Copyright (c) 2004, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.HELEN OF TROY had the face that launched a thousand ships.
Today, those luscious locks are drawing looks again, except this time it's Helen of Troy Ltd., an El Paso, Texas, personal-care products maker whose accounting for certain costs and other practices has got skeptical analysts raising questions.
The analysts' No. 1 concern: "capitalized" costs -- that is, costs reported as assets. While most costs are supposed to be expensed immediately, accounting rules do allow some costs to be booked as assets, namely those that relate to the direct production of goods, so that they can be amortized over time. The idea is that those costs associated with future periods are expensed in the periods they affect, adhering to the generally accepted accounting principles. The benefit of such treatment is that the costs get written off over time rather than in a single quarter, helping to smooth earnings.
At Helen of Troy, whose products include hair-care and other appliances sold under licensed trade names such as Vidal Sassoon and Revlon, these costs pertain to inventory bought at a Hong Kong office, where the company has procurement and sales operations. But there's a debate about whether Helen of Troy is being too aggressive in its interpretation of the capitalized-costs rule.
In its latest annual filing, Helen of Troy included a lengthy disclosure of these costs, stating that "capitalized general and administrative expenses include all the expenses of operating the company's Hong Kong sourcing facility," as well as expenses incurred for production forecasting, product design, engineering and packaging.
Some analysts beg to differ that these expenses qualify as part of the actual production of goods, as accounting rules require. The company's decision to lump procurement costs in with inventory, rather than treating them as quarterly general and administrative expenses, could have inflated earnings by more than 5% in the most-recent fiscal year, more than 9% the prior year and nearly 16% in the year before that, these analysts note.
The issue is particularly relevant as Helen of Troy expands and makes further use of capitalization. In June, for example, Helen of Troy completed its $273 million acquisition of household-gadget manufacturer OXO International, increasing sales about 25%.
"We disagree that we're overcapitalizing," says Tom Benson, chief financial officer of Helen of Troy. "Our inventory methodology has been consistent for at least the past 10 years, and this has never been an issue with our auditors. I'm surprised anyone would even bring it up."
To be sure, broad interpretation of the capitalization rules isn't necessarily contrary to generally accepted accounting principles. In their 2002 book, "The Financial Numbers Game: Detecting Creative Accounting Practices," Georgia Institute of Technology accounting Profs. Charles Mulford and Eugene Comiskey devote a 30-page chapter to "Aggressive Capitalization and Extended Amortization Policies." Of Helen of Troy's approach, Prof. Mulford says that analysts are right to bring attention to the matter as a warning, but he doesn't "see it as necessarily indicating the existence of improper accounting."
Helen of Troy's capitalized general and administrative costs were only $4.7 million for the fiscal year ended Feb. 29. Still, to some critics, the treatment is part of a larger strategy of aggressive accounting.
Another cause for concern, they say, is the company's classification of certain intangible assets as having indefinite lives, which means the company currently avoids writing these assets down and running more than $2 million in annual expenses through the income statement. Some critics also cite the company's reincorporation in Bermuda in 1994 to minimize its tax burden, a decision that has received scrutiny from both the U.S. Internal Revenue Service and Hong Kong Inland Revenue Department.
"There is a moderate level of concern here," says Leah Townsend, a research analyst at Glass Lewis & Co., a proxy-advisory firm in Broomfield, Colo., who recently issued a "Yellow Card Company Alert" on Helen of Troy highlighting the capitalization and other accounting issues. "Any of the items by themselves don't raise a flag, but together they do." In her report, Ms. Townsend also notes the company's "strong balance sheet, net income and cash-flow generation."
Helen of Troy says the company appropriately amortizes necessary intangible assets. As for its tax strategies, the company moved offshore "to be competitive with a world-wide tax situation," says Chris Carameros, executive vice president. "We comply with all the rules."
In the past few years, Helen of Troy has grown through operational improvements and acquisitions. Earnings rose more than 56% in fiscal 2004, and the company's stock has gained 30% since last August. Its debt is low, even after the company recently sold a $225 million note to help finance the OXO acquisition.
But some analysts also say the business is getting too complicated. They point to Helen of Troy's growing dependence on brand licensing, substantial manufacturing contracts in Asia and the company's determination to expand through purchases like OXO that take it into barbecue, garden and automotive products.
"This is one of the most scrutinized companies I follow," says Doug Lane, an analyst at Avondale Partners LLC, an investment bank in Nashville, Tenn. "These have been issues that come up in conversations with clients."
Recently, some companies' cost write-off practices have drawn the attention of the Securities and Exchange Commission, but there's no indication that the SEC is looking into Helen of Troy's accounting. For example, the SEC is conducting an informal inquiry into franchise repurchases by Krispy Kreme Doughnuts Inc., following questions about capitalization of franchise rights. And personal-care product maker Nu Skin Enterprises Inc. recently had to reclassify certain assets' lives as definite instead of indefinite, requiring a $1.2 million charge.
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