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EXCEL - IDEA: XBRL DOCUMENT - ELIZABETH ARDEN INCFinancial_Report.xls
EX-10.5 - EXH 10.5 - SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CR. AGREEMENT - ELIZABETH ARDEN INCexh_10-5.htm
EX-10.8 - EXH 10.8 - SECOND AMENDMENT TO SECOND LIEN - ELIZABETH ARDEN INCexh_10-8.htm
EX-31.1 - EXH 31.1 - SEC 302 CERTIFICATION OF CEO - ELIZABETH ARDEN INCexh_31-1.htm
EX-31.2 - EXH 31.2 - SEC 302 CERTIFICATION OF PRINC FINANCIAL OFFICER - ELIZABETH ARDEN INCexh_31-2.htm
EX-32 - EXH 32 - SEC 906 CERTIFICATION OF CEO AND SVP FINANCE & CORP DEVELOPMENT - ELIZABETH ARDEN INCexh_32.htm
EX-10.24 - EXH 10.24 - SEVERANCE POLICY - ELIZABETH ARDEN INCexh_10-24.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2013

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 1-6370

ELIZABETH ARDEN, INC.

(Exact name of registrant as specified in its charter)

Florida

        

59-0914138

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
Identification No.)

2400 S.W. 145 Avenue, Miramar, Florida

 

33027

(Address of principal executive offices)

 

(Zip Code)

(954) 364-6900

(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes  [X]      No  [  ]

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  [X]      No  [  ]

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

     Large accelerated filer

[X]

Accelerated filer

[   ]

     Non-accelerated filer

[   ]  (Do not check if a smaller reporting company)

Smaller reporting company

[   ]

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  [   ]      No  [X]

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class

     

Outstanding at
February 3, 2014

Common Stock, $.01 par value per share

 

29,693,457


ELIZABETH ARDEN, INC.

INDEX TO FORM 10-Q

PART I

 

FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

 

Page No.

 

 

Unaudited Consolidated Balance Sheets -- December 31, 2013 and June 30, 2013

 

3

 

 

 

 

Unaudited Consolidated Statements of Income -- Three and six months ended December 31, 2013 and December 31, 2012

 

4

 

 

   

Unaudited Consolidated Statements of Comprehensive Income -- Three and six months ended December 31, 2013 and December 31, 2012

 

5

 

 

 

 

Unaudited Consolidated Statement of Shareholders' Equity -- Six months ended
December 31, 2013

 

6

 

 

 

 

Unaudited Consolidated Statements of Cash Flow -- Six months ended December 31, 2013 and December 31, 2012

 

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

   

PART II

 

OTHER INFORMATION

   

 

 

Item 1A.

 

Risk Factors

 

37

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

Item 5.

 

Other Information

 

38

Item 6.

 

Exhibits

 

38

 

 

Signatures

 

41

 

 

Exhibit Index

 

42

- 2 -


PART I      FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Amounts in thousands, except shares and par value)

   

As of

   

   

December 31,
2013

   

June 30,
2013

   

ASSETS

                 

Current Assets

                 
 

Cash and cash equivalents

 

$

43,894

   

$

61,674

   
 

Accounts receivable, net

   

275,349

     

211,763

   
 

Inventories

   

344,888

     

310,934

   
 

Deferred income taxes

   

29,231

     

35,850

   
 

Prepaid expenses and other assets

   

43,633

     

37,458

   

   

Total current assets

   

736,995

     

657,679

   

Property and equipment, net

110,785

106,588

Exclusive brand licenses, trademarks and intangibles, net

   

289,809

     

296,416

   

Goodwill

   

31,607

     

21,054

   

Debt financing costs, net

   

5,851

     

6,536

   

Deferred income taxes

   

4,973

     

1,442

   

Other

   

16,645

     

14,017

   

   

Total assets

 

$

1,196,665

   

$

1,103,732

   

LIABILITIES AND SHAREHOLDERS' EQUITY

                 

Current Liabilities

                 
 

Short-term debt

 

$

97,950

   

$

88,000

   
 

Accounts payable - trade

   

145,192

     

115,180

   
 

Other payables and accrued expenses

   

116,992

     

90,179

   

   

Total current liabilities

   

360,134

     

293,359

   

Long-term Liabilities

                 
 

Long-term debt

   

250,000

     

250,000

   
 

Deferred income taxes and other liabilities

   

31,877

     

45,091

   

   

Total long-term liabilities

   

281,877

     

295,091

   

   

Total liabilities

   

642,011

     

588,450

   

Redeemable noncontrolling interest (See Note 5)

   

6,615

     

--

   

Commitments and contingencies (See Note 10)

                 

Shareholders' Equity

                 
 

Common stock, $.01 par value, 50,000,000 shares authorized; 34,533,840 and
   34,338,422
shares issued, respectively

   

345

     

343

   
 

Additional paid-in capital

   

352,358

     

349,060

   
 

Retained earnings

   

294,715

     

258,065

   
 

Treasury stock (4,841,308 and 4,686,094 shares at cost, respectively)

   

(93,169

)

   

(87,776

)

 
 

Accumulated other comprehensive loss

   

(6,210

)

   

(4,410

)

 

   

Total shareholders' equity

   

548,039

     

515,282

   

   

Total liabilities, redeemable noncontrolling interest and shareholders' equity

 

$

1,196,665

   

$

1,103,732

   

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 3 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands, except per share data)

Three Months Ended

Six Months Ended

December 31,
2013

December 31,
2012

December 31,
2013

December 31,
2012

Net sales

$

418,137

$

467,919

$

761,746

$

812,460

Cost of goods sold:

    Cost of sales

225,236

229,966

418,910

425,577

    Depreciation related to cost of goods sold

1,987

1,487

3,817

3,018

        Total cost of goods sold

227,223

231,453

422,727

428,595

Gross profit

190,914

236,466

339,019

383,865

Operating expenses:

    Selling, general and administrative

129,003

163,253

258,375

292,660

    Depreciation and amortization

11,137

9,372

21,836

18,501

        Total operating expenses

140,140

172,625

280,211

311,161

Income from operations

50,774

63,841

58,808

72,704

Interest expense, net

5,734

6,424

11,766

12,622

Income before income taxes

45,040

57,417

47,042

60,082

Provision for income taxes

10,384

12,608

10,798

13,089

Net income

34,656

44,809

36,244

46,993

Net loss attributable to noncontrolling interests
   (See Note 5)

(297

)

--

(406

)

--

Net income attributable to Elizabeth Arden
   shareholders

$

34,953

$

44,809

$

36,650

$

46,993

Net income per common share attributable to
   Elizabeth Arden shareholders:

    Basic

$

1.18

$

1.51

$

1.24

$

1.59

    Diluted

$

1.16

$

1.47

$

1.21

$

1.54

Weighted average number of common shares:

    Basic

29,649

29,680

29,648

29,617

    Diluted

30,129

30,492

30,182

30,498

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 4 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in thousands)

Three Months Ended

Six Months Ended

December 31,
2013

December 31,
2012

December 31,
2013

December 31,
2012

Net income

$

34,656

$

44,809

$

36,244

$

46,993

Other comprehensive income (loss), net of tax:

                               

    Foreign currency translation adjustments (1)

   

(2,086

)

   

(153

)

   

107

     

1,069

 

    Net unrealized cash flow hedging (loss) gain (2)

   

(540

)

   

689

     

(1,907

)

   

18

 

Total other comprehensive (loss) income, net of tax

   

(2,626

)

   

536

     

(1,800

)

   

1,087

 

Comprehensive income

   

32,030

     

45,345

     

34,444

     

48,080

 

Net loss attributable to noncontrolling interests

   

(297

)

   

--

     

(406

)

   

--

 

Comprehensive income attributable to Elizabeth
   Arden shareholders

 

$

32,327

   

$

45,345

   

$

34,850

   

$

48,080

 

(1)

Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.

(2)

Net of tax expense of $125 and $121 for the three months ended December 31, 2013 and 2012, respectively. Net of tax benefit of $64 and $58 for the six months ended December 31, 2013 and 2012, respectively.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 5 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

(Amounts in thousands)

   

Common Stock

   

Additional
Paid-in

   

Retained

   

Treasury Stock

   

Accumulated
Other
Comprehensive

   

Total
Shareholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Shares

   

Amount

   

Income (Loss)

   

Equity

 

Balance as of July 1, 2013

   

34,338

   

$

343

   

$

349,060

   

$

258,065

     

(4,686

)

 

$

(87,776

)

 

$

(4,410

)

 

$

515,282

 

Issuance of common stock upon exercise of
   options, net of tax withholdings of $1,428

   

139

     

2

     

328

     

--

     

--

     

--

     

--

     

330

 

Issuance of common stock for employee
   stock purchase plan

   

33

     

--

     

1,101

                                     

1,101

 

Issuance of restricted stock, net of forfeitures
   and tax withholdings

   

24

     

--

     

(1,197

)

   

--

     

--

     

--

     

--

     

(1,197

)

Amortization of share-based awards

   

--

     

--

     

3,225

     

--

     

--

     

--

     

--

     

3,225

 

Repurchase of common stock

   

--

     

--

     

--

     

--

     

(155

)

   

(5,393

)

   

--

     

(5,393

)

Excess tax benefit from share-based awards

   

--

     

--

     

(159

)

   

--

     

--

     

--

     

--

     

(159

)

Net income attributable to Elizabeth Arden
   shareholders

   

--

     

--

     

--

     

36,650

     

--

     

--

     

--

     

36,650

 

Foreign currency translation adjustments

   

--

     

--

     

--

     

--

     

--

     

--

     

107

     

107

 

Net unrealized cash flow hedging loss

   

--

     

--

     

--

     

--

     

--

     

--

     

(1,907

)

   

(1,907

)

Balance as of December 31, 2013

   

34,534

   

$

345

   

$

352,358

   

$

294,715

     

(4,841

)

 

$

(93,169

)

 

$

(6,210

)

 

$

548,039

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 6 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(Dollars in thousands)

   

Six Months Ended

 

   

December 31,
2013

   

December 31,
2012

 

Operating Activities:

               
 

Net income

 

$

36,244

   

$

46,993

 
 

Adjustments to reconcile net income to net cash used in operating activities:

               

Depreciation and amortization

25,653

21,519

 

Amortization of senior note offering and credit facility costs

   

685

     

682

 
 

Amortization of share-based awards

   

3,225

     

2,848

 
 

Deferred income taxes

   

6,258

     

9,376

 

   Changes in assets and liabilities, net of acquisitions:

               
 

Increase in accounts receivable

   

(61,606

)

   

(99,551

)

 

Increase in inventories

   

(32,074

)

   

(30,530

)

 

(Increase) decrease in prepaid expenses and other assets

   

(6,400

)

   

6,481

 
 

Increase in accounts payable

   

30,810

     

19,664

 
 

Increase in other payables, accrued expenses and other liabilities

   

12,206

     

11,418

 

Other

232

212

   

Net cash provided by (used in) operating activities

   

15,233

     

(10,888

)

Investing Activities:

               
 

Additions to property and equipment

   

(25,822

)

   

(19,004

)

 

Acquisition of businesses, intangibles and other assets

   

(3,000

)

   

(8,068

)

 

Cash received from consolidation of variable interest entity

   

574

     

--

 

   

Net cash used in investing activities

   

(28,248

)

   

(27,072

)

Financing Activities:

               
 

Proceeds from short-term debt

   

7,750

     

14,300

 
 

Proceeds from the exercise of stock options

   

1,758

     

4,514

 
 

Repurchase of common stock

   

(5,393

)

   

--

 
 

Proceeds from the issuance of common stock under the employee stock
   purchase plan

   

1,101

     

1,057

 
 

Payments of contingent consideration related to acquisition

   

(4,914

)

   

--

 
 

Payments to noncontrolling interests

   

(4,979

)

   

--

 
 

Excess tax benefit from share-based awards

   

--

     

4,945

 
 

Payments under capital lease obligations

   

(35

)

   

--

 

   

Net cash (used in) provided by financing activities

   

(4,712

)

   

24,816

 

Effect of exchange rate changes on cash and cash equivalents

(53

)

67

Net decrease in cash and cash equivalents

   

(17,780

)

   

(13,077

)

Cash and cash equivalents at beginning of period

   

61,674

     

59,080

 

Cash and cash equivalents at end of period

 

$

43,894

   

$

46,003

 

Supplemental Disclosure of Non-Cash Information:

               
 

Additions to property and equipment not paid for (not included above)

 

$

2,338

   

$

241

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 7 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    BUSINESS AND BASIS OF PRESENTATION

          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.

          The unaudited consolidated financial statements include the accounts of the Company's wholly-owned domestic and international subsidiaries, as well as a variable interest entity ("VIE") of which the Company is the primary beneficiary in accordance with consolidation accounting guidance. See Note 5 for information on the consolidated VIE. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission") for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statement presentation and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013 (the "2013 Annual Report"), filed with the Commission.

          The consolidated balance sheet of the Company as of June 30, 2013, is derived from the financial statements included in the 2013 Annual Report but does not include all disclosures required by accounting principles generally accepted in the United States. The other consolidated financial statements presented in this quarterly report are unaudited but include all adjustments that are of a normal recurring nature that management considers necessary for the fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of results for the full fiscal year.

NOTE 2.    ACCUMULATED OTHER COMPREHENSIVE LOSS

          The Company's accumulated other comprehensive loss shown on the accompanying consolidated balance sheets consists of foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized (losses) gains, net of taxes, related to the Company's foreign currency contracts.

          The components of accumulated other comprehensive loss were as follows:

(Amounts in thousands)

December 31,
2013

June 30,
2013

Cumulative foreign currency translation adjustments

$

(4,900

)

$

(5,007

)

Unrealized hedging (losses) gains, net of taxes (1)

(1,310

)

597

Accumulated other comprehensive loss

$

(6,210

)

$

(4,410

)

(1)   Net of tax benefit of $3 as of December 31, 2013 and tax expense of $61 as of June 30, 2013.

NOTE 3.    NET INCOME PER SHARE ATTRIBUTABLE TO ELIZABETH ARDEN SHAREHOLDERS

          Basic net income per share attributable to Elizabeth Arden shareholders is computed by dividing the net income attributable to Elizabeth Arden shareholders by the weighted average number of shares of the Company's outstanding common stock, $.01 par value per share ("Common Stock"). The calculation of net income per diluted share attributable to Elizabeth Arden shareholders is similar to net income per basic share attributable to Elizabeth Arden shareholders except that the denominator includes potentially dilutive common shares, such as stock options and non-vested restricted stock or restricted stock units.

- 8 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The following table represents the computation of net income per share attributable to Elizabeth Arden shareholders:

(Amounts in thousands, except per
   share data)

 

Three Months Ended

   

Six Months Ended

 

   

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Basic

                               
 

Net income attributable to Elizabeth
   Arden shareholders

 

$

34,953

   

$

44,809

   

$

36,650

   

$

46,993

 

 

Weighted average shares outstanding

   

29,649

     

29,680

     

29,648

     

29,617

 

 

Net income per basic share attributable
   to Elizabeth Arden shareholders

 

$

1.18

   

$

1.51

   

$

1.24

   

$

1.59

 

Diluted

                               
 

Net income attributable to Elizabeth
   Arden shareholders

 

$

34,953

   

$

44,809

   

$

36,650

   

$

46,993

 

 

Weighted average shares outstanding

   

29,649

     

29,680

     

29,648

     

29,617

 

 

Potential common shares - treasury
   method

   

480

     

812

     

534

     

881

 

 

Weighted average shares and potential
   dilutive common shares

   

30,129

     

30,492

     

30,182

     

30,498

 

 

Net income per diluted share attributable
   to Elizabeth Arden shareholders

 

$

1.16

   

$

1.47

   

$

1.21

   

$

1.54

 

          The following table shows the number of potential common shares for the three and six months ended December 31, 2013 and 2012 that were not included in the net income per diluted share attributable to Elizabeth Arden shareholders calculation because to do so would have been anti-dilutive:

(Amounts in thousands)

 

Three Months Ended

   

Six Months Ended

 

   

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Number of shares

   

104

     

17

     

81

     

90

 

NOTE 4.    RESTRUCTURING EXPENSES

          In August 2013, the Company announced it expected to incur approximately $5 million in restructuring expenses and related transition costs and expenses in fiscal 2014. These restructuring expenses and related transition costs and expenses reflect amounts incurred with respect to sales and other positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies. During the three and six months ended December 31, 2013, the Company incurred restructuring expenses of $0.4 million and $2.2 million, respectively.

          Aggregate amounts paid during the three and six months ended December 31, 2013 for restructuring expenses were $0.5 million and $1.4 million, respectively. All of the restructuring expenses are included in selling, general and administrative expenses in the Company's consolidated statements of income and, as described in Note 16, have not been attributed to any of the Company's reportable segments and are included in unallocated corporate expenses. At December 31, 2013, the Company had a restructuring liability of $0.8 million that is expected to be paid over the remainder of fiscal 2014.

- 9 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.    INVESTMENTS AND NONCONTROLLING INTERESTS

          On July 2, 2013, the Company, through a subsidiary (the "EA USC Subsidiary"), invested $6.0 million in US Cosmeceutechs, LLC ("USC"), a skin care company that develops and sells skin care products into the professional dermatology and spa channels. The investment, which is in the form of a collateralized convertible note that bears interest at 1.5%, is convertible into 50% of the fully diluted equity interest of USC at any time at the option of the EA USC Subsidiary, and also converts automatically upon the satisfaction of certain conditions. As of December 31, 2013, the note had not been converted.

          Under the terms of the operating agreement of USC, the EA USC Subsidiary has control of the board of managers of USC and the power to direct activities that could have a substantial impact on the economic performance of USC, including those that could result in the obligation to absorb losses or the right to receive benefits that could potentially be significant to USC. Based on the investment in USC and EA USC Subsidiary's 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 USC's financial statements in accordance with Topic 810, Consolidation.

          On July 11, 2013, the EA USC Subsidiary purchased a 30% equity interest in USC from the sole equity member (the "Member") for $3.6 million under the terms of a put-call agreement with the USC Member. Under the terms of the put-call agreement, the EA USC Subsidiary has an option to purchase the Member's remaining 20% equity interest in USC at specified prices under certain circumstances based on USC's performance, and similarly the Member has the ability to put its interest in USC to the Company at specified prices under certain circumstances based on USC's performance. Based on the terms of the put-call agreement, it is likely that the EA USC Subsidiary would exercise its call option prior to the Member exercising his put option. In accordance with Topic 480, Distinguishing Liabilities from Equity, the Company is required to classify the noncontrolling interest in USC as a "redeemable noncontrolling interest" in the mezzanine section of the Company's consolidated balance sheet.

          As a result of the agreements with USC and the Member and the requirement to consolidate the financial statements of USC, the Company recorded the following amounts on its consolidated balance sheet on the July 2, 2013 closing date:

(Amounts in thousands)

   

Amount

 

Inventory

 

$

2,541

 

Other assets

   

1,577

 

Intangible assets (1)

   

2,873

 

Goodwill

   

10,553

 

Current liabilities

   

(3,698

)

Long-term liabilities

   

(1,846

)

Redeemable noncontrolling interest

   

(12,000

)

(1)

The intangible assets relate to trademarks and other intangibles and are being amortized over an average useful life of approximately 15 years and 10 years, respectively.

          The fair value of USC on the closing date was $12 million. With the exception of the intangible assets and goodwill, the values assigned to the assets and liabilities above were based on their carrying values on the date of investment, which approximated their fair value. In determining the value of the intangible assets and goodwill, the Company considered, among other factors, the intention for future use of any existing intellectual property and any intellectual property currently being developed, as well as the value of the current workforce and its potential to develop future intellectual property to be used in the business. As of the date of investment, there were no significant research and development activities for new intellectual property in progress for use outside of the current portfolio of products. It is expected that certain technology and formulas used in current USC products will be integrated into certain select Elizabeth Arden skin care products in the future. As a result, based on the Company's valuation, the primary value was determined to be related to the current workforce and its potential to develop new intellectual property in the future, which is represented in the goodwill amount above. The goodwill recorded relates to the Company's North America segment and is not deductible for tax purposes. The fair values of the intangible assets and goodwill were calculated primarily using (i) an income approach, and (ii) discount rates which reflect the risk associated with receiving future cash flows.

- 10 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following provides an analysis of the change in the redeemable noncontrolling interest liability for the six months ended December 31, 2013:

(Amounts in thousands)

   

Amount

 

Beginning as of June 30, 2013

$

--

Amount recorded on closing date

12,000

Payment to Member for 30% equity interest

(3,600

)

Payments to noncontrolling interests

(1,379

)

Net loss attributable to noncontrolling interests

(406

)

Balance at December 31, 2013

 

$

6,615

 

          On July 12, 2013, the Company invested $3 million for a 20% equity interest in a company that is developing a beauty device (the "Device Company"). Under the terms of the equity interest purchase agreement, the Company has an obligation to purchase an additional 20% equity interest at a cost of $6 million upon the achievement of certain milestones related to the development and shipment to customers of a beauty device. In conjunction with the purchase of the equity interest, the Company entered into a license with the Device Company to become the exclusive worldwide manufacturer, marketer and distributor of the beauty device. In addition, the Company also has an option to purchase the remaining 60% equity interest in the Device Company at a specified price under certain circumstances based on the sales performance of the device. The investment has been accounted for using the equity method and at December 31, 2013, is included in other assets on the consolidated balance sheet.

NOTE 6.    INVENTORIES

          The components of inventory were as follows:

(Amounts in thousands)

December 31,
2013

   

June 30,
2013

 

Raw materials

$

55,570

   

$

66,295

 

Work in progress

 

21,164

     

26,902

 

Finished goods

 

268,154

     

217,737

 

        Total

$

344,888

   

$

310,934

 

NOTE 7.    EXCLUSIVE BRAND LICENSES, TRADEMARKS AND INTANGIBLES, NET AND GOODWILL

          The following summarizes the cost basis amortization and weighted average estimated life associated with the Company's intangible assets:

(Amounts in thousands)

December 31,
2013

   

June 30,
2013

   

June 30, 2013
Weighted Average
Estimated Life

 

Elizabeth Arden brand trademarks

$

122,415

   

$

122,415

   

Indefinite

 

Exclusive brand licenses and related trademarks

 

179,558

     

179,506

   

13

 

Exclusive brand trademarks

 

101,604

     

100,902

   

17

 

Other intangibles (1)

 

18,580

     

16,000

   

20

 

Exclusive brand licenses, trademarks and intangibles, gross

 

422,157

     

418,823

       

Accumulated amortization:

                   

   Exclusive brand licenses and related trademarks

 

(75,876

)

   

(68,508

)

     

   Exclusive brand trademarks

 

(50,420

)

   

(48,398

)

     

   Other intangibles

 

(6,052

)

   

(5,501

)

     

Exclusive brand licenses, trademarks and intangibles, net

$

289,809

   

$

296,416

       

(1)   Primarily consists of customer relationships, customer lists, non-compete agreements and product formulas.

- 11 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          At December 31, 2013, 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. The amount of goodwill recorded on the consolidated balance sheet at December 31, 2013, increased by $10.5 million from the June 30, 2013 balance as a result of the investment in USC. See Note 5. The Company did not record any impairments during the six months ended December 31, 2013, as there were no events that triggered an impairment analysis.

          Amortization expense was $4.9 million and $5.1 million for the three months ended December 31, 2013 and 2012, respectively, and $9.8 million and $10.0 million for the six months ended December 31, 2013 and 2012, respectively. At December 31, 2013, 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)

Remainder
of 2014

   

2015

   

2016

   

2017

   

2018

 

Amortization expense

$

9.5

   

$

18.7

   

$

18.0

   

$

16.6

   

$

16.5

 

NOTE 8.    OTHER PAYABLES AND ACCRUED EXPENSES

          A summary of the Company's other payables and accrued expenses is as follows:

(Amounts in thousands)

December 31,
2013

   

June 30,
2013

 

Accrued advertising, promotion and royalties

$

46,935

   

$

26,668

 

Accrued employee-related benefits

 

11,575

     

12,605

 

Accrued value added taxes

 

7,685

     

6,395

 

Accrued interest

 

5,770

     

6,200

 

Other accruals

 

45,027

     

38,311

 

Total other payables and accrued expenses

$

116,992

   

$

90,179

 

NOTE 9.    SHORT-TERM DEBT

          The Company has a $300 million revolving bank credit facility ("the 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. Under the terms of the Credit Facility, the Company may, at any time, increase the size of the Credit Facility up to $375 million without entering into a formal amendment requiring the consent of all of the banks, subject to the Company's satisfaction of certain conditions. The Credit Facility was amended in June 2012 to allow for the contingent consideration that may become payable with respect to the acquisition of certain assets of Give Back Brands, LLC and to allow for the second lien facility further described below. The credit facility expires in January 2016.

          The Credit Facility is guaranteed by all of the Company's U.S. subsidiaries and is collateralized by a first priority lien on all of the Company's U.S. accounts receivable and inventory. Borrowings under the Credit Facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of the Company's inventory, as determined pursuant to the terms of the Credit Facility; provided, however, that from August 15 to October 31 of each year the Company's borrowing base may be temporarily increased by up to $25 million.

          The Credit Facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declines to less than $25 million ($35 million from September 1 through January 31). The Company's average borrowing base capacity for the quarter ended December 31, 2013, did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended December 31, 2013.

          Under the terms of the Credit Facility, the Company may pay dividends or repurchase Common Stock if it maintains borrowing base capacity of at least $25 million from February 1 to August 31, and at least $35 million from September 1 to January 31, after making the applicable payment. The Credit Facility restricts the Company from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

- 12 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          Borrowings under the credit portion of the Credit Facility bear interest at a floating rate based on an "Applicable Margin" which is determined by reference to a debt service coverage ratio. At the Company's option, the Applicable Margin may be applied to either the London InterBank Offered Rate ("LIBOR") or the base rate (which is comparable to prime rates). The Applicable Margin ranges from 1.75% to 2.50% for LIBOR loans and from 0.25% to 1.0% for base rate loans, except that 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 Company's borrowing base is in effect, is 1.0% higher. The Company is required to pay an unused commitment fee ranging from 0.375% to 0.50% based on the quarterly average unused portion of the Credit Facility.

        At December 31, 2013, the Applicable Margin was 1.75% for LIBOR loans and 0.25% for base rate loans. For the six months ended December 21, 2013 and 2012, the weighted average annual interest rate on borrowings under the Credit Facility was 2.1% and 2.0%, respectively.

          The Company has a second lien credit agreement (the "Second Lien Facility") with JPMorgan Chase Bank, N.A. providing the Company the ability to borrow up to $30 million on a revolving basis. The Second Lien Facility matures on July 2, 2014. The Second Lien Facility is collateralized by a second priority lien on all of the Company's U.S. accounts receivable and inventories, and the interest on borrowings charged under the Second Lien Facility is either (i) LIBOR plus an applicable margin of 3.25% or (ii) the base rate specified in the Second Lien Facility (which is comparable to prime rates) plus a margin of 1.75%. The unused commitment fee applicable to the Second Lien Facility ranges from 0.25% to 0.375% based on the quarterly average unused portion of the Second Lien Facility. To the extent the Company borrows amounts under the Second Lien Facility, the Company has the option to prepay all or a portion of such borrowings, provided the borrowing base capacity under the Credit Facility is in excess of $35 million after giving effect to the applicable prepayment each day for the 30 day period ending on the date of the prepayment.

          At December 31, 2013, the Company had $98.0 million in outstanding borrowings and approximately $3.2 million in letters of credit outstanding under the Credit Facility compared with $88.0 million in borrowings and $2.6 million in letters of credit outstanding at June 30, 2013. At both December 31, 2013 and June 30, 2013, the Company had no outstanding borrowings under the Second Lien Facility. At December 31, 2013, based on eligible accounts receivable and inventory available as collateral, an additional $153.7 million in the aggregate could be borrowed under the Credit Facility and the Second Lien Facility. In periods when there are outstanding borrowings, the Company classifies the Credit Facility and Second Lien Facility as short term debt on its balance sheet because it expects to reduce outstanding borrowings over the next twelve months.

NOTE 10.    LONG-TERM DEBT

          The Company's long-term debt consisted of the following:

(Amounts in thousands)

 

December 31,
2013

   

June 30,
2013

 

7 3/8% Senior Notes due March 2021

 

$

250,000

   

$

250,000

 

          On January 21, 2011, the Company issued $250 million aggregate principal amount of 7 3/8% Senior Notes due March 2021 (the "7 3/8% Senior Notes"). 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 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 Credit Facility and the Second Lien Facility to the extent of the collateral securing the Credit Facility and the Second Lien Facility. 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 Company's 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 initially will not be guaranteed by any of the Company's 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 costs in debt financing costs, net, on the consolidated balance sheet, which will be amortized over the life of the 7 3/8% Senior Notes.

- 13 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          On January 30, 2014, the Company consummated the private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), of an additional $100 million aggregate principal amount of 7 3/8% Senior Notes (the "Additional 7 3/8% Senior Notes") issued under a supplement to the Indenture. The original 7 3/8% Senior Notes issued on January 21, 2011 and the Additional 7 3/8% Senior Notes issued on January 30, 2014 will be treated as a single series under the Indenture. The Additional 7 3/8% Senior Notes will have the same terms as the original 7 3/8% Senior Notes and will be subject to a registration rights agreement requiring the Company to file one or more registration statements as part of offers to exchange the Additional 7 3/8% Senior Notes for registered notes having identical terms in all material respects. In connection with the offering of the Additional 7 3/8% Senior Notes, the Credit Facility and the Second Lien Facility were each amended to permit the issuance of additional 7 3/8% Senior Notes under the Indenture.

          The Additional 7 3/8% Senior Notes were sold at 106.75% of their principal amount, and the premium received will be amortized over the remaining life of the 7 3/8% Senior Notes. The net proceeds were used to repay a portion of the Company's outstanding indebtedness under the Credit Facility. In addition, as part of the issuance of the Additional 7 3/8% Senior Notes, the Company expects to incur and capitalize approximately $2 million of related debt financing costs on the consolidated balance sheet, which will be amortized over the remaining life of the 7 3/8% Senior Notes.

NOTE 11.    COMMITMENTS AND CONTINGENCIES

          In connection with the acquisition of global licenses and certain assets from Give Back Brands LLC in June 2012, the Company agreed to pay Give Back Brands LLC up to an additional $28 million subject to the achievement of specified sales targets for the acquired brands over a three-year period from July 1, 2012 through June 30, 2015. As part of the accounting for the acquisition, the Company established a liability for the potential payment of $28 million based upon the probability of achieving the specified sales targets. Based on results for fiscal 2013, conditions for the payment of the first and second $5 million installments were satisfied, and such installments were paid during the third quarter of fiscal 2013 and first quarter of fiscal 2014, respectively. During the second quarter of fiscal 2014, the Company evaluated the probability of achieving the specified sales targets for fiscal 2014 and 2015 based upon updated forecasts, incorporating information from the 2013 holiday season. The Company no longer believes that it is probable that performance targets for the fiscal years 2014 and 2015 will be met, and as a result the Company completely reversed the remaining balance of the contingent liability for potential payments to Give Back Brands LLC. The reversal of the liability resulted in a credit being recorded to selling, general and administrative expenses of $17.2 million in the second quarter of fiscal 2014.

          During fiscal 2013, the Company invested $7.6 million, including transaction costs, for a minority investment in Elizabeth Arden Salon Holdings, LLC, an unrelated party whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons ("Salon Holdings"). The investment, which is in the form of a collateralized convertible note bearing interest at 2%, has been accounted for using the cost method and at December 31, 2013, is included in other assets on the consolidated balance sheet. The Company expects to invest an additional $2.1 million in fiscal 2014. The Company entered into a co-investment agreement with another minority investor of Salon Holdings under which the minority investor has the ability to put its interest in Salon Holdings to the Company under certain circumstances, at a specified price based on the performance of Salon Holdings over the previous 12 month period. Should the minority investor put its interest in Salon Holdings to the Company, it can elect to receive payment in cash, Common Stock or a combination of both. As of December 31, 2013, if the minority investor had put its interest in Salon Holdings to the Company, based on the performance of Salon Holdings over the previous 12 month period, the impact would not have been material to the Company's liquidity.

          The Company is a party to a number of 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 action, proceeding, audit or claim contains an element of uncertainty and may materially affect the Company's cash flows and results of operations in a particular quarter or year, based on current facts and circumstances, the Company's management believes that the outcome of such actions, proceedings, audits, claims and disputes will not have a material adverse effect on the Company's business, prospects, results of operations, financial condition or cash flows.

The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company also files tax returns for its international affiliates in various foreign jurisdictions. The statute of limitations for the Company's U.S. federal tax returns remains open for the year ended June 30, 2008 and subsequent fiscal years. The Internal Revenue Service ("IRS") began an examination of the Company's U.S. federal tax returns for fiscal 2008 and fiscal 2009 during fiscal

- 14 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

year 2011 and, in May 2013 issued an IRS Letter 950 ("30-day Letter") for fiscal 2008 and fiscal 2009 relating to transfer pricing matters. In the 30-day Letter, the IRS proposed adjustments that would increase the Company's U.S. taxable income for fiscal 2008 and fiscal 2009 by approximately $29.1 million, which could be material to the Company's consolidated statements of operations in the period in which resolved unless resolved favorably by the Company. The Company disagrees with the proposed adjustments and has pursued the appeals process and intends to vigorously contest the proposed adjustments 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 at IRS appeals or any judicial process, if necessary, will not have a material adverse effect on the Company's financial condition, business or prospects. In addition, if the examination is not resolved favorably, the Company has $105 million of U.S. federal operating loss carryforwards as of June 30, 2013, of which $60 million 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. During the second quarter of fiscal 2014, the IRS began an examination of the Company's U.S. federal tax returns for fiscal 2010, fiscal 2011 and fiscal 2012. The year ended June 30, 2004 and subsequent fiscal years remain subject to examination for various state tax jurisdictions. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations generally ranging from one to five years. The year ended June 30, 2008 and subsequent fiscal years remain subject to examination for various foreign jurisdictions.

NOTE 12.    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 Company's own assumptions

          At December 31, 2013 the Company's long-term debt consisted of $250 million aggregate principal amount of its 7 3/8% Senior Notes due 2021. See Note 10. At December 31, 2013 and June 30, 2013, the estimated fair value of the 7 3/8% Senior Notes was as follows:

(Amounts in thousands)

December 31,
2013

   

June 30,
2013

 

7 3/8% Senior Notes due March 2021 (Level 2)

$

271,250

   

$

271,250

 

        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 Company's 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 Company's financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2013 and June 30, 2013:

(Amounts in thousands)

December 31, 2013

 

June 30, 2013

 

Asset

   

Liability

   

Asset

   

Liability

 

Level 2

$

884

   

$

2,197

   

$

658

   

$

--

 

Total

$

884

   

$

2,197

   

$

658

   

$

--

 

          See Note 13 for a discussion of the Company's foreign currency contracts.

- 15 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          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. As of December 31, 2013, the Company did not have any non-financial assets and liabilities measured at fair value.

NOTE 13.    DERIVATIVE FINANCIAL INSTRUMENTS

         The Company operates in several foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of the Company's 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 foreign subsidiaries' cost of sales to such fluctuations, as well as cash flow hedges for a portion of its subsidiaries' forecasted 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 Company's 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.

          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 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 the three and six months ended December 31, 2013 or in fiscal 2013 relating to foreign currency contracts used to hedge forecasted revenues resulting from hedge ineffectiveness. As of December 31, 2013, the Company had notional amounts of 26.5 million British pounds and 22.8 million Euros under foreign currency contracts used to hedge forecasted revenues that expire between January 31, 2014 and May 31, 2015.

          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 Company's Canadian and Australian subsidiaries or operating costs of the Company's 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 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 the three and six months ended December 31, 2013 or in fiscal 2013 relating to foreign currency contracts used to hedge forecasted cost of sales or forecasted operating costs resulting from hedge ineffectiveness. As of December 31, 2013, the Company had notional amounts under foreign currency contracts of (i) 2.9 million Canadian dollars and 11.8 million Australian dollars used to hedge forecasted cost of sales, and (ii) 6.0 million Swiss francs to hedge forecasted operating costs that expire between January 31, 2014 and May 31, 2015.

          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 Company's 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 these forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire. Amounts recorded for the three months ended December 31, 2013 were not material. For the six months ended December 31, 2013, the Company recorded losses of $0.7 in selling, general and administrative expenses related to these contracts. For the three and six months ended December 31, 2012, the Company recorded a loss of $0.2 million and a gain of $0.7 million, respectively in selling, general and administrative expenses related to these contracts. As of December 31, 2013, there were no such foreign currency contracts outstanding. There were no amounts recorded in the three and six months ended December 31, 2013 or in fiscal 2013 relating to foreign currency contracts to hedge subsidiary balance sheets resulting from hedge ineffectiveness.

- 16 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          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

December 31,
2013

   

June 30,
2013

 

Other assets

$

884

   

$

658

 

Other payables

$

2,197

   

$

--

 

Loss Reclassified from Accumulated Other Comprehensive Income into Income, Net of Tax (Effective Portion)

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Currency Contracts - Net Sales (1)

$

(418

)

 

$

(170

)

 

$

(362

)

 

$

(173

)

Currency Contracts - Cost of Sales (2)

 

(39

)

   

(149

)

   

(32

)

   

(245

)

Currency Contracts - Selling, General    and Administrative Expenses (3)

 

145

     

23

     

182

     

(30

)

Total (4)

$

(312

)

 

$

(296

)

 

$

(212

)

 

$

(448

)

(1)

Recorded in net sales on the consolidated statements of income.

(2)

Recorded in cost of sales on the consolidated statements of income.

(3)

Recorded in selling, general and administrative expenses on the consolidated statements of income.

(4)

Net of tax benefit of $56 and $79 for the three months ended December 31, 2013 and 2012, respectively. Net of tax benefit of $43 and $127 for the six months ended December 31, 2013 and 2012, respectively.

Net (Loss) Gain Recognized in Other Comprehensive Income on Derivatives, Net of Tax (Effective Portion)

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Currency Contracts - Net Sales

$

(424

)

 

$

254

   

$

(2,109

)

 

$

(426

)

Currency Contracts - Cost of Sales

 

390

     

309

     

289

     

25

 

Currency Contracts - Selling, general
   and administrative expenses

 

(194

)

   

422

     

125

     

867

 

Total (1)

$

(228

)

 

$

985

   

$

(1,695

)

 

$

466

 

(1)

Net of tax expense of $181 and $200 for the three months ended December 31, 2013 and 2012, respectively. Net of tax benefit of $21 for the six months ended December 31, 2013, and net of tax expense of $69 for the six months ended December 31, 2012.

NOTE 14.    REPURCHASES OF COMMON STOCK

          The Company has an existing stock repurchase program pursuant to which the Company's board of directors has authorized the repurchase of $120 million of Common Stock and that is currently scheduled to expire on November 30, 2014.

          As of December 31, 2013, the Company had repurchased 4,517,309 shares of Common Stock on the open market under the stock repurchase program since its inception in November 2005, at an average price of $18.88 per share and at a cost of approximately $85.3 million, including sales commissions, leaving approximately $34.7 million available for additional repurchases under the program. For the six months ended December 31, 2013, the Company repurchased 155,214 shares of Common Stock on the open market under the stock repurchase program at an average price of $34.75 per share and at a cost of $5.4 million, including sales commissions. The acquisition of these shares by the Company was accounted for under the treasury method.

- 17 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.    NEW ACCOUNTING STANDARDS AND NEW TAX LEGISLATION

          In July 2013, the Financial Accounting Standards Board ("FASB") issued an update to Topic 740, Income Taxes. This update requires companies to present an unrecognized tax benefit ("UTB") as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the applicable jurisdiction, to the extent such tax attributes are available to offset the additional tax liability that would result if the UTB were disallowed on the balance sheet date. Whether the settlement by use of carryforwards is available under the law would depend on facts and circumstances available on the balance sheet date. The new guidance is effective for the Company beginning July 1, 2014, and adoption is not expected to have a material impact on the Company's consolidated financial statements.

          In September 2013, the IRS released final tangible property regulations ("repair regulations") under Sections 162(a) and 263(a) of the Internal Revenue Code, regarding the deduction and capitalization of amounts paid to acquire, produce, or improve tangible property. The final regulations replace temporary regulations that were issued in December 2011 and are effective for tax years beginning January 1, 2014, with early adoption permitted for tax years beginning January 1, 2012. The final regulations are effective for the Company for its tax year beginning July 1, 2014, and the Company is currently evaluating the impact of the final repair regulations on its consolidated financial statements.

NOTE 16.    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 Company's 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 December 31, 2013, the Company's operations were organized into the following two operating segments, which also comprise its reportable segments:

   North America - The North America segment sells the Company's portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes the Company's direct to consumer business, which is composed of the Elizabeth Arden branded retail outlet stores and the Company's global e-commerce business. This segment also sells the Elizabeth Arden products through the Red Door 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 income from operations, 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 the Company's 2013 Annual Report under 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 Company's reportable segments is produced for the Chief Executive or included herein.

          Segment profit excludes depreciation and amortization, interest expense, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit to consolidated income before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) restructuring costs for corporate operations, and (iii) acquisition-related costs, including transition costs. 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.

- 18 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table is a comparative summary of the Company's net sales and segment profit by operating segment for the three and six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Segment Net Sales:

                             

    North America

$

269,647

   

$

311,077

   

$

494,306

   

$

542,634

 

    International

 

148,490

     

156,842

     

267,440

     

269,826

 

Total

$

418,137

   

$

467,919

   

$

761,746

   

$

812,460

 

Segment Profit:

                             

    North America

$

33,960

   

$

53,542

   

$

62,847

   

$

90,350

 

    International

 

14,822

     

23,508

     

6,880

     

18,270

 

Total

$

48,782

   

$

77,050

   

$

69,727

   

$

108,620

 

Reconciliation:

                             

    Segment Profit

$

48,782

   

$

77,050

   

$

69,727

   

$

108,620

 

    Less:

                             

        Depreciation and Amortization

 

13,124

     

10,859

     

25,653

     

21,519

 

        Interest Expense, net

 

5,734

     

6,424

     

11,766

     

12,622

 

        Consolidation and Elimination
           Adjustments

 

630

     

415

     

(1,363

)

   

868

 

        Unallocated Corporate Expenses

 

(15,746

)

(1)

 

1,935

(2)

   

(13,371

)

(1)

 

13,529

(2)

Income Before Income Taxes

$

45,040

$

57,417

$

47,042

$

60,082

(1)

Amounts for the three months ended December 31, 2013, include 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 Company's determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, and $0.4 million of restructuring expenses and $1.0 million of related transition costs incurred with respect to sales and other positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies. Amounts for the six months ended December 31, 2013, include 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 Company's determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, and $2.2 million of restructuring expenses and $1.6 million of related transition costs incurred with respect to sales and other positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies.

(2)

Amounts for the three months ended December 31, 2012, include $1.9 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by the Company from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisition of licenses and other assets from those companies, and other transition costs. Amounts for the six months ended December 31, 2012, include $13.5 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by the Company from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisition of licenses and other assets from those companies, and other transition costs and expenses.

- 19 -


 ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes contained in this quarterly report and the Consolidated Financial Statements and related notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended June 30, 2013. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year period.

Overview

          We are a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our extensive product portfolio includes the following:

Elizabeth Arden Brand

The Elizabeth Arden skin care brands: Visible Difference, Ceramide, Prevage, and Eight Hour Cream, Elizabeth Arden branded lipstick, foundation and other color cosmetics products, and the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden Green Tea and UNTOLD

Celebrity Fragrances

The fragrance brands of Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift, Justin Bieber, Nicki Minaj, Usher and Jennifer Aniston

Lifestyle Fragrances

Curve, Giorgio Beverly Hills, PS Fine Cologne and White Shoulders

Designer Fragrances

Juicy Couture, John Varvatos, Alfred Sung, BCBGMAXAZRIA, Ed Hardy, Geoffrey Beene, Halston, Lucky, Rocawear and True Religion

          In addition to our owned and licensed fragrance brands, we distribute approximately 250 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

          Our business strategy during fiscal 2014 has been to focus on two important initiatives: the global repositioning of the Elizabeth Arden brand and expanding the market penetration of our prestige fragrance portfolio in international markets, especially in the large European fragrance market as well as growing markets such as Brazil, Russia and the Middle East. We believe that improving the capabilities and operating efficiencies of our business are important to the success of each of these initiatives and that better leveraging of our overall overhead structure will also help to improve operating margins and earnings. We are currently engaging in a fundamental reexamination of how we commercially execute our business, particularly internationally, with a renewed focus on priority markets and brands, and strengthening our travel retail and distributor relationships, as well as identifying low-return businesses that we should consider exiting. This reexamination of our business may result in decisions that impact net sales, operating margins and earnings in future periods, and the specific facts and circumstances surrounding such future decisions will impact the timing and amount of any costs or expenses that may be incurred.

          We also continue to focus on increasing operating margins and earnings by improving product mix and pricing, improving our supply chain and logistics efficiency, and reducing sales dilution. We believe that improved commercial execution of our international business, improved performance of the prestige fragrance category at mass retail customers, organic growth of our existing brands as well as new licensing opportunities and acquisitions, and continued new product innovation will assist us in achieving these goals.

          The global repositioning for the Elizabeth Arden brand is designed to honor the heritage of the brand while modernizing the brand's presentation and increasing its relevance among target consumers. This comprehensive brand repositioning includes a revised product assortment, improved product formulations, package redesign, counter redesign, new advertising and marketing vehicles, and enhanced beauty advisor support. The initial roll-out was limited to a number of flagship retail doors. During fiscal 2013, we introduced our new product assortment to our prestige retail customers and replaced most of such flagship retail counters with new counters. We also extended elements of the new advertising, marketing and beauty advisor programs beyond our global flagship retail doors to the next tier of approximately 200 retail doors globally.

          In fiscal 2013, we incurred pre-tax costs and expenses of $23.1 million in connection with the brand repositioning. During fiscal 2014, we expect to incur approximately $16 million in additional pre-tax costs and expenses in connection with the continued roll-out of the Elizabeth Arden brand repositioning and to exit unprofitable retail doors in certain markets, of which $13.5 million has been incurred through the six months ended December 31, 2013. The specific facts and circumstances of the continued roll-out of the repositioning will impact the timing and amount of any such costs and expenses as well as capital expenditures.

- 20 -


          In fiscal 2014, we also expect to incur approximately $5 million in restructuring expenses and related transition costs, of which $2.2 million in restructuring costs and $1.6 million of related transition costs and expenses, have been incurred through the six months ended December 31, 2013. These restructuring expenses and related transition costs and expenses include amounts incurred with respect to sales positions as well as other staff positions across various business units that are being eliminated to drive expense savings and additional operating efficiencies. We are also implementing the last phase of an Oracle global enterprise system, which includes an upgrade to certain of our information systems relating to our global supply chain and logistics functions. This is intended to further increase business efficiencies throughout our Company to improve our cash flow, operating margins and profitability.

          In fiscal 2012, we acquired (i) the global licenses and certain assets, including inventory, related to the Ed Hardy, True Religion and BCBGMAXAZRIA fragrance brands from New Wave Fragrances, LLC, and (ii) the global licenses and certain assets related to the Justin Bieber and Nicki Minaj fragrance brands, including existing inventory of the Justin Bieber fragrances, from Give Back Brands LLC. For ease of reference in this Form 10-Q, the acquisitions from New Wave Fragrances LLC and Give Back Brands LLC are referred to herein on a collective basis as the 2012 acquisitions.

          In fiscal 2013, we invested a total of $7.6 million, including transaction costs, for a minority investment in Elizabeth Arden Salon Holdings, LLC, an unrelated entity whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons. The investment was made with the intent of accelerating the growth of the spa business in parallel with the growth of the Elizabeth Arden brand and the Elizabeth Arden brand repositioning. The investment, which is in the form of a collateralized convertible note bearing interest at 2%, has been accounted for using the cost method and at December 31, 2013, is included in other assets on our consolidated balance sheet. We expect to invest an additional $2.1 million in fiscal 2014.

          On July 2, 2013, we invested, through a subsidiary, $6.0 million in US Cosmeceutechs, LLC, a skin-care company that develops and sells skin care products into the professional dermatology and spa channels. The investment, which is in the form of a collateralized convertible note that bears interest at 1.5%, is convertible into 50% of the fully diluted equity interest of US Cosmeceutechs, LLC at any time at the option of our subsidiary and also converts automatically upon the satisfaction of certain conditions. Based on our investment in US Cosmeceutechs, LLC and our subsidiary's controlling rights under the operating agreement, we have determined that US Cosmeceutechs, LLC is a variable interest entity, or VIE, of which we are the primary beneficiary, requiring our consolidation of US Cosmeceutechs, LLC financial statements in accordance with Topic 810, Consolidation. See Note 5 to the Notes to Unaudited Consolidated Financial Statements.

          On July 11, 2013, our subsidiary purchased a 30% equity interest in US Cosmeceutechs, LLC from the sole equity member for $3.6 million under the terms of a put-call agreement with such member. Under the terms of the put-call agreement, our subsidiary has an option to purchase the member's remaining 20% equity interest in US Cosmeceutechs, LLC at specified prices under certain circumstances based on the performance of US Cosmeceutechs, LLC, and similarly the member has the ability to put its interest in US Cosmeceutechs, LLC to us at specified prices under certain circumstances based on the performance of US Cosmeceutechs, LLC. Based on the terms of the put-call agreement, it is likely that our subsidiary would exercise its call option prior to the member exercising his put option. In accordance with Topic 480, Distinguishing Liabilities from Equity, we are required to classify the noncontrolling interest in USC as a "redeemable noncontrolling interest" in the mezzanine section of our consolidated balance sheet.

          Also in July 2013, we invested $3 million for a 20% equity interest in a developer of beauty devices. Under the terms of the agreement, we also have a commitment to purchase an additional 20% equity interest at a cost of $6 million upon the achievement of certain milestones related to the development and shipment to customers of a beauty device. In conjunction with the purchase of the equity interest, we entered into a license with the device company to become the exclusive worldwide manufacturer, marketer and distributor of the beauty device. In addition, we also have an option to purchase the remaining 60% equity interest in the device company at a specified price under certain circumstances based on the sales performance of the device. See Note 5 to the Notes to Unaudited Consolidated Financial Statements.

          We manage our business by evaluating net sales, EBITDA (as defined later in this discussion), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable, operating cash flow and return on invested capital). We encounter a variety of challenges that may affect our business and should be considered as described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended June 30, 2013 and in the section of this quarterly report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results."

Seasonality

          Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2013, approximately

- 21 -


60% of our net sales were made during the first half of our fiscal year. We also experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our short-term borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

          Due to product innovation and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

Critical Accounting Policies and Estimates

          As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Our most critical accounting policies relate to revenue recognition, provisions for inventory obsolescence, allowances for sales returns, markdowns and doubtful accounts, intangible and long-lived assets, income taxes, hedging contracts and share-based compensation. Since June 30, 2013, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

Foreign Currency Contracts

          We operate in several foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of our foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. We also enter into cash flow hedges for a portion of our forecasted inventory purchases to reduce the exposure of our Canadian and Australian subsidiaries' cost of sales to such fluctuations, as well as cash flow hedges for a portion of our subsidiaries' forecasted Swiss franc operating costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. We do not enter into derivative financial contracts for speculative or trading purposes.

          Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity, to the extent such contracts are effective, and are recognized in net sales or cost of 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 the three and six months ended December 31, 2013 or in fiscal 2013 relating to foreign currency contracts used to hedge forecasted revenues, forecasted cost of sales or forecasted operating costs resulting from hedge ineffectiveness.

          When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce exposure of our 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.

          The following table summarizes the effect of the pre-tax loss from our settled foreign currency contracts on the specified line items in our consolidated statements of income for the three and six months ended December 31, 2013 and 2012.

(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Net Sales

$

(462

)

 

$

(187

)

 

$

(400

)

 

$

(190

)

Cost of Sales

 

(65

)

   

(213

)

   

(56

)

   

(351

)

Selling, general and administrative

 

173

     

(188

)

   

(491

)

   

(742

)

Total pre-tax loss

$

(354

)

 

$

(588

)

 

$

(947

)

 

$

(1,283

)

- 22 -


Results of Operations

          The following discussion compares the historical results of operations for the three and six months ended December 31, 2013 and 2012. Results of operations as a percentage of net sales were as follows (dollar amounts in thousands; percentages may not add due to rounding):

Three Months Ended

Six Months Ended

December 31,
2013

December 31,
2012

December 31,
2013

December 31,
2012

Net sales

$

418,137

100.0

%

$

467,919

100.0

%

$

761,746

100.0

%

$

812,460

100.0

%

Cost of sales

225,236

53.8

229,966

49.2

418,910

55.0

425,577

52.4

Depreciation in cost of sales

1,987

0.5

1,487

0.3

3,817

0.5

3,018

0.4

Gross profit (1)(2)

190,914

45.7

236,466

50.5

339,019

44.5

383,865

47.2

Selling, general and administrative
   expenses

129,003

30.9

163,253

34.9

258,375

33.9

292,660

36.0

Depreciation and amortization

11,137

2.7

9,372

2.0

21,836

2.9

18,501

2.3

Income from operations (1)(2)

50,774

12.1

63,841

13.6

58,808

7.7

72,704

8.9

Interest expense, net

5,734

1.4

6,424

1.4

11,766

1.5

12,622

1.5

Income before income taxes

45,040

10.8

57,417

12.3

47,042

6.2

60,082

7.4

Provision for income taxes

10,384

2.5

12,608

2.7

10,798

1.4

13,089

1.6

Net income

34,656

8.3

44,809

9.6

36,244

4.8

46,993

5.8

Net loss attributable to noncontrolling
   interests (3)

(297

)

(0.1

)

--

--

(406

)

--

--

--

Net income attributable to Elizabeth
   Arden shareholders

34,953

8.4

44,809

9.6

36,650

4.8

46,993

5.8

Other data

EBITDA and EBITDA margin (4)

$

63,898

15.3

%

$

74,700

16.0

%

$

84,461

11.1

%

$

94,223

11.6

%

(1)

For the three months ended December 31, 2013, gross profit and income from operations includes $8.6 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand and $0.5 million of transition costs incurred related to the restructuring discussed in the following sentence. In addition, income from operations includes (i) 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 our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, (ii) $0.4 million of restructuring expenses and $0.5 million of related transition expenses primarily incurred with respect to sales positions and other staff positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies, and (iii) $0.7 million of non-recurring product changeover expenses related to the repositioning of the Elizabeth Arden brand. For the six months ended December 31, 2013, gross profit and income from operations includes $12.4 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand and $0.5 million of transition costs incurred related to the restructuring discussed above. In addition, income from operations includes (i) 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 discussed above, (ii) $2.2 million of restructuring expenses and $1.1 million of related transition expenses related to the restructuring discussed above, and (iii) $1.1 million of non-recurring product changeover expenses related to the repositioning of the Elizabeth Arden brand.

(2)

For the three months ended December 31, 2012, gross profit and income from operations includes $1.9 million of inventory-related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions and other transition costs, and $3.6 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand. In addition, income from operations includes $0.3 million of non-recurring product changeover expenses, related to the repositioning of the Elizabeth Arden brand. For the six months ended December 31, 2012, gross profit and income from operations includes $13.2 million of inventory-related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions and other transition costs, and $7.0 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand. In addition, income from operations includes $0.3 million in transition costs associated with the 2012 acquisitions and $0.4 million of non-recurring product changeover expenses related to the repositioning of the Elizabeth Arden brand.

(3)

See Note 5 to Notes to Unaudited Consolidated Financial Statements. 

(4)

For a definition of EBITDA and a reconciliation of net income to EBITDA, see "EBITDA" under Results of Operations -- Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012 and under Six Months Ended December 31, 2013 compared to Six Months Ended December 31, 2012. EBITDA margin represents EBITDA divided by net sales.

- 23 -


          At December 31, 2013, our operations were organized into the following two operating segments, which also comprise our reportable segments:

North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes our direct to consumer business, which is composed of our Elizabeth Arden branded retail outlet stores and our global e-commerce business. This segment also sells the Elizabeth Arden products through the Red Door beauty salons and spas, which are owned and operated by a third party licensee in which we have a minority investment.

International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, to perfumeries, boutiques, department stores, travel retail outlets and distributors in approximately 120 countries outside of North America.

          Segment profit excludes depreciation and amortization, interest expense, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit to consolidated income before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) restructuring costs for corporate operations and (iii) acquisition-related costs, including transition costs. 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. We do not have any intersegment sales.

          The following table is a comparative summary of our net sales and segment profit by operating segment for the three and six months ended December 31, 2013 and 2012 and reflects the basis of presentation described in Note 16 -- "Segment Data and Related Information" to the Notes to Unaudited Consolidated Financial Statements for all periods presented.

(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Segment Net Sales:

                             

    North America

$

269,647

   

$

311,077

   

$

494,306

   

$

542,634

 

    International

 

148,490

     

156,842

     

267,440

     

269,826

 

Total

$

418,137

   

$

467,919

   

$

761,746

   

$

812,460

 

Segment Profit:

                             

    North America

$

33,960

   

$

53,542

   

$

62,847

   

$

90,350

 

    International

 

14,822

     

23,508

     

6,880

     

18,270

 

    Less:

                             

        Depreciation and Amortization

 

13,124

     

10,859

     

25,653

     

21,519

 

        Interest Expense, net

 

5,734

     

6,424

     

11,766

     

12,622

 

        Consolidation and Elimination
           Adjustments

 

630

     

415

     

(1,363

)

   

868

 

        Unallocated Corporate Expenses (1)

 

(15,746

)(1)

   

1,935

(2)

   

(13,371

)(1)

   

13,529

(2)

Income Before Income Taxes

$

45,040

   

$

57,417

   

$

47,042

   

$

60,082

 

(1)

Amounts for the three months ended December 31, 2013, include a credit of $17.2 million for the for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands LLC based on our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, and $0.4 million of restructuring expenses and $1.0 million of related transition costs incurred with respect to sales and other positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies. Amounts for the six months ended December 31, 2013, include 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 our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, and $2.2 million of restructuring expenses and $1.6 million of related transition costs incurred with respect to sales and other positions across various business units that are being eliminated to derive expense savings and additional operating efficiencies.

(2)

Amounts for the three months ended December 31, 2012, include $1.9 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by the Company from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisition of licenses and other assets from those companies, and other transition costs. Amounts for the six months ended December 31, 2012, include $13.5 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by the Company from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions and other transition costs and expenses.

- 24 -


          The following is additional net sales information relating to the following product categories: the Elizabeth Arden Brand (skin care, cosmetics and fragrances) and Celebrity, Lifestyle, Designer and Other Fragrances.

(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

   

December 31,
2013

   

December 31,
2012

 

Net Sales:

                             

    Elizabeth Arden Brand

$

142,158

   

$

147,957

   

$

262,682

   

$

256,436

 

    Celebrity, Lifestyle, Designer and
         Other Fragrances

 

275,979

     

319,962

     

499,064

     

556,024

 

Total

$

418,137

   

$

467,919

   

$

761,746

   

$

812,460

 

Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012.

          Net Sales.    Net sales decreased by 10.6%, or $49.8 million, for the three months ended December 31, 2013, compared to the three months ended December 31, 2012. Excluding the unfavorable impact of foreign currency, net sales decreased by 10.1%, or $47.4 million. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

          Segment Net Sales:

 

          North America

          Net sales decreased by 13.3%, or $41.4 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 13.1%, or $40.7 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $46.6 million due to lower net sales for a number of brands including Juicy Couture, Justin Bieber, Curve, Ed Hardy, Taylor Swift and Elizabeth Taylor. Net sales of Elizabeth Arden branded products decreased by $6.0 million, reflecting lower sales for fragrances and color cosmetic products. Net sales of distributed brands were $11.1 million higher than the prior year period, primarily due to sales of the One Direction Our Moment fragrance in the prestige channel. Our North America net sales results for the quarter ended December 31, 2013 were impacted by weaker than anticipated replenishment orders and holiday retail sales at a number of our non-prestige retail accounts as well as a higher volume of fragrance launch activity in the prior year.

          International

          Net sales decreased by 5.3%, or $8.4 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 4.3%, or $6.7 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $8.0 million primarily due to lower net sales of Britney Spears, Juicy Couture, Ed Hardy and Justin Bieber fragrances. Partially offsetting these decreases were higher sales of Nicki Minaj fragrances. Net sales of Elizabeth Arden branded products were relatively flat as higher sales of color cosmetic products were offset by slightly lower skin care and fragrance sales. Our International results were impacted by lower net sales of $12.4 million in Europe, partially offset by higher net sales of $5.9 million in the Asia Pacific region driven by the Greater China market.

          Product Category Net Sales:

          Elizabeth Arden Brand

          Net sales decreased by 3.9% or $5.8 million, primarily due to lower sales of fragrances. Excluding the unfavorable impact of foreign currency, net sales decreased by 3.6% or $5.3 million. Net sales of fragrances decreased by 9.8%, or $5.9 million primarily due to lower sales of Red Door fragrances, partially offset by net sales resulting from the current year launch of UNTOLD, and net sales of color cosmetic products decreased by 7.0% or $1.4 million. Net sales of skin care products increased 2.2%, or $1.5 million.

          Celebrity, Lifestyle, Designer and Other Fragrances

          Net sales decreased by 13.7% or $44.0 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 13.2% or $42.1 million. The decrease includes lower net sales for a number of brands including Juicy Couture, Justin Bieber, Ed Hardy, Taylor Swift, Curve, Elizabeth Taylor and Britney Spears. Sales of distributed brands were $11.1 million higher than the prior year period primarily due to sales of the One Direction Our Moment fragrance in the prestige channel in North America.

- 25 -


          Gross Margin.   For the three months ended December 31, 2013 and 2012, gross margins were 45.7% and 50.5%, respectively. Gross margin in the current year period was negatively impacted by $9.1 million, or 210 basis points, of product changeover costs associated with the Elizabeth Arden brand repositioning and transition costs related to restructuring activities. Gross margin in the prior year period was negatively impacted by $5.5 million, or 120 basis points, of inventory-related costs associated with the 2012 acquisitions and product changeover costs associated with the Elizabeth Arden brand repositioning. The current year gross margin was lower as a result of (i) higher returns and discounts and allowances in the current year, (ii) lower sales of higher margin fragrances due to a higher volume of launch activity in the prior year period, and (iii) a higher proportion of sales in the current year of distributed brands, which have lower gross margins.

          SG&A.   Selling, general and administrative expenses decreased by 21.0%, or $34.3 million, for the three months ended December 31, 2013, compared to the three months ended December 31, 2012. The decrease was due to lower marketing and sales expenses of $12.8 million and lower general and administrative expenses of $21.4 million. The decrease in marketing and sales expenses was primarily due to higher media and advertising spend in the prior year in support of fragrance launches, higher marketing expenses in the prior year related to the Elizabeth Arden repositioning and lower royalty expense in the current year period primarily due to lower net sales of licensed products. The decrease in general and administrative expenses was principally due to (i) 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 our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, and (ii) lower incentive compensation costs of approximately $5.8 million, partially offset by (iii) $0.4 million of restructuring expenses and $0.5 million of related transition expenses recorded in the current year. The three months ended December 31, 2013, also included $0.7 million of product changeover expenses related to the Elizabeth Arden brand repositioning as compared to $0.3 million in the prior year period. For the three months ended December 31, 2013 and 2012, total share-based compensation costs charged against income for all stock plans was $1.6 million and $1.4 million, respectively.

          Segment Profit.

          North America

          Segment profit decreased 36.6%, or $19.6 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower selling, general and administrative expenses.

          International

          Segment profit decreased 36.9%, or $8.7 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower selling, general and administrative expenses.

          Depreciation and Amortization Expense.    Depreciation and amortization expense increased by 18.8% or $1.8 million, for the three months ended December 31, 2013, compared to the three months ended December 31, 2012, primarily due to higher depreciation expense for computer hardware and software, and in-store counters and displays primarily related to the Elizabeth Arden brand repositioning.

          Interest Expense, Net.    Interest expense, net of interest income, was $0.7 million lower for the three months ended December 31, 2013, compared to the three months ended December 31, 2012. The decrease was primarily due to lower average borrowings under our second lien credit facility and the reversal of interest accreted on the potential earnout payments to Give Back Brands LLC.

          Provision for Income Taxes.    The pre-tax income from our domestic and international operations consisted of the following for the three months ended December 31, 2013 and 2012:

(Amounts in thousands)

Three Months Ended

 

December 31,
2013

   

December 31,
2012

 

Domestic pre-tax income

$

25,480

$

30,260

Foreign pre-tax income

 

19,560

     

27,157

 

Total income before income taxes

$

45,040

$

57,417

Effective tax rate

23.1

%

22.0

%

- 26 -


          For interim reporting, the effective tax rate is based on expected full year reported earnings and considers earnings contribution by tax jurisdiction. As facts and circumstances change during the fiscal year, which could impact the full year expected earnings or the expected earnings contribution by tax jurisdiction, the effective tax rate is adjusted in the period in which such changes become known or are enacted into law. Additionally, discrete items that could impact the effective tax rate are reported in the interim period incurred.

          The effective tax rate in the current year period was higher as compared to the prior year period due to a shift in the ratio of earnings contributions between jurisdictions. The effective tax rate for the full fiscal year ended June 30, 2013 was 14.6%.

          A substantial portion of our consolidated taxable income is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income. As a result, any material shift in the relative proportion of our consolidated taxable income that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate. We currently expect our reported effective tax rate for the year ending June 30, 2014 to be approximately 29%.

          Net Income Attributable to Elizabeth Arden Shareholders.    Net income attributable to Elizabeth Arden shareholders for the three months ended December 31, 2013, was $35.0 million, compared to $44.8 million for the three months ended December 31, 2012. The decrease in net income attributable to Elizabeth Arden shareholders was primarily due to lower net sales and gross profit, higher depreciation and amortization expense and a higher effective tax rate in the current year period, partially offset by lower selling, general and administrative expenses.

          EBITDA.    EBITDA (net income attributable to Elizabeth Arden shareholders plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense, plus net income or (net loss) attributable to noncontrolling interest) of $63.9 million for the three months ended December 31, 2013, represents a decrease of $10.8 million compared to the prior year due to the lower gross profit in the current period. EBITDA for the three months ended December 31, 2013, includes (i) 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 our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, (ii) $9.3 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand, and (ii) $0.4 million of restructuring expenses and $1.0 million of related transition costs and expenses. EBITDA for the three months ended December 31, 2012 was $74.7 million and includes (i) $1.9 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions and other transition costs, and (ii) $3.9 million of non-recurring product changeover costs and expenses related to the Elizabeth Arden brand repositioning.

          EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Elizabeth Arden shareholders (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance, or to net cash provided by operating, investing or financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. This information has been disclosed here to permit a more complete comparative analysis of our operating performance relative to other companies and of our debt servicing ability. EBITDA may not, however, be comparable in all instances to other similar types of measures.

          In addition, EBITDA has limitations as an analytical tool, including the fact that:

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

it does not reflect any cash income taxes that we may be required to pay; and

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

          The following is a reconciliation of net income attributable to Elizabeth Arden shareholders, as determined in accordance with generally accepted accounting principles, to EBITDA:

- 27 -


(Amounts in thousands)

Three Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Net income attributable to Elizabeth Arden shareholders

$

34,953

   

$

44,809

 

Plus:

             

   Provision for income taxes

 

10,384

     

12,608

 

   Interest expense, net

 

5,734

     

6,424

 

   Depreciation in cost of sales

 

1,987

     

1,487

 

   Depreciation and amortization

 

11,137

     

9,372

 

   Net loss applicable to noncontrolling interest (See Note 5 to
      Notes to Unaudited Consolidated Financial Statements)

 

(297

)

   

--

 

          EBITDA

$

63,898

   

$

74,700

 

Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012.

          Net Sales.    Net sales decreased by 6.2%, or $50.7 million, for the six months ended December 31, 2013, compared to the six months ended December 31, 2012. Excluding the unfavorable impact of foreign currency, net sales decreased by 5.6%, or $45.1 million. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

          Segment Net Sales:

 

          North America

          Net sales decreased by 8.9%, or $48.3 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 8.6%, or $46.6 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $77.3 million due to lower net sales for a number of brands including Taylor Swift, Ed Hardy, Juicy Couture, Curve, Justin Bieber, Elizabeth Taylor and Britney Spears. Net sales of Elizabeth Arden branded products decreased by $1.4 million, reflecting lower sales for fragrances partially offset by higher sales of skin care products. Net sales of distributed brands were $30.4 million higher than the prior year period, primarily due to sales of the One Direction Our Moment fragrance in the prestige channel. Our North America net sales results for the six months ended December 31, 2013 were impacted by weaker than anticipated replenishment orders and holiday retail sales at a number of our non-prestige retail accounts as well as a higher volume of fragrance launch activity in the prior year.

          International

          Net sales decreased by 0.9%, or $2.4 million. Excluding the unfavorable impact of foreign currency, net sales increased by 0.5%, or $1.4 million. Net sales of licensed and non-Elizabeth Arden branded, owned products decreased an aggregate of $9.5 million primarily due to lower net sales for primarily Juicy Couture, Britney Spears, Giorgio, Ed Hardy and Taylor Swift fragrances. Partially offsetting these decreases were higher sales of Nicki Minaj fragrances and Justin Bieber fragrances due to the launch of Justin Bieber The Key. Net sales of Elizabeth Arden branded products increased by $7.7 million, due to higher sales of fragrance and skin care products. Our International results were impacted by lower net sales of $7.4 million in Europe and $4.1 in our travel retail and distributor markets, partially offset by higher net sales of $9.1 million in the Asia Pacific region driven by the Greater China market.

          Product Category Net Sales:

          Elizabeth Arden Brand

          Net sales increased by 2.4% or $6.2 million, due to higher sales of skin care products. Excluding the unfavorable impact of foreign currency, net sales increased by 3.1% or $8.1 million. Net sales of both color cosmetic products and fragrances were relatively flat.

          Celebrity, Lifestyle, Designer and Other Fragrances

          Net sales decreased by 10.2% or $57.0 million. Excluding the unfavorable impact of foreign currency, net sales decreased by 9.6% or $53.2 million. The decrease includes lower net sales for a number of brands including Taylor Swift, Juicy Couture, Ed Hardy, Curve, Elizabeth Taylor, Britney Spears and Justin Bieber, which were slightly offset by higher net sales of Nicki Minaj fragrances due to the launch of Nicki Minaj Minajesty. Sales of distributed brands were $30.4 million higher than the prior year period primarily due to sales of the One Direction Our Moment fragrance in the prestige channel in North America.

- 28 -


          Gross Margin.   For the six months ended December 31, 2013 and 2012, gross margins were 44.5% and 47.2%, respectively. Gross margin in the current year period was negatively impacted by $12.9 million, or 170 basis points, of product changeover costs associated with the Elizabeth Arden brand repositioning and transition costs related to restructuring activities. Gross margin in the prior year period was negatively impacted by $20.2 million, or 250 basis points, of inventory-related costs associated with the 2012 acquisitions and product changeover costs associated with the Elizabeth Arden brand repositioning. The current year gross margin was lower as a result of (i) higher returns and discounts and allowances in the current year, (ii) lower sales of higher margin fragrances due to a higher volume of launch activity in the prior year period, and (iii) a higher proportion of sales in the current year of distributed brands, which have lower gross margins.

          SG&A.   Selling, general and administrative expenses decreased by 11.7%, or $34.3 million, for the six months ended December 31, 2013, compared to the six months ended December 31, 2012. The decrease was due to lower marketing and sales expenses of $16.9 million and lower higher general and administrative expenses of $17.4 million. The decrease in marketing and sales expenses was primarily due to higher media and advertising spend in the prior year in support of fragrance launches, higher marketing expenses in the prior year related to the Elizabeth Arden repositioning and lower royalty expense in the current year period due to lower net sales of licensed products. The decrease in general and administrative expenses was principally due to (i) 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 our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, (ii) lower incentive compensation costs of approximately $4.7 million, partially offset by (iii) $2.2 million of restructuring expenses and $1.1 million of related transition expenses recorded in the current year. The six months ended December 31, 2013, also included $1.1 million of product changeover expenses related to the Elizabeth Arden brand repositioning. The six months ended December 31, 2012 included $0.3 million of transition costs for the 2012 acquisitions and $0.4 million of product changeover expenses related to the Elizabeth Arden brand repositioning. For the six months ended December 31, 2013 and 2012, total share-based compensation costs charged against income for all stock plans was $3.2 million and $2.8 million, respectively.

          Segment Profit.

          North America

           Segment profit decreased 30.4%, or $27.5 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower selling, general and administrative expenses.

          International

           Segment profit decreased 62.3%, or $11.4 million, as compared to the prior year. The decrease in segment profit was due to lower sales and gross profit, partially offset by lower selling, general and administrative expenses.

          Depreciation and Amortization Expense.    Depreciation and amortization expense increased by 18.0%, or $3.3 million, for the six months ended December 31, 2013, compared to the six months ended December 31, 2012, primarily due to higher depreciation expense for computer hardware and software and in-store counters and displays primarily related to the Elizabeth Arden brand repositioning.

          Interest Expense, Net.    Interest expense, net of interest income, was $0.9 million lower for the six months ended December 31, 2013, compared to the six months ended December 31, 2012. The decrease was primarily due to lower average borrowings under our second lien credit facility and the reversal of interest accreted on the potential earnouts payable to Give Back Brands LLC.

          Provision for Income Taxes.    The pre-tax income from our domestic and international operations consisted of the following for the six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Six Months Ended

 

December 31,
2013

   

December 31,
2012

 

Domestic pre-tax income

$

15,986

   

$

24,114

 

Foreign pre-tax income

 

31,056

     

35,968

 

Total income before income taxes

$

47,042

   

$

60,082

 

Effective tax rate

23.0

%

21.8

%

- 29 -


          For interim reporting, the effective tax rate is based on expected full year reported earnings and considers earnings contribution by tax jurisdiction. As facts and circumstances change during the fiscal year, which could impact the full year expected earnings or the expected earnings contribution by tax jurisdiction, the effective tax rate is adjusted in the period in which such changes become known or are enacted into law. Additionally, discrete items that could impact the effective tax rate are reported in the interim period incurred.

          The effective tax rate in the current year period was higher as compared to the prior year period due to a shift in the ratio of earnings contributions between jurisdictions. The effective tax rate for the full fiscal year ended June 30, 2013 was 14.6%.

          A substantial portion of our consolidated taxable income is typically generated in Switzerland, where our international operations are headquartered and managed, and is taxed at a significantly lower effective tax rate than our domestic taxable income. As a result, any material shift in the relative proportion of our consolidated taxable income that is generated between the United States and Switzerland could have a material effect on our consolidated effective tax rate. We currently expect our reported effective tax rate for the year ending June 30, 2014 to be approximately 29%.

          Net Income Attributable to Elizabeth Arden Shareholders.    Net income attributable to Elizabeth Arden shareholders for the six months ended December 31, 2013, was $36.7 million, compared to $47.0 million for the six months ended December 31, 2012. The decrease in net income attributable to Elizabeth Arden shareholders was primarily due to lower net sales and gross profit, higher depreciation and amortization expense and a higher effective tax rate in the current year period, partially offset by lower selling, general and administrative expenses.

          EBITDA.    EBITDA (net income attributable to Elizabeth Arden shareholders plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense, plus net income or (net loss) attributable to noncontrolling interest) of $84.5 million for the six months ended December 31, 2013, represents a decrease of $9.7 million compared to the prior year due to the lower gross profit in the current period. EBITDA for the six months ended December 31, 2013, includes (i) a credit of $17.2 for the complete reversal of the remaining balance of the contingent liability for potential payments to Give Back Brands LLC based on our determination that it is not probable that the performance targets for the fiscal years 2014 and 2015 will be met, (ii) $13.5 million of non-recurring product changeover costs and expenses related to the repositioning of the Elizabeth Arden brand, and (iii) $2.2 million of restructuring expenses and $1.6 million of related transition costs and expenses. EBITDA for the six months ended December 31, 2012, was $94.2 million and includes $13.2 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the 2012 acquisitions of and other transition costs, (ii) $0.3 million in transition expenses recorded in selling, general and administrative expenses associated with such acquisitions, and (iii) $7.4 million of non-recurring product changeover costs and expenses related to the Elizabeth Arden brand repositioning.

          EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Elizabeth Arden shareholders (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance, or to net cash provided by operating, investing or financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. This information has been disclosed here to permit a more complete comparative analysis of our operating performance relative to other companies and of our debt servicing ability. EBITDA may not, however, be comparable in all instances to other similar types of measures.

          In addition, EBITDA has limitations as an analytical tool, including the fact that:

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

it does not reflect any cash income taxes that we may be required to pay; and

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

          The following is a reconciliation of net income attributable to Elizabeth Arden shareholders, as determined in accordance with generally accepted accounting principles, to EBITDA:

- 30 -


(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Net income attributable to Elizabeth Arden shareholders

$

36,650

   

$

46,993

 

Plus:

             

   Provision for income taxes

 

10,798

     

13,089

 

   Interest expense, net

 

11,766

     

12,622

 

   Depreciation in cost of sales

 

3,817

     

3,018

 

   Depreciation and amortization

 

21,836

     

18,501

 

   Net loss applicable to noncontrolling interest (See Note 5 to
      Notes to Unaudited Consolidated Financial Statements)

 

(406

)

   

--

 

          EBITDA

$

84,461

   

$

94,223

 

          The following is a reconciliation of net cash flow used in operating activities, as determined in accordance with generally accepted accounting principles, to EBITDA:

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Net cash provided by (used in) operating activities

$

15,233

   

$

(10,888

)

Changes in assets and liabilities, net of acquisitions

 

56,832

     

92,306

 

Interest expense, net

 

11,766

     

12,622

 

Amortization of senior note offering and credit facility costs

 

(685

)

   

(682

)

Provision for income taxes

 

10,798

     

13,089

 

Deferred income taxes

 

(6,258

)

   

(9,376

)

Amortization of share-based awards

 

(3,225

)

   

(2,848

)

          EBITDA

$

84,461

   

$

94,223

 

Liquidity and Capital Resources

          The following chart summarizes our cash flows (outflows) from operating, investing and financing activities for the six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Net cash provided by (used in) operating activities

$

15,233

   

$

(10,888

)

Net cash used in investing activities

 

(28,248

)

   

(27,072

)

Net cash (used in) provided by financing activities

 

(4,712

)

   

24,816

 

Net decrease in cash and cash equivalents

 

(17,780

)

   

(13,077

)

Operating Activities

          Cash provided by (used in) our operating activities is driven by net income adjusted for non-cash expenses and changes in working capital. The following chart illustrates our net cash provided by (used in) operating activities for the six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Net income

$

36,244

   

$

46,993

 

Net adjustments to reconcile net income to net cash (used in)
   provided by operating activities

 

35,821

     

34,425

 

Net change in assets and liabilities, net of acquisitions
   ("working capital changes")

 

(56,832

)

   

(92,306

)

Net cash provided by (used in) operating activities

$

15,233

   

$

(10,888

)

- 31 -


          For the six months ended December 31, 2013, net cash provided by operating activities was $15.2 million, as compared to net cash used in operating activities of $10.9 million for the six months ended December 31, 2012. Net income decreased by $10.7 million, and net adjustments to reconcile net income to cash used in operating activities increased by $1.4 million as compared to the prior year. Working capital changes utilized cash of $57.3 million in the current year period as compared to $92.3 million in the prior year. Cash utilized by working capital changes in the current period decreased primarily due to lower accounts receivable balances as a result of lower sales in the current year and higher accounts payable, primarily due to timing of payments to vendors.

Investing Activities

          The following chart illustrates our net cash used in investing activities for the six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Additions to property and equipment

$

(25,822

)

 

$

(19,004

)

Acquisition of businesses, intangibles and other assets

 

(3,000

)

   

(8,068

)

Cash received from consolidation of variable interest entity

 

574

     

--

 

Net cash used in investing activities

$

(28,248

)

 

$

(27,072

)

          For the six months ended December 31, 2013, net cash used in investing activities of $28.2 million was composed of (i) $25.8 million of capital expenditures, (ii) $3.0 million associated with the purchase of an equity interest in a company that is developing a beauty device, and (iii) $0.6 million of cash received in connection with the investment in US Cosmeceutechs, LLC and the requirement to consolidate its financial statements. For the six months ended December 31, 2012, net cash used in investing activities of $27.1 million was composed of (i) $19.0 million of capital expenditures, (ii) $7.6 million associated with a minority investment in Elizabeth Arden Salon Holdings, LLC, an unrelated entity whose subsidiaries operate the Red Door beauty salons and spas, and (iii) $0.5 million for the acquisition of a cosmetic formula. The increase in capital expenditures for the six months ended December 31, 2013 is primarily due to (i) expenditures incurred for in-store counters and displays related to the Elizabeth Arden brand repositioning, (ii) leasehold improvements associated with the opening of the Elizabeth Arden Red Door Spa at our New York office location and (iii) computer hardware and software related to the last phase our Oracle global enterprise system.

Financing Activities

          The following chart illustrates our net cash (used in) provided by financing activities for the six months ended December 31, 2013 and 2012:

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2013

   

December 31,
2012

 

Proceeds from short-term debt

$

7,750

   

$

14,300

 

Proceeds from the exercise of stock options

 

1,758

     

4,514

 

Repurchase of common stock

 

(5,393

)

   

--

 

Payments to noncontrolling interests

 

(4,979

)

   

--

 

Payments of contingent consideration related to acquisition

 

(4,914

)

   

--

 

All other financing activities

 

1,066

     

6,002

 

Net cash (used in) provided by financing activities

$

(4,712

)

 

$

24,816

 

          For the six months ended December 31, 2013, net cash used in financing activities was $4.7 million, as compared to cash provided by financing activities of $24.8 million for the six months ended December 31, 2012. During the six months ended December 31, 2013, borrowings under our credit facility increased by $10.0 million from a balance of $88.0 million at June 30, 2013, and $2.2 million of short term debt was repaid by US Cosmeceutechs, LLC following our investment. During the six months ended December 31, 2012, borrowings under our credit facility increased by $14.3 million from a balance of $89.2 million at June 30, 2012. Additionally, during the six months ended December 31, 2012, we borrowed $30 million under our second lien term loan and all of such proceeds were used to reduce outstanding borrowings under our credit facility. (See "Future Liquidity and Capital Needs" below for further information on our credit facility and second lien facility). In addition, during the current year period, (i) repurchases of common stock totaled $5.4 million, (ii) payments of contingent consideration related to the acquisition of global licenses and certain

- 32 -


other assets of Give Back Brands LLC totaled $4.9 million, and (iii) payments related to the noncontrolling interests in US Cosmeceutechs, LLC totaled $5.0 million. Proceeds from the exercise of stock options were $1.8 million in the current year period as compared to $4.5 million in the prior year period.

          Interest paid during the six months ended December 31, 2013, included $9.2 million of interest payments on the 7 3/8% senior notes due 2021, $2.2 million of interest paid on the borrowings under our credit facility and $0.1 million of interest paid on our second lien term loan. Interest paid during the six months ended December 31, 2012, included $9.2 million of interest payments on the 7 3/8% senior notes due 2021, $2.1 million of interest paid on the borrowings under our credit facility and $0.6 million of interest paid on our second lien term loan.

          At December 31, 2013, we had approximately $43.9 million of cash, of which $34.5 million was held outside of the United States, primarily in South Africa, the United Kingdom, Canada, Australia and Switzerland. The cash held outside the U.S. was needed to meet local working capital requirements and therefore considered permanently reinvested in the applicable local subsidiary.

        Future Liquidity and Capital Needs.    Our principal future uses of funds are for working capital requirements, including brand and product development and marketing expenses, new product launches, additional brand acquisitions or product licensing and distribution arrangements, capital expenditures and debt service. In addition, we may use funds to repurchase material amounts of our common stock and senior notes through open market purchases, privately negotiated transactions or otherwise, depending upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We have historically financed our working capital needs primarily through internally generated funds, our credit facility and external financing. We collect cash from our customers based on our sales to them and their respective payment terms.

          We have a $300 million revolving bank 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. See Note 9 to the Unaudited Notes to Consolidated Financial Statements. Under the terms of the credit facility, we may, at any time, increase the size of the credit facility up to $375 million without entering into a formal amendment requiring the consent of all of the banks, subject to our satisfaction of certain conditions. The credit facility expires in January 2016.

          The credit facility is guaranteed by all of our U.S. subsidiaries and is collateralized by a first priority lien on all of our U.S. accounts receivable and inventory. Borrowings under the credit facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of our inventory, as determined pursuant to the terms of the credit facility; provided, however, that from August 15 to October 31 of each year, our borrowing base may be temporarily increased by up to $25 million.

          The credit facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declines to less than $25 million ($35 million from September 1 through January 31). Our average borrowing base capacity for the quarter ended December 31, 2013 did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended December 31, 2013. We were in compliance with all applicable covenants under the credit facility for the quarter ended December 31, 2013.

          Under the terms of the credit facility, we may pay dividends or repurchase common stock if we maintain borrowing base capacity of at least $25 million from February 1 to August 31, and at least $35 million from September 1 to January 31, after making the applicable payment. The credit facility restricts us from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

          Borrowings under the credit portion of the credit facility bear interest at a floating rate based on an "Applicable Margin" which is determined by reference to a debt service coverage ratio. At our option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate (which is comparable to prime rates). The Applicable Margin ranges from 1.75% to 2.50% for LIBOR loans and from 0.25% to 1.0% for base rate loans, except that the Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in our borrowing base is in effect, is 1.0% higher. We are required to pay an unused commitment fee ranging from 0.375% to 0.50% based on the quarterly average unused portion of the credit facility. The interest rates payable by us on our 7 3/8% senior notes and on borrowings under our revolving credit facility and second lien facility are not impacted by credit rating agency actions.

          At December 31, 2013, the Applicable Margin was 1.75% for LIBOR loans and 0.25% for base rate loans. The commitment fee on the unused portion of the credit facility at December 31, 2013 was 0.50%. For the six months ended December 31, 2013 and 2012, the weighted average annual interest rate on borrowings under the credit facility was 2.1% and 2.0%, respectively.

- 33 -


          We have a second lien facility agreement with JPMorgan Chase Bank, N.A. providing us the ability to borrow up to $30 million on a revolving basis. The second lien facility matures on July 2, 2014. The second lien facility is collateralized by a second priority lien on all of our U.S. accounts receivable and inventories and the interest on borrowings charged under the second lien facility is either (i) LIBOR plus an applicable margin of 3.25% or (ii) the base rate specified in the second lien facility (which is comparable to prime rates) plus a margin of 1.75%. The unused commitment fee applicable to the second lien facility ranges from 0.25% to 0.375% based on the quarterly average unused portion of the second lien facility. To the extent we borrow amounts under the second lien facility, we have the option to prepay all or a portion of such borrowings, provided the borrowing base capacity under the credit facility is in excess of $35 million after giving effect to the applicable prepayment each day for the 30 day period ending on the date of the prepayment.

          At December 31, 2013, we had $98 million in borrowings and $3.2 million in letters of credit outstanding under the credit facility and no borrowings under our second lien facility. At December 31, 2013, based on eligible accounts receivable and inventory available as collateral, an additional $153.7 million in the aggregate could be borrowed under our credit facility and our second lien facility. The borrowing base capacity under the credit facility typically declines in the second half of our fiscal year as our higher accounts receivable balances resulting from holiday season sales are likely to decline due to cash collections.

          On January 27, 2014, we announced that we intend to seek amendments to our credit facility to extend the maturity of the credit facility through the date which is five years from the closing date of such amendment, amend certain covenants to facilitate the incurrence of additional permitted indebtedness, decrease the interest rate on outstanding borrowings and decrease the unused commitment fees. We also intend to seek an amendment to our second lien facility to increase the available borrowings thereunder from $30 million to $40 million and extend its maturity through the date which is three years from the closing date of such amendment. The proposed amendments would require the consent of the requisite lenders thereunder. There is no assurance that we will receive such consents, or as to the timing thereof, or that the proposed amendments will not be modified in connection with seeking such consents.

          At December 31, 2013, we had outstanding $250 million aggregate principal amount of 7 3/8% senior notes due March 2021. 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 our 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 credit facility and the second lien facility to the extent of the collateral securing the credit facility and second lien facility. The indenture applicable to the 7 3/8% senior notes generally permits us (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 our common stock or redeem subordinated indebtedness. The indenture generally limits our 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 us to repurchase their notes in the event of a change of control involving us (as defined in the indenture). The 7 3/8% senior notes initially will not be guaranteed by any of our subsidiaries but could become guaranteed in the future by any domestic subsidiary of ours that guarantees or incurs certain indebtedness in excess of $10 million.

          On January 30, 2014, we consummated the private placement pursuant to Rule 144A under the Securities Act of 1933, as amended, of an additional $100 million aggregate principal amount of 7 3/8% senior notes issued under a supplement to the indenture. The original 7 3/8% senior notes issued on January 21, 2011 and the additional 7 3/8% senior notes issued on January 30, 2014 will be treated as a single series under the indenture. The additional 7 3/8% senior notes will have the same terms as the original 7 3/8% senior notes and will be subject to a registration rights agreement requiring us to file one or more registration statements as part of offers to exchange the additional 7 3/8% senior notes for registered notes having identical terms in all material respects. In connection with the offering of the additional 7 3/8% senior notes, the credit facility and the second lien facility were each amended to permit the issuance of additional 7 3/8% senior notes under the indenture.

          The additional 7 3/8% senior notes were sold at 106.75% of their principal amount, and the premium received will be amortized over the remaining life of the 7 3/8% senior notes. The net proceeds were used to repay a portion of our outstanding indebtedness under the credit facility. In addition, as part of the issuance of the additional 7 3/8% senior notes, we expect to incur and capitalize approximately $2 million of related debt financing costs on the consolidated balance sheet, which will be amortized over the remaining life of the 7 3/8% senior notes.

          Based upon our internal projections, we believe that existing cash and cash equivalents, internally generated funds and borrowings under our credit facility and second lien facility will be sufficient to cover debt service, working capital requirements and capital expenditures for the next twelve months, other than additional working capital requirements that may result from further expansion of our operations through acquisitions of additional brands or licensing or distribution arrangements. A deterioration in the economic and retail environment, however, could cause us to fail to satisfy the financial maintenance covenant under our credit facility that applies only in the event we do not have the requisite average borrowing base capacity as set forth under the credit facility. In such

- 34 -


an event, we would not be allowed to borrow under the credit facility or second lien facility and may not have access to the capital necessary for our business. In addition, a default under our credit facility or second lien facility that causes acceleration of the debt under either facility could trigger a default under our outstanding 7 3/8% senior notes. In the event we are not able to borrow under either borrowing facility, we would be required to develop an alternative source of liquidity. There is no assurance that we could obtain replacement financing or what the terms of such financing, if available, would be.

          We have discussions from time to time with manufacturers and owners of prestige fragrance brands regarding our possible acquisition of additional trademark, exclusive licensing and/or distribution rights. We currently have no material agreements or commitments with respect to any such acquisition, although we periodically execute routine agreements to maintain the confidentiality of information obtained during the course of discussions with such manufacturers and brand owners. There is no assurance that we will be able to negotiate successfully for any such future acquisitions or that we will be able to obtain acquisition financing or additional working capital financing on satisfactory terms for further expansion of our operations.

          Repurchases of Common Stock.    We have an existing stock repurchase program pursuant to which our board of directors has authorized the repurchase of $120 million of common stock and that is currently scheduled to expire on November 30, 2014.

          As of December 31, 2013, we had repurchased 4,517,309 shares of common stock on the open market under the stock repurchase program since its inception in November 2005, at an average price of $18.88 per share and at a cost of approximately $85.3 million, including sales commissions, leaving approximately $34.7 million available for additional repurchases under the program. For the six months ended December 31, 2013, we repurchased 155,214 shares of common stock on the open market under the stock repurchase program at an average price of $34.75 per share and at a cost of $5.4 million, including sales commissions. The acquisition of these shares by us was accounted for under the treasury method.

 

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses and/or cost savings, interest rates, foreign exchange rates, the outcome of contingencies such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A -- "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013:

*

factors affecting our relationships with our customers or our customers' businesses, including the absence of contracts with customers, our customers' financial condition, and changes in the retail, fragrance and cosmetic industries, such as the consolidation of retailers and the associated closing of retail doors as well as retailer inventory control practices, including, but not limited to, levels of inventory carried at point of sale and practices used to control inventory shrinkage;

*

risks of international operations, including foreign currency fluctuations, hedging activities, economic and political consequences of terrorist attacks, disruptions in travel, unfavorable changes in U.S. or international laws or regulations, diseases and pandemics, and political instability in certain regions of the world;

*

our reliance on license agreements with third parties for the rights to sell most of our prestige fragrance brands;

*

our reliance on third-party manufacturers for substantially all of our owned and licensed products and our absence of contracts with suppliers of distributed brands and components for manufacturing of owned and licensed brands;

*

delays in shipments, inventory shortages and higher supply chain costs due to the loss of or disruption in our distribution facilities or at key third party manufacturing or fulfillment facilities that manufacture or provide logistic services for our products;

*

our ability to respond in a timely manner to changing consumer preferences and purchasing patterns and other international and domestic conditions and events that impact retailer and/or consumer confidence and demand, such as domestic or international recessions or economic uncertainty;

*

our ability to protect our intellectual property rights;

*

the success, or changes in the timing or scope, of our new product launches, advertising and merchandising programs;

*

our ability to successfully manage our inventories;

*

the quality, safety and efficacy of our products;

- 35 -


*

the impact of competitive products and pricing;

*

our ability to (i) implement our growth strategy and acquire or license additional brands or secure additional distribution arrangements, (ii) successfully and cost-effectively integrate acquired businesses or new brands, and (iii) finance our growth strategy and our working capital requirements;

*

our level of indebtedness, our ability to realize sufficient cash flows from operations to meet our debt service obligations and working capital requirements, and restrictive covenants in our revolving credit facility, second lien facility and the indenture for our 7 3/8% senior notes;

*

changes in product mix to less profitable products;

*

the retention and availability of key personnel;

*

changes in the legal, regulatory and political environment that impact, or will impact, our business, including changes to customs or trade regulations, laws or regulations relating to ingredients or other chemicals or raw materials contained in products or packaging, or accounting standards or critical accounting estimates;

*

the success of our global Elizabeth Arden brand repositioning efforts;

*

the impact of tax audits, including the ultimate outcome of the pending Internal Revenue Service examination of our U.S. federal tax returns for the fiscal years ended June 30, 2008 and June 30, 2009, changes in tax laws or tax rates, and our ability to utilize our deferred tax assets;

*

our ability to effectively implement, manage and maintain our global information systems and maintain the security of our confidential data and our employees' and customers' personal information, including our ability to successfully and cost-effectively implement the last phase of our Oracle global enterprise system;

*

our reliance on third parties for certain outsourced business services, including information technology operations, logistics management and employee benefit plan administration;

*

the potential for significant impairment charges relating to our trademarks, goodwill, investments in other entities or other intangible assets that could result from a number of factors, including such entities' business performance or downward pressure on our stock price; and

*

other unanticipated risks and uncertainties.

          We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

          As of December 31, 2013, we had $98 million in borrowings and $3.2 million in letters of credit outstanding under our revolving credit facility and no outstanding balances under our second lien facility. Borrowings under our revolving credit facility are seasonal, with peak borrowings typically in the months of September, October and November. Borrowings under the credit facility and second lien facility are subject to variable rates and, accordingly, our earnings and cash flow will be affected by changes in interest rates. Based upon our average borrowings under our revolving credit facility and second lien facility during the six months ended December 31, 2013, and assuming there had been a two percentage point (200 basis point) change in the average interest rate for these borrowings, it is estimated that our interest expense for the six months ended December 31, 2013 would have increased or decreased by approximately $1.8 million. See Note 9 to the Notes to Unaudited Consolidated Financial Statements.

Foreign Currency Risk

          We sell our products in approximately 120 countries around the world. During the fiscal year ended June 30, 2013, we derived approximately 41% of our net sales from our international operations. We conduct our international operations in a variety of different countries and derive our sales in various currencies including the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar, as well as the U.S. dollar. Most of our skin care and cosmetic products are produced in third-party manufacturing facilities located in the U.S. Our operations may be subject to volatility because of currency changes, inflation and changes in political and economic conditions in the countries in which we operate. With respect to international operations, our sales, cost of goods sold and expenses are typically denominated in a combination of local currency and the U.S. dollar. Our results of operations are reported in

- 36 -


U.S. dollars. Fluctuations in currency rates can affect our reported sales, margins, operating costs and the anticipated settlement of our foreign denominated receivables and payables. A weakening of the foreign currencies in which we generate sales relative to the currencies in which our costs are denominated, which is primarily the U.S. dollar, may adversely affect our ability to meet our obligations and could adversely affect our business, prospects, results of operations, financial condition or cash flows. Our competitors may or may not be subject to the same fluctuations in currency rates, and our competitive position could be affected by these changes.

          As of December 31, 2013, we had notional amounts of 26.5 million British pounds and 22.8 million Euros under open foreign currency contracts that expire between January 31, 2014 and May 31, 2015 to reduce the exposure of our foreign subsidiary revenues to fluctuations in currency rates. As of December 31, 2013, we had notional amounts under foreign currency contracts of (i) 2.9 million Canadian dollars and 11.8 million Australian dollars used to hedge forecasted cost of sales, and (ii) 6.0 million Swiss francs to hedge forecasted operating costs that expire between January 31, 2014 and May 31, 2015. We have designated each qualifying foreign currency contract as a cash flow hedge. The gains and losses of these contracts will only be recognized in earnings in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. The realized loss, net of taxes, recognized during the three and six months ended December 31, 2013 from settled contracts was approximately $0.3 million and $0.2 million, respectively. At December 31, 2013, the unrealized loss, net of taxes, associated with these open contracts of approximately $1.3 million is included in accumulated other comprehensive income in our consolidated balance sheet. See Notes 2 and 13 to the Notes to Unaudited Consolidated Financial Statements.

          When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds, Canadian dollars and Australian dollars to reduce the exposure of our foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. As of December 31, 2013, there were no such foreign currency contracts outstanding. The realized loss, net of taxes, recognized during the three and six months ended December 31, 2013, from the settlement of these contracts was $0.1 million and $0.7 million, respectively.

          We do not utilize foreign exchange contracts for trading or speculative purposes. There can be no assurance that our hedging operations or other exchange rate practices, if any, will eliminate or substantially reduce risks associated with fluctuating exchange rates.

ITEM 4.    CONTROLS AND PROCEDURES

          E. Scott Beattie, our Chairman, President and Chief Executive Officer, and Marcey Becker, our Senior Vice President-Finance and Corporate Development, who is currently acting as our principal financial officer, have evaluated the effectiveness and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based upon such evaluation, they have concluded that, as of the Evaluation Date, our disclosure controls and procedures are functioning effectively.

          There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

[Remainder of page intentionally left blank.]

- 37 -


PART II.    OTHER INFORMATION

ITEM 1A.    RISK FACTORS

          Risk factors describing the major risks to our business can be found under Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. There has been no material change in our risk factors from those previously discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

          This table provides information with respect to our purchases of shares of our common stock, $.01 par value per share, during the three months ended December 31, 2013.

Issuer Purchases of Equity Securities

   

(a)

 

(b)

 

(c)

 

(d)

 

Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
Per Share

 

Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (1)

 

Approximate
Dollar Value
that May Yet
Be Purchased
Under the
Plans or
Programs (2)

 

October 1, 2013 through October 31, 2013

--

$

N/A

--

$

35,042,844

November 1, 2013 through November 30, 2013

--

$

N/A

--

$

35,042,844

December 1, 2013 through December 31, 2013

 

9,706

 

$

34.91

 

9,706

 

$

34,704,038

 

Totals

 

9,706

 

$

34.91

 

9,706

 

$

34,704,038

 

(1)   We have an existing stock repurchase program pursuant to which our board of directors has authorized the repurchase of $120 million of Common Stock and that is currently scheduled to expire on November 30, 2014. The stock repurchase program was first announced on November 3, 2005, the increase of the program to $120 million was announced on November 4, 2010, and the extension of the program to November 30, 2014 was announced on August 8, 2012. All shares purchased during the quarter ended December 31, 2013 as part of a publically announced plan were purchased on the open market.

(2)   Amounts reflect the remaining dollar value of shares that may be purchased under the stock repurchase program described above.

ITEM 5.    OTHER INFORMATION

          On February 3, 2014, our board of directors amended our existing Severance Policy, which was originally adopted in 2002, to bring the Severance Policy more in line with current general market and peer practices.  The amendments consisted of modifications to the calculation of benefits payable upon a termination following a change of control, providing that outstanding long-term cash and performance-based cash awards will be treated similarly to outstanding equity awards upon the occurrence of a change of control, and adopting a "modified cut-back" provision that could potentially reduce severance payments made upon termination following a change of control if such severance payments would result in an excise tax under certain circumstances pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended.  The above description of the amended Severance Policy does not purport to be complete and is qualified in its entirety by reference to the full text of the Severance Policy, as amended, which is filed as Exhibit 10.24 of this Form 10-Q and is incorporated by reference herein.

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ITEM 6.    EXHIBITS

Exhibit
Number

 

Description

3.1

 

Amended and Restated Articles of Incorporation of the Company dated November 17, 2005 (incorporated herein by reference to Exhibit 3.1 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2005 (Commission File No. 1-6370)).

3.2

 

Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.1 filed as part of the Company's Form 8-K dated October 27, 2009 (Commission File No. 1-6370)).

4.1

 

Indenture, dated as of January 21, 2011, respecting Elizabeth Arden, Inc.'s 7 3/8% Senior Notes due 2021, among Elizabeth Arden, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K dated January 21, 2011 (Commission File No. 1-6370)).

4.2

 

First Supplemental Indenture, dated as of January 30, 2014, to the Indenture dated January 21, 2011, respecting Elizabeth Arden, Inc.'s 7 3/8% Senior Notes due 2021, among Elizabeth Arden, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 filed as part of the Company's Form 8-K dated January 30, 2014) (Commission File No. 1-6370)).

4.3

 

Registration Rights Agreement, dated as of January 30, 2014, to the Indenture dated January 21, 2011, respecting the Company's 7 3/8% Senior Notes due 2021, among Elizabeth Arden, Inc. and by and among JPMorgan Securities LLC, as representative of the initial purchasers (incorporated herein by reference to Exhibit 4.2 filed as part of the Company's Form 8-K dated January 30, 2014) (Commission File No. 1-6370)).

10.1

 

Third Amended and Restated Credit Agreement, dated as of January 21, 2011, among Elizabeth Arden, Inc., as borrower, JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as collateral agent and syndication agent, Wells Fargo Capital Finance, LLC, HSBC Bank USA, N.A. and U.S. Bank National Association, as co-documentation agents, JPMorgan Chase Bank, N.A., and Bank of America, N.A. as joint lead arrangers, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 filed as part of the Company's Form 8-K dated January 21, 2011 (Commission File No. 1-6370)).

10.2

 

Amended and Restated Security Agreement dated as of January 29, 2001, made by the Company and certain of its subsidiaries in favor of Fleet National Bank (n/k/a Bank of America, N.A.), as administrative agent (incorporated herein by reference to Exhibit 4.5 filed as part of the Company's Form 8-K dated January 23, 2001 (Commission File No. 1-6370)).

10.3

 

Letter Agreement dated September 18, 2013, amending that certain Amended and Restated Security Agreement dated as of January 29, 2001, made by the Company and certain of its subsidiaries in favor of Fleet National Bank (n/k/a Bank of America, N.A.), as administrative agent (incorporated herein by reference to Exhibit 10.3 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2013 (Commission File No. 1-6370)).

10.4

 

First Amendment to Third Amended and Restated Credit Agreement dated as of June 12, 2012, among Elizabeth Arden, Inc., as Borrower, JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America, N.A., as the collateral agent, and the other banks party thereto (incorporated by reference to Exhibit 10.3 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

10.5*

 

Second Amendment to Third Amended and Restated Credit Agreement dated as of January 16, 2014 among Elizabeth Arden, Inc., as Borrower, JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America, N.A., as the collateral agent, and the other banks party thereto.

10.6

 

Credit Agreement (Second Lien) dated as of June 12, 2012, between Elizabeth Arden, Inc. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.4 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

10.7

 

First Amendment to Credit Agreement (Second Lien) dated as of February 11, 2013, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A. (incorporated by reference to Exhibit 10.5 filed as part of the Company's Form 10-Q for the quarter ended March 31, 2013 (Commission File No. 1-6370)).

10.8*

 

Second Amendment to Credit Agreement (Second Lien) dated as of January 16, 2014, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A.

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Exhibit
Number

 

Description

10.9

 

Amended and Restated Deed of Lease dated as of January 17, 2003, between the Company and Liberty Property Limited Partnership (incorporated herein by referenced to Exhibit 10.5 filed as a part of the Company's Form 10-Q for the quarter ended April 26, 2003 (Commission File No. 1-6370)).

10.10

 

Amendment to the Amended and Restated Deed of Lease dated as of June 30, 2012, between the Company and Liberty Property Limited Partnership (incorporated by reference to Exhibit 10.6 filed as part of the Company's Form 10-K for the year ended June 30, 2012 (Commission File No. 1-6370)).

10.11+

2004 Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.12 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2007 (Commission File No. 1-6370)).

10.12+

2004 Non-Employee Director Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.2 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2006 (Commission File No. 1-6370)).

10.13+

 

2000 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.14 filed as part of the Company's Form 10-Q for the quarter ended December 31, 2007 (Commission File No. 1-6370)).

10.14+

 

1995 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.4 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2006 (Commission File No. 1-6370)).

10.15+

 

2011 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.3 filed as part of the Company's Form S-8, Registration No. 333-177839, dated November 9, 2011 (Commission File No. 1-6370)).

10.16+

Non-Employee Director Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.6 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2006 (Commission File No. 1-6370)).

10.17 +

Form of Nonqualified Stock Option Agreement for stock option awards under the Company's Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.8 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.18 +

 

Form of Incentive Stock Option Agreement for stock option awards under the Company's 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.9 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.19 +

 

Form of Nonqualified Stock +Option Agreement for stock option awards under the Company's 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.10 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.20 +

 

Form of Stock Option Agreement for stock option awards under the Company's 2000 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.11 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.21 +

 

Form of Stock Option Agreement for stock option awards under the Company's 2004 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.14 filed as a part of the Company's Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 1-6370)).

10.22 +

 

Form of Stock Option Agreement for stock option awards under the Company's 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.19 filed as a part of the Company's Form 10-K for the year ended June 30, 2005 (Commission File No. 1-6370)).

10.23 +

 

Form of Restricted Stock Agreement for the restricted stock awards under the Company's 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.20 filed as a part of the Company's Form 10-K for the year ended June 30, 2005 (Commission File No. 1-6370)).

10.24 +*

 

Elizabeth Arden, Inc. Severance Policy, as amended and restated on February 3, 2014.

10.25 +

 

Form of Restricted Stock Agreement for service-based restricted stock awards (three-year vesting period) under the Company's 2000 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.32 filed as part of the Company's Form 10-K for the year ended June 30, 2007 (Commission File No. 1-6370)).

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Exhibit
Number

 

Description

10.26+

 

Form of Indemnification Agreement for Directors and Officers of Elizabeth Arden, Inc. (incorporated by reference to Exhibit 10.1 filed as part of the Company's Form 8-K dated August 11, 2009 (Commission File No. 1-6370)).

10.27 +

 

Elizabeth Arden Inc. 2010 Stock Award and Incentive Plan (incorporated by reference to Exhibit 4.3 filed as part of the Company's Form S-8, Registration No. 333-170287, filed on November 2, 2010 (Commission File No. 1-6370)).

10.28 +

 

Form of Restricted Stock Agreement for service-based stock awards under the Company's 2010 Stock Award and Incentive Plan (incorporated herein by reference to Exhibit 10.35 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2010 (Commission File No. 1-6370)).

10.29 +

 

Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Company's 2010 Stock Award and Incentive Plan (incorporated herein by reference to Exhibit 10.22 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2011 (Commission File No. 1-6370)).

10.30 +

 

Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Company's 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.26 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2012 (Commission File No. 1-6370)).

10.31 +

 

Letter Agreement between Elizabeth Arden, Inc. and Kathleen Widmer, dated March 19, 2013, regarding 2013 retention payment (incorporated herein by reference to Exhibit 10.28 filed as part of the Company's Form 10-Q for the quarter ended March 31, 2013 (Commission File No. 1-6370)).

10.32 +

 

Termination Agreement between Elizabeth Arden International S.a.r.l and Dirk Trappmann dated August 14, 2013 (incorporated herein by reference to Exhibit 10.30 filed as part of the Company's Form 10-Q for the quarter ended September 30, 2013 (Commission File No. 1-6370)).

31.1 *

 

Section 302 Certification of Chief Executive Officer.

31.2 *

 

Section 302 Certification of Principal Financial Officer.

32 *

 

Section 906 Certifications of the Chief Executive Officer and the Principal Financial Officer.

101.INS **

 

XBRL Instance Document.

101.SCH **

 

XBRL Taxonomy Extension Schema Document.

101.CAL **

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF **

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB **

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE **

 

XBRL Taxonomy Extension Presentation Linkbase Document.

+

Management contract or compensatory plan or arrangement.

*

Filed herewith.

**

Filed herewith as Exhibit 101 are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) unaudited condensed consolidated balance sheets as of December 31, 2013 and June 30, 2013, (ii) unaudited condensed consolidated statements of income for the three months and six months ended December 31, 2013 and 2012, respectively, (iii) unaudited condensed consolidated statements of comprehensive income for the three and six months ended December 31, 2013 and 2012, respectively, (iv) unaudited condensed consolidated statements of cash flows for the six months ended December 31, 2013 and 2012, respectively, and (v) the notes to the unaudited condensed consolidated financial statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

- 41 -


SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

ELIZABETH ARDEN, INC.

     

Date:  February 6, 2014

 

/s/ E. Scott Beattie

 

 

E. Scott Beattie

 

 

Chairman, President and Chief Executive Officer

   

(Principal Executive Officer)

     

Date:  February 6, 2014

 

/s/ David B. Rattner

 

 

David B. Rattner

 

 

Vice President and Controller

   

(Principal Accounting Officer)

     

 

- 42 -


EXHIBIT INDEX

Exhibit
Number

 

Description

10.5

Second Amendment to Third Amended and Restated Credit Agreement dated as of January 16, 2014 among Elizabeth Arden, Inc., as Borrower, JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America, N.A., as the collateral agent, and the other banks party thereto.

10.8

Second Amendment to Credit Agreement (Second Lien) dated as of January 16, 2014, between Elizabeth Arden, Inc. and JPMorgan Chase Bank N.A.

10.24

 

Elizabeth Arden, Inc. Severance Policy, as amended and restated on February 3, 2014.

31.1

Section 302 Certification of Chief Executive Officer.

31.2

Section 302 Certification of Principal Financial Officer.

32

Section 906 Certifications of the Chief Executive Officer and the Principal Financial Officer.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

- 43 -