SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Feb. 28, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

(a)  General

When used in these notes, the terms “Helen of Troy”, “the Company”, “we”, “our”, or “us” means Helen of Troy Limited, a Bermuda company, and its subsidiaries.  We refer to the Company’s common shares, par value $0.10 per share, as “common stock.” References to “Kaz” refer to the operations of Kaz, Inc. and its subsidiaries, which we acquired in a merger on December 31, 2010.  References to “PUR” refer to the PUR brand of water filtration products we acquired, along with certain other assets and liabilities, from The Procter & Gamble Company and certain of its affiliates on December 30, 2011.  Kaz and PUR comprise a segment within the Company referred to as the Healthcare / Home Environment segment. References to “OXO” refer to the operations of OXO International and certain of its affiliated subsidiaries that comprise the Housewares segment of the Company’s business. We mention product and service names in this report for identification purposes only.  Any product and service names mentioned may be protected by trademarks, trade names, services marks, and other intellectual property rights.  These intellectual property rights may be owned by the Company or other parties in the United States and other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. All trademarks, trade names, service marks and logos referenced herein belong to their respective owners.  References to “the FASB” refer to the Financial Accounting Standards Board. References to “GAAP” refer to U.S. generally accepted accounting principles. References to “ASC” refer to the codification of GAAP in the Accounting Standards Codification issued by the FASB.

We are a global designer, developer, importer, marketer, and distributor of an expanding portfolio of brand-name consumer products.  We have three segments: Personal Care, Housewares and Healthcare / Home Environment.  Our Personal Care segment’s products include electric hair care, beauty care and wellness appliances; grooming tools and accessories; and liquid, solid- and powder-based personal care and grooming products. Our Housewares segment provides a broad range of innovative consumer products for the home. Product offerings include food preparation and storage, cleaning, organization, and baby and toddler care products. The Healthcare / Home Environment segment focuses on health care devices such as thermometers, blood pressure monitors, humidifiers, and heating pads; water filtration systems; and small home appliances such as air purifiers, portable heaters, fans, and bug zappers.  All three segments sell their products primarily through mass merchandisers, drugstore chains, warehouse clubs, catalogs, grocery stores, and specialty stores.  In addition, the Personal Care segment sells extensively through beauty supply retailers and wholesalers, and the Healthcare / Home Environment segment sells certain of its product lines through medical distributors and other products through home improvement stores.  We purchase our products from unaffiliated manufacturers, most of which are located in China, Mexico and the United States.

Our financial statements are prepared in U.S. Dollars and in accordance with GAAP.  GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates. We have reclassified, combined or separately disclosed certain amounts in the prior years’ consolidated financial statements and accompanying footnotes to conform to the current year’s presentation.

Consolidation

(b)  Consolidation

Our consolidated financial statements include the accounts of Helen of Troy Limited and its wholly-owned subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation.

Cash and cash equivalents

(c)  Cash and cash equivalents

Cash equivalents include all highly-liquid investments with an original maturity of three months or less. We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.

We consider commercial paper and money market investment accounts to be cash equivalents.  Cash equivalents comprised $1.09 and $0.80 million of the amounts reported on our consolidated balance sheets as “Cash and cash

equivalents” at February 28, 2013 and February 29, 2012, respectively.  Notes (11) and (12) contain additional information regarding our cash and cash equivalents.

Trading securities and long-term marketable securities

(d) Trading securities and long-term marketable securities

Trading securities, when held, consist of shares of common stock of publicly traded companies and are stated on our consolidated balance sheets at fair value, as determined by the most recent trading price of each security as of each balance sheet date.  We determine the appropriate classification of our investments when those investments are purchased and reevaluate those determinations at each balance sheet date.  Trading securities, when held, are included in the “Current assets” section of our consolidated balance sheets.

All realized and unrealized gains and losses attributable to both trading and long-term marketable securities are included in “Nonoperating income (expense), net” in the consolidated statements of income.  The sum of realized and unrealized net losses attributable to trading and long-term marketable security investments totaled $0.70 million in fiscal year 2012.  Notes (11) and (12) contain additional information regarding our long-term marketable securities.

Receivables

(e)  Receivables

Our receivables are comprised of trade credit granted to customers, primarily in the retail industry, offset by two valuation reserves: an allowance for doubtful receivables and an allowance for back-to-stock returns.

Our allowance for doubtful receivables reflects our best estimate of probable losses, determined principally based on historical experience and specific allowances for known troubled accounts. Our policy is to charge off receivables when we have determined they will no longer be collectible. Charge offs are applied as a reduction to the allowance for doubtful accounts and any recoveries of previous charge offs are netted against bad debt expense in the period recovered.   At February 28, 2013 and February 29, 2012, the allowance for doubtful receivables was $1.76 and $1.81 million, respectively.

Our allowance for back-to-stock returns reflects our best estimate of future customer returns, determined principally based on historical experience and specific allowances for known pending returns.  At February 28, 2013 and February 29, 2012, the allowance for back-to-stock returns was $3.27 and $3.73 million, respectively.

The Company has significant concentrations of credit risk with two major customers, representing 17 and 11 percent of gross trade receivables, respectively.  In addition, as of February 28, 2013 and February 29, 2012, approximately 42 and 37 percent, respectively, of the Company’s gross trade receivables were due from its five top customers.

Inventory, net and cost of goods sold

(f)  Inventory, net and cost of goods sold

Our inventory consists almost entirely of finished goods. We record inventory on our balance sheet at the average or standard cost, or net realizable value, if it is below our recorded cost.  Average and standard costs include the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, freight costs associated with transporting the product from our manufacturers to our distribution centers, and general and administrative expenses directly attributable to acquiring inventory, as applicable.

General and administrative expenses in inventory include all the expenses of operating the Company’s sourcing activities, expenses incurred for production monitoring, and expenses incurred for product design, engineering and packaging. We charged $30.28, $18.74 and $10.68 million of such general and administrative expenses to inventory during fiscal years 2013, 2012 and 2011, respectively. We estimate that $9.64 and $6.91 million of general and administrative expenses directly attributable to the procurement of inventory were included in our inventory balances on hand at February 28, 2013 and February 29, 2012, respectively.

The “Cost of goods sold” line item on the consolidated statements of income is comprised of the book value (average or standard cost, or net realizable value if it is below our recorded cost) of inventory sold to customers during the reporting period.  When circumstances dictate that we use net realizable value in lieu of cost, we base our estimates on expected future selling prices less expected disposal costs.

For fiscal years 2013, 2012 and 2011, cost of goods sold manufactured by vendors in the Far East comprised approximately 66, 78 and 80 percent, respectively, of consolidated cost of goods sold.  Our mix of Far East manufacturing has declined since fiscal year 2011 as the Healthcare / Home Environment segment has become a larger part of our business.  This segment sources a significant portion of their products in both the U.S. and Mexico.  We have sourcing relationships with close to 225 third-party manufacturers.  During fiscal year 2013, one vendor fulfilled approximately 10 percent of our product requirements while the top two manufacturers combined fulfilled approximately 19 percent of our product requirements.  Over the same period, our top five suppliers fulfilled approximately 33 percent of our product requirements.

Property and equipment

(g) Property and equipment

These assets are stated at cost, or in the case of assets recorded through acquisition, their fair values when they were acquired. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. Expenditures for repair and maintenance of property and equipment are expensed as incurred.   For tax purposes, accelerated depreciation methods are used where allowed by tax laws.

License agreements, trademarks, patents and other intangible assets

(h)  License agreements, trademarks, patents, and other intangible assets

A significant portion of our consolidated sales are made subject to trademark license agreements with various licensors. Our license agreements are reported on our consolidated balance sheets at cost, less accumulated amortization. The cost of our license agreements represents amounts paid to licensors to acquire the license or to alter the terms of the license in a manner that we believe to be in our best interest.  Many licenses have extension terms that may require additional payments to the licensor as part of the terms of renewal.  The Company capitalizes costs incurred to renew or extend the term of a license agreement and amortizes such costs on a straight-line basis over the remaining term or economic life of the agreement, whichever is shorter. Royalty payments are not included in the cost of license agreements. Royalty expense under our license agreements is recognized as incurred and is included in our consolidated statements of income on the line entitled “Selling, general and administrative expense” (“SG&A”). Net sales revenue subject to trademark license agreements requiring royalty payments comprised approximately 44, 45 and 33 percent of consolidated net sales revenue for fiscal years 2013, 2012 and 2011, respectively.

We also sell products under trademarks that we own. Trademarks that we acquire from other entities are generally recorded on our consolidated balance sheets based upon the appraised cost of acquiring the trademark, net of any accumulated amortization and impairment charges. Costs associated with developing trademarks internally are recorded as expenses in the period incurred. In certain instances where trademarks have readily determinable useful

lives, we amortize their costs on a straight-line basis over such lives. In most instances, we have determined that acquired trademarks have an indefinite useful life.  In these cases, no amortization is recorded.  Patents acquired through purchase from other entities, if material, are recorded on our consolidated balance sheets based upon the appraised value of the acquired patents and amortized over the remaining life of the patent.  Additionally, we incur certain costs, primarily legal fees in connection with the design and development of products to be covered by patents, which are capitalized as incurred and amortized on a straight-line basis over the life of the patent in the jurisdiction filed, typically 14 years.

Other intangible assets include customer lists, distribution rights, patent rights, and non-compete agreements that we acquired from other entities.  These are recorded on our consolidated balance sheets based upon the fair value of the acquired asset and amortized on a straight-line basis over the remaining life of the asset as determined either through outside appraisal or by the term of any controlling agreements. See Notes (4) and (5) to these consolidated financial statements for additional information on our intangible assets.

Goodwill, intangible and other long-lived assets and impairments

(i)  Goodwill, intangible and other long-lived assets and impairments

We complete our analysis of the carrying value of our goodwill and other intangible assets during the first quarter of each fiscal year, or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid and the fair value of the net tangible and intangible assets received in the acquisition of a business.  We evaluate goodwill at the reporting unit level (operating segment or one level below an operating segment).  We measure the amount of any goodwill impairment based upon the estimated fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets and estimates of the implied fair value of goodwill.  An impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.

We consider whether circumstances or conditions exist that suggest that the carrying value of our goodwill and other long-lived assets might be impaired. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of each of the individual assets exceeds its fair market value. If the analysis indicates that an individual asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the individual asset’s carrying value over its fair value. These steps entail significant amounts of judgment and subjectivity.  Events and changes in circumstances that may indicate there is impairment include, but are not limited to, strategic decisions to exit a business or dispose of an asset made in response to changes in economic, political and competitive conditions, the impact of the economic environment on our customer base and on broad market conditions that drive valuation considerations by market participants, our internal expectations with regard to future revenue growth and the assumptions we make when performing our impairment reviews, a significant decrease in the market price of our assets, a significant adverse change in the extent or manner in which our assets are used, a significant adverse change in legal factors or the business climate that could affect our assets, an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset, and significant changes in the cash flows associated with an asset.  We analyze these assets at the individual asset, reporting unit and Company levels.

As further discussed in Note (4) to these consolidated financial statements, we recorded non-cash impairment charges totaling $2.16 million ($2.10 million after tax) for fiscal year 2011, in order to reflect the carrying value of certain trademarks in our Housewares and Personal Care segments at estimates of their fair value.

Economic useful lives and amortization of intangible assets

(j)  Economic useful lives and amortization of intangible assets

We amortize intangible assets, such as licenses and trademarks, over their economic useful lives, unless those assets’ economic useful lives are indefinite. If an intangible asset’s economic useful life is deemed indefinite, that asset is not amortized. When we acquire an intangible asset, we consider factors such as the asset’s history, our plans for that asset, and the market for products associated with the asset. We consider these same factors when reviewing the economic useful lives of our existing intangible assets as well.  We review the economic useful lives of our intangible assets at least annually.

Intangible assets consist primarily of goodwill, license agreements, trademarks, customer lists, distribution rights, patents, patent licenses, and non-compete agreements.  Some of our goodwill is held in jurisdictions that allow deductions for tax purposes, however, in those jurisdictions we have no tax basis for the associated goodwill recorded for book purposes.  Effectively, none of our goodwill is deductible for tax purposes.  We amortize certain intangible assets using the straight-line method over appropriate periods ranging from 2 to 30 years. We recorded intangible asset amortization totaling $22.40, $20.07 and $9.89 million during fiscal years 2013, 2012 and 2011, respectively. See Notes (4) and (5) to these consolidated financial statements for more information about our intangible assets.

Auction rate securities

(k)  Auction rate securities

Prior to fiscal year 2009, we made investments of excess cash on hand in AAA auction rate notes, AAA variable rate demand bonds and similar investments that we normally sought to dispose of within 35 or fewer days (“auction rate securities” or “ARS”).  After fiscal year 2009, these ARS were subject to failed auctions that affected their liquidity, but these failures did not represent a default by the issuer of the security. Upon an auction failure, the interest rates reset based on a formula contained in the security.  The securities continued to accrue interest and to be auctioned until one of the following occurred: the auction succeeded, the issuer called the securities or the securities matured.

On September 15, 2011, the Company entered into an agreement to sell its then-remaining portfolio of $18.80 million par value ARS for approximately 96 percent of par, or $18.05 million. The transaction settled in the fiscal quarter ended November 30, 2011. For fiscal years 2012 and 2011, in addition to the transaction just described, we liquidated $3.25 and $0.35 million, respectively, of these securities at par.

Fair value classifications

(l)  Fair value classifications

We classify our various assets and liabilities recorded or reported at fair value under a hierarchy prescribed by GAAP that prioritizes inputs to fair value measurement techniques into three broad levels:

· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

· Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

· Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Assets and liabilities subject to classification are classified upon acquisition.  When circumstances dictate the transfer of an asset or liability to a different level, our policy is to recognize the transfer at the beginning of the reporting period in which the event resulting in the transfer occurred.

Warranties

(m)  Warranties

Our products are under warranty against defects in material and workmanship for periods ranging from two to five years. We estimate our warranty accrual using historical trends and believe that these trends are the most reliable method by which we can estimate our warranty liability. The following table summarizes the activity in the Company’s accrual for the past two fiscal years:

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

	Last Day of February,
	2013			2012
Beginning balance	$	26,665		$	24,021
Additions to the accrual	35,723			28,529
Reductions of the accrual - payments and credits issued	(37,127		)	(25,885		)
Ending balance	$	25,261		$	26,665

Financial instruments

(n)  Financial instruments

The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short maturity of these items. See Note (9) to these consolidated financial statements for our assessment of the fair value of our Senior Notes and other long-term debt.

We use interest rate swaps (the “swaps”) to protect our funding costs against rising interest rates.  The interest rate swaps allow us to raise long-term borrowings at floating rates and effectively swap them into fixed rates.  Under our swaps, we agree with another party to exchange quarterly the difference between fixed-rate and floating-rate interest amounts calculated by reference to notional amounts that match the amount of our underlying debt.  Under these swap agreements, we pay the fixed rates and receive the floating rates.  The swaps settle quarterly and terminate upon maturity of the related debt.  We hedge a portion of our foreign exchange rate risk by entering into forward contracts and foreign currency swaps to exchange foreign currencies for U.S. Dollars at specified rates.  Our foreign exchange contracts, foreign currency swaps and interest rate swaps are considered highly effective and are accounted for as cash flow hedges.  See Notes (11), (12) and (17) to these consolidated financial statements for more information on our hedging activities.

Income taxes and uncertain tax positions

(o)  Income taxes and uncertain tax positions

Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax bases of applicable assets and liabilities. Generally, deferred tax assets represent future income tax reductions while deferred tax liabilities represent income taxes that we expect to pay in the future. We measure deferred tax assets and liabilities using enacted tax rates for the years in which we expect temporary differences to be reversed or be settled. Changes in tax rates affect the carrying values of our deferred tax assets and liabilities, and the effects of any tax rate changes are recognized in the periods when they are enacted.  The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible or before our net operating loss and tax credit carryforwards expire.

We recognize the benefit of a tax position if that position will more likely than not be sustained in an audit, based on the technical merits of the position.  If the tax position meets the more likely than not recognition threshold, the tax effect is recognized at the largest amount of the benefit that has greater than a fifty percent likelihood of being realized upon ultimate settlement.  Liabilities created for unrecognized tax benefits are disclosed as a separate liability and not combined with deferred tax liabilities or assets.  We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes.  Note (10) to these consolidated financial statements contains additional information regarding our income taxes.

Revenue recognition

(p)  Revenue recognition

Sales are recognized when revenue is realized or realizable and has been earned. Sales and shipping terms vary among our customers, and as such, revenue is recognized when risk and title to the product transfer to the customer. Net sales revenue is comprised of gross revenues less estimates of expected returns, trade discounts and customer allowances, which include incentives such as cooperative advertising agreements and off-invoice markdowns. Such deductions are recorded and/or amortized during the period the related revenue is recognized. Sales and value added taxes collected from customers and remitted to governmental authorities are excluded from net sales revenue reported in the consolidated financial statements.

Consideration granted to customers

(q)  Consideration granted to customers

We offer our customers certain incentives in the form of cooperative advertising arrangements, volume rebates, product markdown allowances, trade discounts, cash discounts, slotting fees, and similar other arrangements.  In instances where the customer provides us with proof of performance, reductions in amounts received from customers as a result of cooperative advertising programs are included in our consolidated statements of income in SG&A.  Customer incentives included in SG&A were $14.25, $13.76 and $12.71 million for the fiscal years 2013, 2012 and 2011, respectively.

Other reductions in amounts received from customers as a result of cooperative advertising programs are recorded as reductions of net sales revenue.  Markdown allowances, slotting fees, trade discounts, cash discounts, and volume rebates are all recorded as reductions of net sales revenue.

Advertising

(r)  Advertising

Advertising costs, including cooperative advertising discussed in (q) above, are expensed in the period in which they are incurred and included in our consolidated statements of income in SG&A. We incurred total advertising costs, including amounts paid to customers for cooperative media and print advertising, of $51.08, $42.87 and $34.99 million during fiscal years 2013, 2012 and 2011, respectively.

Shipping and handling revenues and expenses

(s)  Shipping and handling revenues and expenses

Shipping and handling expenses are included in our consolidated statements of income in SG&A. These expenses include distribution center costs, third-party logistics costs and outbound transportation costs.  Our expenses for shipping and handling totaled $83.81, $74.42 and $54.05 million during fiscal years 2013, 2012 and 2011, respectively. We bill our customers for charges for shipping and handling on certain sales made directly to consumers and retail customers ordering relatively small dollar amounts of product. Such charges are recorded as a reduction of our shipping and handling expense and are not material in the aggregate.

Foreign currency transactions and related derivative financial instruments

(t)  Foreign currency transactions and related derivative financial instruments

The U.S. Dollar is the functional currency for the Company and all its foreign subsidiaries; therefore, we do not have a translation adjustment recorded through accumulated other comprehensive income (loss).  All our non-U.S. subsidiaries’ transactions involving other currencies have been re-measured in U.S. Dollars using average exchange rates for the months in which the transactions occurred.  In our consolidated statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities are recognized in their respective income tax lines and all other foreign exchange gains and losses are recognized in SG&A. We recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($2.36), ($0.67) and $1.82 million in SG&A and ($0.04), $0.04 and ($0.02) million in income tax expense during fiscal years 2013, 2012 and 2011, respectively.

In order to manage our exposure to changes in foreign currency exchange rates, we use forward currency contracts and foreign currency swaps to exchange foreign currencies for U.S. Dollars at specified rates. We account for these transactions as cash flow hedges, which requires these derivatives to be recorded on the balance sheet at their fair value and that changes in the fair value of the forward exchange contracts are recorded each period in our consolidated statements of income or other comprehensive income (loss), depending on the type of hedging instrument and the effectiveness of the hedges. All our current contracts are cash flow hedges and are adjusted to their fair market values at the end of each fiscal quarter.  We evaluate all hedging transactions each quarter to determine that they are effective. Any ineffectiveness is recorded as part of SG&A in our consolidated statements of income.  See Notes (11), (12) and (17) to these consolidated financial statements for a further discussion of our hedging activities.

Share-based compensation plans

(u)  Share-based compensation plans

Stock options are recognized in the financial statements based on their fair values using an option pricing model at the date of grant.  We use a Black-Scholes option-pricing model to calculate the fair value of options.  This model requires various judgmental assumptions including volatility, forfeiture rates and expected option life.  We estimate forfeitures for option awards at the dates of grant based on historical experience and revise as necessary if actual forfeitures significantly differ from these estimates.   Share-based compensation expense is adjusted for estimated forfeitures and is recognized on a straight-line basis over the requisite service period of the award.   Restricted share-based compensation is recognized in the financial statements based on quoted fair values of the shares at the date of grant.  See Note (15) to these consolidated financial statements for more information on our share-based compensation plans.

Interest income

(v)  Interest income

Interest income is included in “Nonoperating income (expense), net” on the consolidated statements of income.  Interest income totaled $0.07, $0.30 and $0.53 million in fiscal years 2013, 2012 and 2011, respectively.  Interest income is normally earned on cash invested in short-term accounts, cash equivalents, and temporary and long-term investments.

Earnings per share

(w)  Earnings per share

We compute basic earnings per share based upon the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share based upon the weighted average number of shares of common stock plus the effects of potentially dilutive securities. In fiscal years 2012 and 2011, our dilutive securities consisted entirely of outstanding options for common stock.   Beginning in fiscal year 2013, dilutive securities also include certain unvested restricted shares that will be issued in connection with certain employment agreements. See Notes (13) and (15) to these consolidated financial statements for more information regarding these restricted shares.  Options for common stock are excluded from the computation of diluted earnings per share if their effect is antidilutive.

For fiscal years 2013, 2012 and 2011, the components of basic and diluted shares were as follows:

WEIGHTED AVERAGE DILUTED SECURITIES

(in thousands)

	Fiscal Years Ended the Last Day of February,
	2013	2012	2011
Weighted average shares outstanding, basic	31,754	31,340	30,669
Incremental shares of common stock attributable to share-based payment arrangements	182	365	686
Weighted average shares outstanding, diluted	31,936	31,705	31,355
Dilutive securities, as a result of in-the-money options	278	522	2,337
Dilutive securities, as a result of unvested restricted shares	252	-	-
Antidilutive securities, as a result of out-of-the-money options	586	349	173