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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file Number 1-10585
CHURCH & DWIGHT CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4996950
(State of incorporation) (I.R.S. Employer Identification No.)
469 North Harrison Street, Princeton, N.J. 08543-5297
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (609) 683-5900
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 twelve 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
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As of November 1, 2002, there were 39,880,333 shares of Common
Stock outstanding.
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PART I - FINANCIAL INFORMATION
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales.......................................... $ 263,786 $ 238,372 $ 779,051 $ 694,788
Cost of sales...................................... 182,586 166,524 548,663 489,049
---------- ---------- ---------- ----------
Gross Profit....................................... 81,200 71,848 230,388 205,739
Marketing expense.................................. 22,752 19,995 61,737 55,240
Selling, general and administrative expenses....... 30,299 26,018 88,982 81,207
---------- ---------- ---------- ----------
Income from Operations............................. 28,149 25,835 79,669 69,292
Equity in earnings of affiliates................... 5,453 886 17,734 3,069
Investment earnings................................ 295 360 1,300 1,211
Other income (expense)............................. (1,394) (110) (2,481) (1,453)
Interest expense................................... (5,663) (3,278) (17,848) (5,128)
----------- ----------- ----------- -----------
Income before minority interest and taxes ......... 26,840 23,693 78,374 66,991
Minority interest.................................. -- 29 129 3,783
---------- ---------- ---------- ----------
Income before taxes................................ 26,840 23,664 78,245 63,208
Income taxes....................................... 9,265 8,418 27,095 22,337
---------- ---------- ---------- ----------
Net Income......................................... 17,575 15,246 51,150 40,871
Retained earnings at beginning of period........... 340,072 296,907 312,409 276,700
---------- ---------- ---------- ----------
357,647 312,153 363,559 317,571
Dividends paid..................................... 2,985 2,924 8,897 8,342
---------- ---------- ---------- ----------
Retained earnings at end of period................. $ 354,662 $ 309,229 $ 354,662 $ 309,229
========== ========== ========== ==========
Weighted average shares outstanding - Basic........ 39,794 39,011 39,548 38,803
Weighted average shares outstanding - Diluted...... 41,875 41,037 41,749 40,724
Earnings Per Share:
Net income per share - Basic....................... $.44 $.39 $1.29 $1.05
Net income per share - Diluted..................... $.42 $.37 $1.23 $1.00
Dividends Per Share................................ $.075 $.075 $.225 $.215
See Notes to Condensed Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 27, 2002 Dec. 31, 2001
-------------- -------------
(Dollars in thousands) (Unaudited)
Assets
Current Assets
Cash and cash equivalents........................................................... $ 76,148 $ 52,446
Accounts receivable, less allowances of $2,030 and $3,666........................... 102,600 106,291
Inventories......................................................................... 89,133 101,214
Deferred income taxes............................................................... 25,260 19,849
Note receivable and current portion of long-term note receivable.................... 870 5,803
Prepaid expenses.................................................................... 6,432 7,604
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Total Current Assets................................................................ 300,443 293,207
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Property, Plant and Equipment (Net)................................................. 240,975 231,449
Notes Receivable.................................................................... 9,708 11,951
Equity Investment in Affiliates..................................................... 129,408 115,121
Long-term Supply Contracts.......................................................... 6,827 7,695
Tradenames.......................................................................... 85,272 136,934
Goodwill ........................................................................... 184,352 127,320
Other Assets........................................................................ 29,223 25,408
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Total Assets........................................................................ $ 986,208 $ 949,085
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings............................................................... $ 4,737 $ 3,220
Accounts payable and accrued expenses............................................... 158,825 176,176
Current portion of long-term debt................................................... 16,035 8,360
Income taxes payable................................................................ 6,038 8,260
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Total Current Liabilities........................................................... 185,635 196,016
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Long-term Debt...................................................................... 379,969 406,564
Deferred Income Taxes............................................................... 47,564 27,032
Deferred and Other Long-term Liabilities............................................ 24,346 19,164
Nonpension Postretirement and Postemployment Benefits............................... 15,857 15,880
Minority Interest................................................................... 173 2,126
Commitments and Contingencies
Stockholders' Equity
Preferred Stock-$1.00 par value
Authorized 2,500,000 shares, none issued....................................... -- --
Common Stock-$1.00 par value
Authorized 100,000,000 shares, issued 46,660,988 shares........................ 46,661 46,661
Additional paid-in capital.......................................................... 36,488 28,414
Retained earnings................................................................... 354,662 312,409
Accumulated other comprehensive (loss).............................................. (15,624) (9,728)
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422,187 377,756
Common stock in treasury, at cost:
6,839,805 shares in 2002 and 7,518,105 shares in 2001.......................... (89,523) (95,453)
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Total Stockholders' Equity.......................................................... 332,664 282,303
========== ==========
Total Liabilities and Stockholders' Equity.......................................... $ 986,208 $ 949,085
========== ==========
See Notes to Condensed Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
(Dollars in thousands) Sept. 27, 2002 Sept. 28, 2001
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Cash Flow From Operating Activities
Net Income.......................................................................... $ 51,150 $ 40,871
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization....................................... 21,319 19,649
Equity in earnings of affiliates............................................... (17,734) (3,069)
Deferred income taxes.......................................................... 18,110 1,696
Other.......................................................................... 2,439 (782)
Change in assets and liabilities:
Decrease/(increase) in accounts receivable..................................... 3,304 (29,686)
Decrease/(increase) in inventories............................................. 10,436 (11,540)
Decrease/(increase) in prepaid expenses........................................ 634 (79)
(Decrease) in accounts payable................................................. (19,846) (11,722)
Increase in income taxes payable............................................... 1,945 9,242
Increase in other liabilities.................................................. 1,220 2,009
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Net Cash Provided By Operating Activities........................................... 72,977 16,589
Cash Flow From Investing Activities
Decrease in short-term investments.................................................. -- 1,993
Additions to property, plant and equipment.......................................... (30,879) (22,323)
Acquisition of Biovance stock (net of cash acquired of $365)........................ (7,747) --
Investment in note receivable....................................................... -- (16,380)
Proceeds from note receivable....................................................... 5,803 --
Distributions from affiliates....................................................... 3,447 4,901
Other long-term assets.............................................................. (717) --
Proceeds from sale of fixed assets.................................................. 211 2,349
Purchase of USAD stock.............................................................. -- (101,642)
Investment in affiliates............................................................ (2,631) (108,450)
Investment in supply contract....................................................... -- (808)
Purchase of and adjustment to purchase price of product lines....................... (919) (128,939)
Purchase of intangibles............................................................. -- (1,625)
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Net Cash Used In Investing Activities............................................... (33,432) (370,924)
Cash Flow From Financing Activities
Long-term debt borrowing............................................................ -- 560,000
Long-term debt (repayment).......................................................... (20,480) (170,179)
Short-term debt borrowing/(repayment)............................................... 3,576 (11,896)
Proceeds from stock options exercised............................................... 9,958 8,561
Deferred financing costs............................................................ -- (8,632)
Payment of cash dividends........................................................... (8,897) (8,342)
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Net Cash (Used In) Provided By Financing Activities................................. (15,843) 369,512
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Net Change In Cash and Cash Equivalents............................................. 23,702 15,177
Cash And Cash Equivalents At Beginning Of Year...................................... 52,446 21,573
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Cash And Cash Equivalents At End Of Period.......................................... $ 76,148 $ 36,750
========= =========
Acquisition in which liabilities were assumed are as follows:
Fair value of assets................................................................ $ 14,880 $ 169,907
Cash paid for stock................................................................. (8,112) (110,877)*
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Liabilities assumed................................................................. $ (6,768) $ (59,030)
========= =========
*Includes $9.2 million paid in 2000
See Notes to Condensed Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of September 27, 2002, the consolidated
statements of income and retained earnings for the three months and nine months
ended September 27, 2002 and September 28, 2001 and the consolidated statements
of cash flow for the nine months then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments, except as noted in Management's Discussion and
Analysis) necessary to present fairly the financial position, results of
operations and cash flow at September 27, 2002 and for all periods presented
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2001 annual
report to shareholders. The results of operations for the period ended September
27, 2002 are not necessarily indicative of the operating results for the full
year.
2. Inventories consist of the following:
(In thousands) Sept. 27, 2002 Dec. 31, 2001
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Raw materials and supplies.......................................................... $ 29,648 $ 28,869
Work in process..................................................................... 254 651
Finished goods ..................................................................... 59,231 71,694
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$ 89,133 $ 101,214
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3. Property, Plant and Equipment consist of the following:
(In thousands) Sept. 27, 2002 Dec. 31, 2001
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Land................................................................................ $ 6,285 $ 6,503
Buildings and improvements.......................................................... 101,148 92,577
Machinery and equipment............................................................. 249,376 253,749
Office equipment and other assets................................................... 25,298 25,037
Software ........................................................................... 5,547 5,652
Mineral rights ..................................................................... 153 257
Construction in progress............................................................ 34,074 17,593
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421,881 401,368
Less accumulated depreciation, depletion and amortization........................... 180,906 169,919
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Net Property, Plant and Equipment................................................... $ 240,975 $ 231,449
========== ==========
4. Earnings Per Share
Basic EPS is calculated based on income available to common shareholders and the
weighted-average number of shares outstanding during the reported period.
Diluted EPS includes additional dilution from potential common stock issuable
pursuant to the exercise of stock options outstanding.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Segment Information
Segment sales and operating profit for the third quarter and year to date of
2002 and 2001 are as follows:
Unconsolidated
(In thousands) Consumer Specialty Affiliates Total
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Net Sales
Third quarter 2002........................ $326,752 $56,523 $(119,489) $263,786
Third quarter 2001........................ 195,569 54,105 (11,302) 238,372
Year to date 2002......................... 963,871 166,572 (351,392) 779,051
Year to date 2001......................... 564,794 166,413 (36,419) 694,788
Operating Profit
Third quarter 2002........................ 42,202 7,628 (21,681) 28,149
Third quarter 2001........................ 19,028 8,358 (1,551) 25,835
Year to date 2002......................... 119,644 22,670 (62,645) 79,669
Year to date 2001......................... 50,339 24,599 (5,646) 69,292
Both Consumer and Specialty net sales and operating profit include 100 percent
of the results of unconsolidated affiliates.
Product line net sales data for the third quarter and year to date periods are
as follows:
Deodorizing Uncon-
and Personal International Specialty solidated
Cleaning Laundry Care Consumer Products Affiliates Total
-------- ------- ---- -------- -------- ---------- -----
3rd Qtr 2002.... $ 62,349 $ 101,142 $ 101,806 $ 61,455 $ 56,523 $ (119,489) $ 263,786
3rd Qtr 2001.... 59,640 98,308 26,243 11,378 54,105 (11,302) 238,372
YTD 2002........ $ 188,123 $ 299,046 $ 293,879 $ 182,823 $ 166,572 $ (351,392) $ 779,051
YTD 2001........ 165,277 288,743 80,545 30,229 166,413 (36,419) 694,788
As a result of the Arrid Antiperspirant acquisition and the formation of Armkel,
the Company has reclassified the consumer product division into four product
lines, which breaks out international from the underlying products and combines
the specialty products division into one product line. Prior year sales have
been reclassified.
6. Armkel, LLC
The following table summarizes financial information for Armkel, LLC. The
Company accounts for its 50% interest under the equity method.
Quarter Ended Nine Months Ended
(In thousands) Sept. 27, 2002 Sept. 27, 2002
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Income statement data:
Net sales....................................................................... $ 110,290 $ 322,601
Gross profit.................................................................... 61,756 170,472
Net income ..................................................................... 9,316 25,209
Equity earnings in affiliate ................................................... 4,658 15,104
Sept. 27, December 31,
(In thousands) 2002 2001
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Balance sheet data:
Current assets.................................................................. $ 252,152 $ 269,343
Noncurrent assets............................................................... 568,759 544,450
Short-term debt................................................................. 12,441 5,671
Current liabilities (excluding short-term debt)................................. 115,647 136,257
Long-term debt.................................................................. 433,656 439,750
Other long-term liabilities..................................................... 28,478 28,711
Partners' equity................................................................ 230,689 203,404
Under the partnership agreement with Kelso, the Company is allocated 50% of all
book and tax profits. If there are losses, the Company is allocated 50% of all
book and tax losses up to $10 million and 100% of such losses above that level
for the period starting September 28, 2001, the date of the acquisition. The
Company is entitled to 100% of the profits until an amount equal to the
accumulated excess losses is recorded.
During 2002, the Company invoiced Armkel $15.7 million for administrative and
management oversight services, and purchased $5.4 million of deodorant
antiperspirant inventory produced by Armkel at its cost. Armkel invoiced the
Company $1.6 million of transition administrative services. The Company has a
receivable from Armkel at September 27, 2002 of approximately $5.0 million that
primarily related to administration fees and invoices paid by the Company on
behalf of Armkel.
7. Acquisitions
a. As previously announced, in January the Company acquired Biovance
Technologies, Inc., a small Oskaloosa, Iowa-based producer of specialty
feed ingredients which complement our existing range of animal nutrition
products. The purchase price paid in the first quarter was $7.7 million
(net of cash acquired) and included an additional $6.8 million for the
assumption of liabilities. The Company has accrued $3.0 million of
additional payments based upon contractual obligations, which will be paid
in 2003. Additional payments will be required based on operating
performance. Pro forma results of operations are not included as they would
not have a material effect on the Company's results of operations.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
(In thousands)
Current assets.......................................................................... $ 1,374
Property, plant and equipment........................................................... 4,640
Patents and non-compete agreement....................................................... 3,183
Tradenames.............................................................................. 490
Goodwill................................................................................ 5,193
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Total assets acquired (includes cash of $365)........................................... 14,880
Current liabilities..................................................................... (4,529)
Long-term liabilities................................................................... (2,239)
-----------
Net assets acquired..................................................................... $ 8,112
===========
The results of operations are included in the accompanying financial
statements from January 1, 2002, and were not significant.
An appraisal has been completed and the purchase price allocation was
modified based on its results. Goodwill is not being amortized, based on
the provisions of SFAS 142 "Goodwill and Other Intangible Assets." The
Goodwill is not expected to be deductible for tax purposes and will be
included in the specialty products segment. All other intangibles are being
amortized based on their estimated useful lives.
b. During July, the Company increased its ownership position of its
Brazilian Subsidiary, QGN to approximately 98.5% from 85% at a cost of
approximately $4.4 million. Approximately one half was paid in July and the
balance is due in 2003.
8. Recent Accounting Pronouncements
a. Effective January 1, 2002, the Company adopted EITF 00-14 "Accounting
for Certain Sales Incentives" and EITF 00-25 "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer" and EITF
01-9 "Accounting for Consideration given to a Customer or a Reseller of the
Vendor's Products." EITF 00-14 addresses the income statement
classification for offers by a vendor directly to end consumers that are
exercisable after a single exchange transaction in the form of coupons,
rebate offers, or free products or services disbursed on the same date as
the underlying exchange transaction. The issue requires the cost of these
items to be accounted for as a reduction of revenues, not included as a
marketing expense as the Company did previously. EITF 00-25 outlines
required accounting treatment of certain sales incentives, including
slotting or placement fees, cooperative advertising arrangements, buydowns
and other allowances. The Company previously recorded such costs as
marketing expenses. The issue requires the Company to report the paid
consideration expense as a reduction of sales, rather than marketing
expense. EITF 01-9 codifies and reconciles certain issues from EITF 00-14
and EITF 00-25. The third quarter and year to date 2001 net sales have been
reclassified to conform with these pronouncements. The impact was a
reduction of net sales for the third quarter and year to date periods of
approximately $35.9 and $100.6 million in 2002 and $32.2 and $89.5 million
in 2001, respectively, and did not have an effect on net income.
b. In January 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a business (as previously defined in
that Opinion). This statement also amends ARB No. 51, "Consolidated
Financial Statements" to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company has
evaluated this statement and has determined there is no material impact on
the Company's consolidated financial statements.
c. During the second quarter, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment
of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement amends FASB Statement No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company will
adopt the provisions of this Statement upon its effective date and does not
anticipate it to have a material effect on its financial statements.
d. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal commitment to
an exit or disposal plan. Examples of costs covered by the standard include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. The Company is currently evaluating the impact this pronouncement
will have on its consolidated financial statements.
9. Goodwill and Other Intangibles
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." Under its
changes, SFAS No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. The Company
adopted this statement upon its effective date.
The following tables discloses the carrying value of all intangible assets:
(In thousands) September 27, 2002 December 31, 2001
------------------ -----------------
Gross Carrying Accum. Gross Carrying Accum.
Amount Amortization Net Amount Amortization Net
Amortized intangible assets:
- ---------------------------
Tradenames............ $ 31,890 $ (4,485) $ 27,405 $ 31,400 $ (3,271) $ 28,129
Technology............ 6,281 (725) 5,556 4,241 (302) 3,939
Non Compete Agreement. 1,143 (88) 1,055 -- -- --
--------- -------- --------- -------- ------- -------
Total................. $ 39,314 $ (5,298) $ 34,016 $ 35,641 $ (3,573) $ 32,068
========= ========= ========= ========== ======== =========
Unamortized intangible assets - Carrying value
Tradenames............ $ 57,867 $ 108,805
--------- ----------
Total................. $ 57,867 $ 108,805
========= ==========
Intangible amortization expense amounted to $1.7 million in 2002 and $4.3 in
2001. The estimated intangible amortization for each of the next five years is
approximately $2.3 million.
The changes in the carrying amount of goodwill for the nine months ended
September 27, 2002 is as follows:
(In thousands) Consumer Specialty Total
Balance December 31, 2001......................................... $ 116,372 $ 10,948 $ 127,320
Purchase accounting adjustments................................... 49,885 -- 49,885
Goodwill acquired during 2002..................................... -- 7,859 7,859
FAS 109 adjustment................................................ -- (137) (137)
Foreign exchange/other............................................ 1 (576) (575)
----------- ---------- -----------
Balance September 27, 2002........................................ $ 166,258 $ 18,094 $ 184,352
=========== ========== ===========
In accordance with FAS 142, the Company completed the impairment test of the
valuation of goodwill and intangibles as of January 1, 2002 and its annual
review as of April 1, 2002 and based upon the results, there was no impairment.
During the third quarter, the Company took a $1.1 million impairment charge
included in selling, general and administrative expenses related to one of its
unamortized tradenames due to changes in market conditions since April 1, 2002.
Fair value was determined using discounted cash flows.
During the second quarter, the Company completed the purchase price allocation
of the USAD acquisition and during the third quarter completed the purchase
price allocation of the Carter-Wallace acquired brands, which adjusted the
valuation of indefinite lived tradenames and goodwill. The Company in 2001
amortized tradenames and goodwill under rules in effect prior to the issuance of
FAS 142 using the same useful life, therefore, there was no impact to the 2001
amortization expense recorded by the Company.
Net income results and per share amounts for the quarter and nine months ended
September 27, 2002 and September 28, 2001 reflecting goodwill and intangible
assets that are no longer being amortized is as follows:
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871
Goodwill amortization (net of tax)..................... -- 604 -- 1,443
Discontinued tradename amortization (net of tax)....... -- 301 -- 401
---------- ---------- ---------- ----------
Adjusted net income.................................... $ 17,575 $ 16,151 $ 51,150 $ 42,715
========== ========== ========== ==========
Basic earnings per share
As reported........................................ $.44 $.39 $1.29 $1.05
Goodwill amortization.............................. -- .01 -- .03
Tradename amortization............................. -- .01 -- .01
---------- ---------- ---------- ----------
Adjusted net income................................ $.44 $.41 $1.29 $1.09
========== ========== ========== ==========
Diluted earnings per share
As reported........................................ $.42 $.37 $1.23 $1.00
Goodwill amortization.............................. -- .01 -- .03
Tradename amortization............................. -- .01 -- .01
---------- ---------- ---------- ----------
Adjusted net income................................ $.42 $.39 $1.23 $1.04
========== ========== ========== ==========
10. Comprehensive Income
The following table presents the Company's Comprehensive Income for the three
months ending September 27, 2002 and September 28, 2001:
Three Months Ended Nine Months Ended
(In thousands) Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2002 2001 2002 2001
---- ---- ---- ----
Net Income......................................... $ 17,545 $ 15,246 $ 51,150 $ 40,871
Other Comprehensive Income, net of tax:
Foreign exchange translation adjustments........ (3,184) (1,420) (4,678) (3,512)
Interest rate swap agreements................... (946) -- (1,218) --
Available for Sale securities................... -- (1,050) -- 2,152
---------- ----------- ---------- ----------
Comprehensive Income............................... $ 13,415 $ 12,776 $ 45,254 $ 39,511
========== ========== ========== ==========
11. Commitments and Contingencies
a. Certain former shareholders of Carter-Wallace have brought legal action
against the company that purchased the pharmaceutical business of
Carter-Wallace regarding the fairness of the consideration these
shareholders received. Pursuant to various indemnification agreements,
Armkel could be liable for damages up to $12 million, and the Company could
be liable directly to Armkel for an amount up to $2 million.
The Company believes that the consideration offered was fair to the former
Carter-Wallace shareholders, and it cannot predict with certainty the
outcome of this litigation.
b. The Company has commitments to acquire approximately $15 million of raw
material and packaging supplies from our vendors. The packaging supplies
are in either a converted or non-converted status. This enables the Company
to respond quickly to changes in customer orders/requirements.
c. The Company, in the ordinary course of its business, is the subject of,
or a party to, various pending or threatened legal actions. The Company
believes that any ultimate liability arising from these actions will not
have a material adverse effect on its consolidated financial statements.
12. Reclassification
Certain prior year amounts have been reclassified in order to conform with the
current year presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
For the quarter ended September 27,2002 net sales increased 10.7% from $238.4
million to $263.8 million. Consumer sales increased 11.2% to $217.6 million,
primarily due to the addition of the Arrid antiperspirant and Lambert Kay pet
care businesses as part of the Carter-Wallace acquisition. Specialty products
increased 7.9% to $46.2 million, primarily due an increase in animal nutrition
products, which was impacted by the Biovance acquisition. Excluding acquisitions
and disposals, and an adjustment of $2.5 million for prior year promotion
reserves based upon latest estimates, sales of existing products increased 3%,
with higher laundry, deodorizer and specialty products sales, and slightly lower
personal care sales. For the nine-month period, net sales increased 12.1% to
$779.1 million from $694.8 million. Consumer sales increased 13.7% to $642.4
million for the same reasons as the current quarter which also includes the $1.8
million prior year promotion reserve adjustment from the second quarter 2002.
Specialty products increased 5.1% to $136.7 million, again for the same reason
as the current quarter. Excluding the items noted earlier, total sales increased
2.9%.
Effective January 1, 2002, the Company adopted EITF 00-14 "Accounting for
Certain Sales Incentives" and EITF 00-25 "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer" and EITF 01-9
"Accounting for Consideration Given to a Customer or a Reseller of the Vendor's
Products." EITF 00-14 addresses the income statement classification for offers
by a vendor directly to end consumers that are exercisable after a single
exchange transaction in the form of coupons, rebate offers, or free products or
services disbursed on the same date as the underlying exchange transaction. The
issue requires the cost of these items to be accounted for as a reduction of
revenues, not included as a marketing expense as the Company did previously.
EITF 00-25 outlines required accounting treatment of certain sales incentives,
including slotting or placement fees, cooperative advertising arrangements,
buydowns and other allowances. The Company previously recorded such costs as
marketing expenses. The issue requires the Company to report the paid
consideration expense as a reduction of sales, rather than marketing expense.
EITF 01-9 codifies and reconciles certain issues from EITF 00-14 and EITF 00-25.
The third quarter and year to date 2001 net sales have been reclassified to
conform with these pronouncements. The impact was a reduction of net sales for
the third quarter and year to date periods of approximately $35.9 and $100.6
million in 2002 and $32.2 and $89.5 million in 2001, and did not have an effect
on net income.
Gross profit margin for the quarter was 30.8% and 30.1% as adjusted for the
change in promotion reserves versus 30.1% in 2001. During the quarter, the
Company sold the remaining high cost antiperspirant inventories produced at the
Carter-Wallace Cranbury plant. Gross profit margin for the nine-month period was
29.6%, unchanged from 2001. This is a result of expenses associated with the
startup of its Madera, California animal nutrition facility, higher expenses
associated with the Cranbury manufactured Arrid Antiperspirant, an increase in
consumer coupon expenses related to 2002 sales which reduced net sales and lower
sales on its existing personal care products. This was offset by lower
manufacturing and distribution costs on laundry products and the prior year
promotion reserve adjustments.
Marketing expenses increased $2.8 million in the quarter and $6.5 million for
the nine-month period. During the current quarter, increased spending on Arm &
Hammer deodorant antiperspirant and spending associated with the acquired
products were partially offset by lower spending on other personal care
products. For the nine-month period, the increase is primarily due to the
acquired products partially offset by lower spending on existing personal care
products.
Selling, general and administrative expenses increased $4.3 million to $30.3
million in the quarter and $7.8 million to $89.0 for the nine-month period. In
the quarter, higher personnel related expenses and transition expenses
associated with the Carter-Wallace acquired products, a $1.1 million impairment
charge related to the tradename valuation of a recently acquired brand and
higher deferred compensation expenses in the current quarter were partially
offset by the elimination of Goodwill and certain tradename amortization expense
associated with the Company's adoption of FAS 142. Excluding deferred
compensation expenses, the reason for the nine month increase is consistent with
the third quarter.
Earnings from affiliates increased due to the inclusion of Armkel, LLC. The
Company's existing equity investments, Armand Products and Armakleen were
virtually unchanged.
Interest expense increased significantly from last year as a result of the
Company carrying the debt that was used to finance the two significant
acquisitions in 2001. Other expenses include in the quarter and nine-month
period foreign exchange losses associated with the Company's Brazilian
subsidiary of $1.3 million and $2.5 million, respectively. Earnings were
negatively impacted in 2001 by a change in the fair value of derivative
instruments not designated as
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued)
hedging instruments. Subsequently, these contracts were designated as hedging
instruments of debt incurred as part of the Carter-Wallace acquisition and
changes in value were recorded through other comprehensive income in the equity
portion of the Company's Balance Sheet.
The effective tax rate for the nine-month period was 34.6% versus 35.3% last
year. This reflects the impact of Armkel's foreign subsidiaries, whose post-tax
results are included in equity in earnings of affiliates, partially offset by a
higher state tax rate.
For the quarter, net income was $17.6 million or $.44 per basic share and $.42
per diluted share, compared to $15.2 million or $.39 per basic share and $.37
per diluted share in the same period last year. This year's results included a
reversal of prior year promotion liabilities of approximately $.04 per share,
partially offset by the tradename impairment charge of $.02 per share. Last
year's results included a $.02 per share charge related to intangibles
amortization that was discontinued in 2002 with the adoption of accounting
standard FAS 142.
For the nine months, net income increased to $51.1 million or $1.29 per basic
share and $1.23 per diluted share compared to $40.9 million or $1.05 per basic
share and $1.00 per diluted share in the same period last year. This year's
results included a $.06 per share first quarter accounting charge relating to
the purchase accounting step-up of opening inventory carrying values by Armkel,
as well as a $.05 per share second quarter gain related to the allocation of
profits of Armkel, a note receivable reserve of approximately $.02 per share,
the reversal of prior year promotion reserves of $.07 per share and a $.02 per
share charge associated with the tradename impairment referred to earlier. Last
year's results included a $.02 plant shutdown charge, as well as a $.04
intangibles amortization charge discontinued in 2002.
Liquidity and Capital Resources
The Company considers cash and short-term investments as the principal
measurement of its liquidity. At September 27, 2002, cash including cash
equivalents totaled $76.1 million as compared to $52.4 million at December 31,
2001.
The Company has outstanding long-term debt of $380.0 million, and the
aforementioned cash equivalents less short-term debt of $20.8 million, for a net
debt position of $324.7 million at quarter-end. In addition, the Company had an
unused revolving credit facility of $100 million. Based on the definition in its
loan agreements, the Company's cash flow (EBITDA) is estimated to be over $102
million for the nine months.
Financial covenants include a leverage ratio and an interest coverage ratio,
which were both met for the quarter. The Company believes cash on hand, along
with the $100 million revolving credit facility is sufficient to meet its
liquidity needs, which includes future capital projects.
During the first nine months of 2002, the Company generated $73.0 million of
cash flow from operating activities and received $10.0 million from stock option
exercises. Significant expenditures include the purchase of Biovance stock of
$7.7 million, property, plant and equipment additions of $30.9 million, the net
repayment of debt of $16.9 million and the payment of cash dividends of $8.9
million.
Cautionary Note on Forward-Looking Statements
This report contains forward-looking statements relating, among others, to
liquidity needs, contingencies and other matters. These statements, represent
the intentions, expectations and beliefs of Church & Dwight, and are subject to
risks, uncertainties and other factors, many of which are outside the Company's
control. These factors, which include the ability of Church & Dwight to
successfully complete the integration of the operations of the consumer products
business of Carter-Wallace into the Armkel joint venture and Church & Dwight,
and assumptions as to market growth and consumer demand (including the effect of
recent political and economic events on consumer purchases), and the outcome of
contingencies, including litigation, environmental remediation and the
divestiture of assets, could cause actual results to differ materially from such
forward-looking statements. With regard to new product introductions, there is
particular uncertainty related to trade, competitive and consumer reactions. For
a description of additional cautionary statements, see Church & Dwight's annual
report filed with the SEC.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, we have concluded that the Company's disclosure
controls and procedures are effective in recording, processing,
summarizing and reporting within the time periods specified in the
SEC's rules and forms material information relating to the Company
(including its consolidated subsidiaries) required to be included in
the Company's periodic SEC filings.
Since Messrs. Davies' and Eiref's most recent review of the Company's
internal controls systems, there have been no significant changes in
internal controls or in other factors that could significantly affect
these controls.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(11) Computation of earnings per share
(99.1) Statement regarding the Certification of the CEO of Church
& Dwight Co., Inc. Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002
(99.2) Statement regarding the Certification of the CFO of Church
& Dwight Co., Inc. Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002
(10) Compensation Plans and Arrangements
(a) Employment letter dated July 24, 2002, by and
between Church & Dwight Co., Inc. and Andrew B.
Steinberg for the position of Vice President, General
Counsel and Secretary.
(b) Separation and Consulting Agreement dated October 4,
2002, by and between Church & Dwight Co., Inc. and Mark
A. Bilawsky.
b. No reports on Form 8-K were filed for the three months ended
September 27, 2002.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
EXHIBIT 11 - Computation of Earnings Per Share
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2002 2001 2002 2001
---- ---- ---- ----
BASIC:
Net Income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871
Weighted average shares outstanding................ 39,794 39,011 39,548 38,803
Basic earnings per share........................... $.44 $.39 $1.29 $1.05
DILUTED:
Net Income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871
Weighted average shares outstanding................ 39,794 39,011 39,548 38,803
Incremental shares under stock option plans........ 2,081 2,026 2,201 1,921
---------- ---------- ---------- ----------
Adjusted weighted average shares outstanding....... 41,875 41,037 41,749 40,724
---------- ---------- ---------- ----------
Diluted earnings per share......................... $.42 $.37 $1.23 $1.00
EXHIBIT 99.1
The Certification of the Chief Executive Officer of Church & Dwight Co., Inc.
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 is not being filed with the Quarterly Report but has
been submitted to the Securities and Exchange Commission under separate cover.
EXHIBIT 99.2
The Certification of the Chief Financial Officer of Church & Dwight Co., Inc.
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 is not being filed with the Quarterly Report but has
been submitted to the Securities and Exchange Commission under separate cover
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.
CHURCH & DWIGHT CO.,INC.
-------------------------------------
(REGISTRANT)
DATE: November 8, 2002 /s/ Zvi Eiref
--------------------------- -------------------------------------
ZVI EIREF
VICE PRESIDENT FINANCE
DATE: November 8, 2002 /s/ Gary P. Halker
--------------------------- -------------------------------------
GARY P. HALKER
VICE PRESIDENT, CONTROLLER AND
CHIEF INFORMATION OFFICER
CERTIFICATION
I, Robert A. Davies, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Church & Dwight Co.,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of any material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by other within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (of persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
----------------
/s/ Robert A. Davies, III
---------------------------------
Robert A. Davies, III
Chief Executive Officer
CERTIFICATION
I, Zvi Eiref, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Church & Dwight Co.,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of any material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by other within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (of persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
----------------
/s/ Zvi Eiref
---------------------------------
Zvi Eiref
Chief Financial Officer