
|
)
|
|
$
|
17.95
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2016
|
|
|
778,172
|
|
|
$
|
13.72
|
|
|
|
|
|
|
|
|
|
|
- 93 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17.
|
Fair Value Measurements
|
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standards also have established a fair value hierarchy, which prioritizes the inputs to
valuation techniques used in measuring fair value into three broad levels as follows:
|
|
|
Level 1 -
|
|
Quoted prices in active markets for identical assets or liabilities
|
|
|
Level 2 -
|
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly
|
|
|
Level 3 -
|
|
Unobservable inputs based on the Companys own assumptions
|
At June 30, 2016 and 2015, the estimated fair value of the Companys 7 3/8% Senior Notes
was as follows:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
7 3/8% Senior Notes due March 2021 (Level 2)
|
|
$
|
356,125
|
|
|
$
|
284,375
|
|
|
|
|
|
|
|
|
|
|
The Company determined the estimated fair value amounts by using available market information and
commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value, primarily due to the illiquid nature of the capital markets in which the 7 3/8% Senior Notes are
traded. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
The Companys derivative assets and liabilities are currently composed of foreign currency contracts. Fair values are based on market prices or determined using valuation models that use as their
basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions.
The following table presents the fair value hierarchy for the Companys financial assets and liabilities that were measured at fair
value on a recurring basis as of June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
(Amounts in thousands)
|
|
Asset
|
|
|
Liability
|
|
|
Asset
|
|
|
Liability
|
|
Level 2
|
|
$
|
564
|
|
|
$
|
1,264
|
|
|
$
|
767
|
|
|
$
|
757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
564
|
|
|
$
|
1,264
|
|
|
$
|
767
|
|
|
$
|
757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 18 for a discussion of the Companys foreign currency contracts.
Accounting standards require non-financial assets and liabilities to be recognized at fair value subsequent to initial recognition when
they are deemed to be other-than-temporarily impaired. In prior fiscal years, the Company recorded asset impairment charges to write-off the carrying values of the Justin Bieber, Nicki Minaj and BCBGMAXAZRIA licenses. As of June 30, 2016, other than
the carrying values of these licenses, the Company did not have any non-financial assets and liabilities measured at fair value.
NOTE 18.
|
Derivative Financial Instruments
|
The Company operates in several foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Companys risk management policy is to enter into
cash flow hedges to reduce a portion of the exposure of the Companys foreign subsidiaries revenues to fluctuations in currency rates using foreign currency forward contracts. The Company also enters into cash flow hedges for a portion of
its forecasted inventory purchases to reduce the exposure of its Canadian and Australian subsidiaries cost of sales to such fluctuations, as well as cash flow hedges for a portion of its subsidiaries forecasted Swiss franc operating
costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. The Company does not enter into derivative financial contracts for speculative or trading purposes.
The Companys derivative financial instruments are recorded in the consolidated balance sheets at fair value determined using
pricing models based on market prices or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers
and market transactions. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the consolidated statements of cash flows.
- 94 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Foreign currency contracts used to hedge forecasted revenues are designated as cash flow
hedges. These contracts are used to hedge forecasted revenues generally over approximately 12 to 24 months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive (loss) income within
shareholders equity to the extent such contracts are effective, and are recognized in net sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value
of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in fiscal 2016, 2015, or 2014 relating to foreign currency contracts used to hedge forecasted revenues resulting from hedge
ineffectiveness.
Foreign currency contracts used to hedge forecasted cost of sales or operating costs are designated as cash
flow hedges. These contracts are used to hedge the forecasted cost of sales of the Companys Canadian and Australian subsidiaries or forecasted operating costs of the Companys Swiss subsidiaries generally over approximately 12 to 24
months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive (loss) income within shareholders equity, to the extent such contracts are effective, and are recognized in cost of
sales or selling, general and administrative expenses in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would
be recognized in earnings immediately. There were no amounts recorded in fiscal 2016, 2015, or 2014 relating to foreign currency contracts used to hedge forecasted cost of sales or operating costs resulting from hedge ineffectiveness.
As of June 30, 2016, the Company had open foreign currency contracts that expire between July 31, 2016 and May 31, 2017,
with notional amounts of (i) 16.1 million Euros and 3.2 million British pounds used to hedge forecasted foreign subsidiary revenues, (ii) 24.8 million Canadian dollars and 21.6 million Australian dollars used to hedge
forecasted cost of sales, and (iii) 13.2 million Swiss francs used to hedge forecasted operating costs.
When
appropriate, the Company also enters into and settles foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce exposure of the Companys foreign subsidiaries balance sheets to fluctuations in
foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in
selling, general and administrative expense in the period in which the contracts expire. For the years ended June 30, 2016 and 2015, the Company recorded a credit of $1.3 million and $2.5 million, respectively, in selling, general and
administrative expenses related to these contracts. For the year ended June 30, 2014, the Company recorded a charge of $1.9 million in selling, general and administrative expenses related to these contracts. As of June 30, 2016, there were
no such foreign currency contracts outstanding. There were no amounts recorded in fiscal 2016, 2015 and 2014 relating to foreign currency contracts to hedge subsidiary balance sheets resulting from hedge ineffectiveness.
The following tables illustrate the fair value of outstanding foreign currency contracts and the gains (losses) associated with the
settlement of these contracts:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Fair Value of Derivative Instruments
Designated as Effective Hedges
|
|
Balance Sheet Location
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
Other assets
|
|
$
|
564
|
|
|
$
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
$
|
1,264
|
|
|
$
|
757
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from Accumulated Other Comprehensive (Loss) Income into (Loss) Income, Net of Tax
(Effective Portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Currency Contracts - Sales
(1)
|
|
$
|
121
|
|
|
$
|
2,664
|
|
|
$
|
(1,311
|
)
|
Currency Contracts - Cost of Sales
(2)
|
|
|
827
|
|
|
|
668
|
|
|
|
88
|
|
Currency Contracts - Selling, General and Administrative Expenses
(3)
|
|
|
(158
|
)
|
|
|
(59
|
)
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(4)
|
|
$
|
790
|
|
|
$
|
3,273
|
|
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Recorded in net sales in the consolidated statements of operations.
|
(2)
|
Recorded in cost of sales in the consolidated statements of operations.
|
(3)
|
Recorded in selling, general and administrative expenses in the consolidated statements of operations.
|
(4)
|
Net of tax expense of $333 and $634 for the years ended June 30, 2016 and 2015, and net of tax benefit of $55 for the year ended June 30, 2014.
|
- 95 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Net Loss Recognized in Other Comprehensive (Loss) Income on Derivatives, Net of Tax (Effective
Portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Currency Contracts - Sales
|
|
$
|
720
|
|
|
$
|
(1,492
|
)
|
|
$
|
(1,011
|
)
|
Currency Contracts - Cost of Sales
|
|
|
(2,153
|
)
|
|
|
(149
|
)
|
|
|
(409
|
)
|
Currency Contracts - Selling, General and Administrative Expenses
|
|
|
(61
|
)
|
|
|
485
|
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(1)
|
|
$
|
(1,494
|
)
|
|
$
|
(1,156
|
)
|
|
$
|
(2,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax benefit of $339, $219 and $365 for the years ended June 30, 2016, 2015 and 2014, respectively.
|
NOTE 19.
|
New Accounting Standards
|
Improvements
to Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standard Update 2016-9,
Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment award transactions. The updated standard involves
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective
for the Company beginning July 1, 2017, including interim periods within that reporting period. The new guidance will be applied either retrospectively or prospectively depending on the particular topic of change, and early adoption is
permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
Leases
In February 2016, the FASB issued Accounting Standard Update 2016-2,
Leases,
which is intended to improve financial
reporting about leasing transactions. The updated standard will require entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee
will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the updated standard will require both types of leases to be
recognized on the balance sheet. The new guidance is effective for the Company beginning July 1, 2019, including interim periods within that reporting period. The new standard is required to be applied retrospectively and early adoption is
permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
Balance Sheet
Classification of Deferred Taxes
In November 2015, the FASB issued Accounting Standard Update 2015-17,
Balance Sheet
Classification of Deferred Taxes
. Under current accounting, deferred taxes for each jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis
generally based on the classification of the assets and liabilities to which the underlying temporary differences relate. The updated standard simplifies the presentation and requires that all deferred tax assets and liabilities be classified as
noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The updated guidance does not change the existing requirement that prohibits companies from offsetting deferred
tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new guidance is effective for the Company beginning July 1, 2017, including interim periods within that reporting period. The new guidance can be
applied either prospectively or retrospectively, and early adoption is permitted. The adoption of this standard will not have a material impact on the Companys consolidated financial statements as it only pertains to a change in the balance
sheet presentation of deferred taxes.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued Accounting Standard Update 2015-11,
Simplifying the Measurement of Inventory
, which changes the
measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers
of financial statements. The updated standard defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance is effective
for the Company beginning July 1, 2016, including interim periods within that reporting period. The new guidance must be applied on a prospective basis. The adoption of this standard will not have a material impact on the Companys
consolidated financial statements.
- 96 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Simplifying the Presentation of Debt Issuance Costs
On April 7, 2015, the FASB issued Accounting Standard Update 2015-03,
Simplifying the Presentation of Debt Issuance Costs
,
which requires all debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the updated
standard, debt issuance costs were required to be presented in the balance sheet as an asset. The guidance in the updated standard is limited to the presentation of debt issuance costs. The updated standard does not affect the recognition and
measurement of debt issuance costs, and the amortization of such costs will continue to be calculated using the interest method and be reported as interest expense. The new guidance will require the Company to reclassify debt financing costs,
currently recorded as assets, as a direct deduction from the carrying value of debt. The new guidance is effective for the Company beginning July 1, 2016, including interim periods within that reporting period. The new guidance is required to
be applied retrospectively. The adoption of this standard will not have a material impact on the Companys consolidated financial statements as it only pertains to a change in the balance sheet presentation of debt issuance costs.
Revenue From Contracts With Customers
In May 2014, the FASB and the International Accounting Standards Board jointly issued a converged standard, Topic 606,
Revenue From Contracts With Customers
. The new standard will require companies
to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in
enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements.
In May 2015, the FASB issued a proposal to amend certain aspects of the new revenue standard, specifically the guidance on identifying
performance obligations and accounting for licenses of intellectual property. The amendments clarify the guidance on determining if the promises in a contract are distinct goods or services and therefore, should be accounted for
separately. The FASBs amendments also (1) clarify that entities are not required to identify promised goods or services that are immaterial in the context of the contract, and (2) allow entities to elect to account for shipping and
handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service.
Subsequently in July 2015, based on the comments received, discussions with various stakeholders, and potential forthcoming amendments to the new revenue standard, the FASB decided to delay the effective
date of the new revenue standard by one year. The new standard is effective for the Company beginning July 1, 2018, including interim periods within that reporting period. The FASB also decided that companies could choose to adopt the new
standard one year earlier which would have been the original effective date. The new standard is required to be applied retrospectively. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
NOTE 20.
|
Quarterly Data (Unaudited)
|
Condensed consolidated quarterly and interim information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
(Amounts in thousands except per share data)
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
September 30,
2015
|
|
Net sales
|
|
$
|
192,651
|
|
|
$
|
191,932
|
|
|
$
|
316,199
|
|
|
$
|
265,951
|
|
Gross profit
(1)
|
|
|
92,006
|
|
|
|
84,225
|
|
|
|
143,928
|
|
|
|
109,506
|
|
Loss from operations
(2)
|
|
|
(14,383
|
)
|
|
|
(19,865
|
)
|
|
|
3,001
|
|
|
|
(9,684
|
)
|
Net loss attributable to Elizabeth Arden common shareholders
(3)
|
|
|
(23,778
|
)
|
|
|
(28,402
|
)
|
|
|
(5,611
|
)
|
|
|
(16,580
|
)
|
Loss per common share attributable to Elizabeth Arden common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
(3)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.56
|
)
|
(1)
|
For the year ended June 30, 2016, gross profit and loss from operations includes $6.5 million of inventory costs under our 2016 Business Transformation Program
primarily related to the closing of our Brazilian affiliate, as well changes in certain distribution and customer arrangements.
|
(2)
|
In addition to the item above in Note 1, loss from operations includes:
|
|
|
|
$14.9 million in expenses under the 2016 Business Transformation Program, primarily comprised of severance and other employee-related expenses and
related transition costs;
|
|
|
|
$0.5 million for the acceleration of depreciation expense for leasehold improvements related to leased space vacated under the 2016 Business
Transformation Program; and
|
|
|
|
$2.0 million for costs incurred related to the pending Revlon Merger.
|
(3)
|
Net loss includes items discussed in Notes 1 and 2 above, as well as valuation allowances recorded as a non-cash charges to income tax expense, comprised of $14.6
million against the Companys U.S. deferred tax assets and $3.9 million against the Companys deferred taxes in certain foreign operations.
|
- 97 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The breakout by fiscal quarter of the 2016 Business Transformation Program costs and
expenses, and costs incurred related to the pending Revlon Merger, as listed in the footnotes above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
(Amounts in millions)
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
September 30,
2015
|
|
2016 Business Transformation Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
2.1
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
3.3
|
|
Restructuring and related transition expenses
|
|
|
2.0
|
|
|
|
1.8
|
|
|
|
6.0
|
|
|
|
5.1
|
|
Depreciation expense related to vacated leased space
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Revlon Merger transaction costs
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.3
|
|
|
$
|
2.4
|
|
|
$
|
6.7
|
|
|
$
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
(Amounts in thousands except per share data)
|
|
June 30,
2015
|
|
|
March 31,
2015
|
|
|
December 31,
2014
|
|
|
September 30,
2014
|
|
Net sales
(1)
|
|
$
|
175,460
|
|
|
$
|
191,653
|
|
|
$
|
333,607
|
|
|
$
|
270,378
|
|
Gross profit
(2)
|
|
|
19,076
|
|
|
|
79,638
|
|
|
|
142,885
|
|
|
|
107,053
|
|
Loss from operations
(3)
|
|
|
(96,113
|
)
|
|
|
(27,372
|
)
|
|
|
(48,115
|
)
|
|
|
(17,525
|
)
|
Net loss attributable to Elizabeth Arden common shareholders
(4)
|
|
|
(108,691
|
)
|
|
|
(35,061
|
)
|
|
|
(56,778
|
)
|
|
|
(45,796
|
)
|
Loss per common share attributable to Elizabeth Arden common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
(4)
|
|
$
|
(3.65
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(1.54
|
)
|
(1)
|
For the year ended June 30, 2015, net sales includes include $28.2 million of returns and markdowns under our 2014 Performance Improvement Plan primarily due to
changes (i) our distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements.
|
(2)
|
In addition to the returns and markdowns described above in Note 1 above, gross profit and loss from operations includes $53.2 million of inventory write-downs under
our 2014 Performance Improvement Plan due primarily to changes in pricing and distribution strategies for certain fragrance products, and the discontinuation of certain products.
|
(3)
|
In addition to the items in Notes 1 and 2 above, loss from operations includes:
|
|
|
|
$13.2 million in expenses under the 2014 Performance Improvement Plan primarily comprised of $8.5 million of customer and vendor contract termination
costs, $4.5 million of severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 million in asset impairment charges;
|
|
|
|
$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs;
|
|
|
|
$2.4 million in expenses under the 2016 Business Transformation Program primarily comprised of $1.6 million of severance and other employee-related
costs and approximately $0.8 million in lease termination costs; and
|
|
|
|
$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to the Companys Credit Facility.
|
(4)
|
Net loss includes items discussed in Notes 1, 2 and 3 above, as well as valuation allowances recorded as a non-cash charges to income tax expense, comprised of $51.9
million against the Companys U.S. deferred tax assets and $6.9 million against the Companys deferred taxes in certain foreign operations. Net loss also includes $20.2 million in accretion, recorded during the first quarter of fiscal
2015, for the change in redemption value related to the issuance of preferred stock
|
The breakout by fiscal
quarter of the 2014 Performance Improvement Plan costs and expenses, product changeover costs and expenses, asset impairments, and restructuring and other expenses as listed in the footnotes above is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
(Amounts in millions)
|
|
June 30,
2015
|
|
|
March 31,
2015
|
|
|
December 31,
2014
|
|
|
September 30,
2014
|
|
2014 Performance Improvement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and markdowns
|
|
$
|
13.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
12.6
|
|
|
$
|
2.7
|
|
Inventory write-downs
|
|
|
48.3
|
|
|
|
0.3
|
|
|
|
4.6
|
|
|
|
|
|
Asset impairments and related charges
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Restructuring and related transition expenses, and contract termination costs
|
|
|
4.1
|
|
|
|
0.2
|
|
|
|
5.4
|
|
|
|
3.3
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
43.8
|
|
|
|
|
|
Restructuring expenses and lease termination costs
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68.1
|
|
|
$
|
0.2
|
|
|
$
|
66.6
|
|
|
$
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 98 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 21.
|
Segment Data and Related Information
|
Reportable operating segments, as defined by Codification Topic 280,
Segment Reporting
, include components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker (the Chief Executive) in deciding how to allocate resources and in assessing performance. As a result of the similarities in the procurement, marketing and distribution processes for all of
the Companys products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Chief Executive.
At June 30, 2016, the Companys operations are organized into the following two operating segments, which also comprise the
Companys reportable segments:
|
|
|
North America
- The North America segment sells the Companys portfolio of owned, licensed and distributed brands, including the Elizabeth
Arden products, to prestige retailers, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes the Companys direct to consumer business, which is composed of the Elizabeth Arden branded retail outlet
stores and the Companys e-commerce business in North America. This segment also sells Elizabeth Arden products through the Red Door Spa beauty salons and spas which are owned and operated by a third party licensee in which the Company has a
minority investment.
|
|
|
|
International
- The International segment sells a portfolio of owned and licensed brands, including Elizabeth Arden products, to perfumeries,
boutiques, department stores, travel retail outlets and distributors in approximately 120 countries outside of North America.
|
The Chief Executive evaluates segment profit based upon operating income, which represents earnings before income taxes, interest expense and depreciation and amortization charges. The accounting policies
for each of the reportable segments are the same as those described in Note 1- General Information and Summary of Significant Accounting Policies. The assets and liabilities of the Company are managed centrally and are reported
internally in the same manner as the consolidated financial statements; thus, no additional information regarding assets and liabilities of the Companys operating segments is produced for the Chief Executive or included herein.
Segment net sales and profit (loss) for the years ended June 30, 2015 and 2014, exclude returns and markdowns related to the 2014
Performance Improvement Plan. In addition, segment profit (loss) excludes depreciation and amortization, interest expense, debt extinguishment charges, and consolidation and elimination adjustments and unallocated corporate costs and expenses, which
are shown in the table reconciling segment profit (loss) to consolidated (loss) income before income taxes. Included in unallocated corporate costs and expenses are (i) restructuring charges that are related to an announced plan,
(ii) restructuring costs for corporate operations, (iii) costs and expenses related to the 2014 Performance Improvement Plan and the 2016 Business Transformation Program, including returns and markdowns, and (iv) costs related to the
pending Revlon Merger. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any
intersegment sales.
The following table is a comparative summary of the Companys net sales and segment profit (loss) by
operating segment for the fiscal years ending June 30, 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amount in thousands)
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Segment Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
584,921
|
|
|
$
|
606,599
|
|
|
$
|
731,164
|
|
International
|
|
|
381,812
|
|
|
|
392,726
|
|
|
|
442,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
966,733
|
|
|
$
|
999,325
|
|
|
$
|
1,173,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Net Sales
|
|
$
|
966,733
|
|
|
$
|
999,325
|
|
|
$
|
1,173,768
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated sales returns and markdowns
|
|
|
|
|
|
|
28,227
|
(2)
|
|
|
9,464
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
966,733
|
|
|
$
|
971,098
|
|
|
$
|
1,164,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 99 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
69,892
|
|
|
$
|
40,633
|
|
|
$
|
66,126
|
|
International
|
|
|
(43,690
|
)
|
|
|
(40,553
|
)
|
|
|
(34,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,202
|
|
|
$
|
80
|
|
|
$
|
31,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss)
|
|
$
|
26,202
|
|
|
$
|
80
|
|
|
$
|
31,154
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
42,698
|
|
|
|
48,483
|
|
|
|
52,134
|
|
Interest Expense
|
|
|
29,905
|
|
|
|
29,626
|
|
|
|
25,825
|
|
Consolidation and Elimination Adjustments
|
|
|
965
|
|
|
|
(64
|
)
|
|
|
(1,127
|
)
|
Unallocated Corporate Costs and Expenses
|
|
|
23,470
|
(1)
|
|
|
141,025
|
(3)
|
|
|
44,686
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes
|
|
$
|
(70,836
|
)
|
|
$
|
(218,990
|
)
|
|
$
|
(90,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts include $21.4 million in costs and expenses with respect to the Companys 2016 Business Transformation Program, primarily comprised of $6.5 million of
inventory costs related to the closing of the Companys Brazilian affiliate, as well as changes in certain distribution and customer arrangements, and $14.9 million of severance and other employee-related expenses and related transition costs.
In addition, fiscal 2016 amounts includes approximately $2.0 million for costs incurred related to the pending Revlon Merger.
|
(2)
|
Amounts represent $28.2 million of returns and markdowns under the Companys 2014 Performance Improvement Plan primarily due to changes to (i) its
distribution strategy in China, (ii) pricing and distribution strategies for certain fragrance products, and (iii) other customer and distribution arrangements.
|
(3)
|
In addition to the returns and markdowns described above in Note 2, amounts for the year ended June 30, 2015, include:
|
|
|
|
$66.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $53.2 million of inventory write-downs under our 2014
Performance Improvement Plan primarily due to changes in pricing and distribution strategies for certain fragrance products and the discontinuation of certain products, $8.5 million of customer and vendor contract termination costs, $4.5 million of
severance, other employee-related expenses and related transition costs associated with the reduction in global headcount positions, and $0.2 million in asset impairment charges;
|
|
|
|
$43.8 million in asset impairment charges primarily related to the write off of the Justin Bieber and Nicki Minaj licenses and other costs;
|
|
|
|
$2.4 million in expenses under the 2016 Business Transformation Program primarily comprised of $1.6 million of severance and other employee-related
costs and approximately $0.8 million in lease termination costs; and
|
|
|
|
$0.2 million of debt extinguishment costs resulting from the December 2014 amendment to the Credit Facility.
|
(4)
|
Amounts represent $9.5 million of returns and markdowns under the 2014 Performance Improvement Plan related to the closing of the Companys Puerto Rico affiliate,
exiting of certain unprofitable doors, changes in customer relationships and non-renewal and expiration of certain fragrance license agreements.
|
(5)
|
In addition to the returns and markdowns described above in Note 4, amounts for the year ended June 30, 2014, include:
|
|
|
|
$46.4 million in costs and expenses under the 2014 Performance Improvement Plan comprised of $30.2 million of inventory write-downs under the 2014
Performance Improvement Plan due to the expiration, non-renewal and wind-down of fragrance license agreements and discontinuation of certain products, $9.7 million in asset impairments and related charges, primarily due to the non-renewal and
expiration of fragrance license agreements, $6.0 million of severance and other employee-related expenses associated with the reduction in global headcount positions and $0.5 million of vendor contract termination costs;
|
|
|
|
$6.0 million of severance and other employee-related expenses and related transition costs incurred with respect to the Fall 2013 Staff Reduction; and
|
|
|
|
a credit of $17.2 million for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands,
LLC based on the Companys determination during the second quarter of fiscal 2014 that it was not probable that the performance targets related to the Justin Bieber and Nicki Minaj licenses for fiscal years 2014 and 2015 would be met.
|
During the year ended June 30, 2016, the Company sold its products in approximately 120 countries
outside the United States through its international affiliates and subsidiaries with operations headquartered in Geneva, Switzerland, and through third party distributors. The Companys international operations are subject to certain risks,
including political instability in certain regions of the world and diseases or other factors affecting customer purchasing patterns, economic and political consequences of terrorist attacks or the threat of such attacks and fluctuations in foreign
exchange rates that could adversely affect its results of operations. See Item 1A Risk Factors. The value of international assets is affected by fluctuations in foreign currency exchange rates. For a discussion of foreign
currency translation, see Note 18.
- 100 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Companys consolidated net sales by principal geographic areas and principal
classes of products are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
547,380
|
|
|
$
|
556,418
|
|
|
$
|
662,533
|
|
United Kingdom
|
|
|
65,643
|
|
|
|
58,628
|
|
|
|
66,155
|
|
Foreign (other than United Kingdom)
|
|
|
353,710
|
|
|
|
356,052
|
|
|
|
435,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
966,733
|
|
|
$
|
971,098
|
|
|
$
|
1,164,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classes of similar products (net sales):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fragrance
|
|
$
|
725,013
|
|
|
$
|
736,804
|
|
|
$
|
901,610
|
|
Skin care
|
|
|
191,341
|
|
|
|
183,176
|
|
|
|
203,833
|
|
Cosmetics
|
|
|
50,379
|
|
|
|
51,118
|
|
|
|
58,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
966,733
|
|
|
$
|
971,098
|
|
|
$
|
1,164,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information concerning consolidated long-lived assets for the U.S. and foreign operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
United States
(1)
|
|
$
|
303,443
|
|
|
$
|
319,099
|
|
Foreign
(2)
|
|
|
41,531
|
|
|
|
43,224
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,974
|
|
|
$
|
362,323
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily exclusive brand licenses, trademarks and intangibles, net, and property and equipment, net.
|
(2)
|
Primarily property and equipment, net, and exclusive brand licenses, trademarks and intangibles, net.
|
- 101 -