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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2003
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 May 6, 2003, there were 40,093,434 shares of Common Stock outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Months Ended
(Dollars in thousands, except per share data) Mar. 28, 2003 Mar. 29, 2002
------------- -------------
Net Sales........................................................................... $ 248,298 $ 256,802
Cost of sales....................................................................... 174,464 183,552
---------- ----------
Gross Profit........................................................................ 73,834 73,250
Marketing expenses.................................................................. 16,943 16,832
Selling, general and administrative expenses........................................ 28,110 29,191
---------- ----------
Income from Operations.............................................................. 28,781 27,227
Equity in earnings of affiliates.................................................... 8,152 917
Investment earnings................................................................. 304 565
Other income (expense), net......................................................... 5 (193)
Interest expense.................................................................... (5,180) (6,088)
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Income before taxes and minority interest........................................... 32,062 22,428
Income taxes........................................................................ 11,107 7,416
Minority interest................................................................... 9 89
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Net Income.......................................................................... 20,946 14,923
Retained earnings at beginning of period............................................ 367,211 312,409
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388,157 327,332
Dividends paid...................................................................... 2,995 2,942
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Retained earnings at end of period.................................................. $ 385,162 $ 324,390
========== ==========
Weighted average shares outstanding - Basic......................................... 39,945 39,267
========== ==========
Weighted average shares outstanding - Diluted....................................... 41,852 41,488
========== ==========
Earnings Per Share:
Net income per share - Basic........................................................ $ 0.52 $ 0.38
========== =========
Net income per share - Diluted...................................................... $ 0.50 $ 0.36
========== =========
Dividends Per Share................................................................. $ .075 $ .075
========== =========
See Notes to Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Mar. 28, 2003 Dec. 31, 2002
(Dollars in thousands) (Unaudited)
Assets
Current Assets
Cash and cash equivalents........................................................... $ 67,242 $ 76,302
Accounts receivable, less allowances of $1,552 and $1,546........................... 96,831 100,252
Inventories......................................................................... 85,912 82,674
Deferred income taxes............................................................... 17,958 18,154
Note receivable - current........................................................... 942 870
Prepaid expenses.................................................................... 6,304 7,184
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Total Current Assets................................................................ 275,189 285,436
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Property, Plant and Equipment (Net)................................................. 240,755 240,007
Note Receivable..................................................................... 8,766 9,708
Equity Investment in Affiliates..................................................... 136,503 131,959
Long-term Supply Contracts.......................................................... 6,259 6,538
Tradenames and Other Intangibles.................................................... 89,341 90,036
Goodwill ........................................................................... 205,752 202,388
Other Assets........................................................................ 22,945 22,169
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Total Assets........................................................................ $ 985,510 $ 988,241
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings............................................................... $ 62,994 $ 4,490
Accounts payable and accrued expenses............................................... 157,768 162,907
Current portion of long-term debt................................................... 3,424 11,455
Income taxes payable................................................................ 18,270 12,315
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Total current liabilities........................................................... 242,456 191,167
Long-term Debt...................................................................... 273,603 352,488
Deferred Income Taxes............................................................... 60,077 57,103
Deferred and Other Long-term Liabilities............................................ 25,348 24,014
Postretirement and Postemployment Benefits.......................................... 15,797 15,609
Minority Interest................................................................... 239 214
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.......................................................... 41,200 39,550
Retained earnings................................................................... 385,162 367,211
Accumulated other comprehensive (loss).............................................. (17,592) (16,919)
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455,431 436,503
Common stock in treasury, at cost:
6,638,254 shares in 2003 and 6,763,554 shares in 2002.......................... (87,441) (88,857)
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Total Stockholders' Equity.......................................................... 367,990 347,646
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Total Liabilities and Stockholders' Equity.......................................... $ 985,510 $ 988,241
========== ==========
See Notes to Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
(Dollars in thousands) Mar. 28, 2003 Mar. 29, 2002
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Cash Flow From Operating Activities
Net Income.......................................................................... $ 20,946 $ 14,923
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization....................................... 7,508 6,482
Equity in earnings of affiliates............................................... (8,152) (917)
Deferred income taxes.......................................................... 3,918 6,701
Other.......................................................................... 312 (152)
Change in assets and liabilities:
Decrease in accounts receivable................................................ 3,754 5,573
(Increase) in inventories...................................................... (2,906) (1,571)
Decrease in prepaid expenses................................................... 927 548
(Decrease) in accounts payable................................................. (5,586) (10,037)
Increase/(decrease) in income taxes payable.................................... 6,677 (2,043)
Increase/(decrease) in other liabilities....................................... 1,278 (11)
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Net Cash Provided By Operating Activities........................................... 28,676 19,496
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Cash Flow From Investing Activities
Additions to property, plant and equipment.......................................... (6,207) (10,104)
Biovance acquisition (net of cash acquired)......................................... (3,424) (7,714)
Proceeds from note receivable....................................................... 870 803
Distributions from affiliates....................................................... 740 703
Other long-term assets.............................................................. (111) (465)
Proceeds from sale of fixed assets.................................................. -- 75
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Net Cash Used In Investing Activities............................................... (8,132) (16,702)
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Cash Flow From Financing Activities
Long-term debt (repayment).......................................................... (87,273) (1,830)
Short-term debt borrowing/(repayment)............................................... 58,614 123
Proceeds from stock options exercised............................................... 2,301 3,261
Payment of cash dividends........................................................... (2,995) (2,942)
Other............................................................................... (251) --
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Net Cash (Used In) Provided By Financing Activities................................. (29,604) (1,388)
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Net Change In Cash and Cash Equivalents............................................. (9,060) 1,406
Cash And Cash Equivalents At Beginning Of Year...................................... 76,302 52,446
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Cash And Cash Equivalents At End Of Period.......................................... $ 67,242 $ 53,852
========= =========
See Notes to Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of March 28, 2003, the consolidated
statements of income and retained earnings for the three months ended March 28,
2003 and March 29, 2002 and the consolidated statements of cash flow for the
three months then ended have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flow at March 28, 2003 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, 2002 annual
report to shareholders. The results of operations for the period ended March 28,
2003 are not necessarily indicative of the operating results for the full year.
2. Inventories consist of the following:
(In thousands) Mar. 28, 2003 Dec. 31, 2002
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Raw materials and supplies.......................................................... $ 31,049 $ 30,987
Work in process..................................................................... 186 142
Finished goods ..................................................................... 54,677 51,545
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$ 85,912 $ 82,674
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3. Property, Plant and Equipment consist of the following:
(In thousands) Mar. 28, 2003 Dec. 31, 2002
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Land................................................................................ $ 6,102 $ 6,079
Buildings and improvements.......................................................... 105,823 105,469
Machinery and equipment............................................................. 268,400 267,568
Office equipment and other assets................................................... 30,646 30,556
Software ........................................................................... 5,957 5,945
Mineral rights ..................................................................... 492 467
Construction in progress............................................................ 15,865 9,920
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433,285 426,004
Less accumulated depreciation, depletion and amortization........................... 192,530 185,997
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Net Property, Plant and Equipment................................................... $ 240,755 $ 240,007
========== ==========
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. The weighted average
number of common shares outstanding used to calculate Basic EPS is reconciled to
those shares used in calculating Diluted EPS as follows:
Three Months Ended
--------------------------------
(In thousands) Mar. 28, 2003 Mar. 29, 2002
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Basic............................................................................... 39,945 39,267
Dilutive effect of stock options.................................................... 1,907 2,221
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Diluted............................................................................. 41,852 41,488
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CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Stock Based Compensation
The Company accounts for costs of stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", rather than the fair-value based method in Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". During the first quarter of 2003, there were no stock options
granted. Had compensation cost been determined based on the fair values of the
stock options at the date of grant in accordance with SFAS 123, the Company
would have recognized compensation expense, net of taxes, of $941,000 and
$865,000 in the first quarter of 2003 and 2002, respectively.
The Company's pro forma net income and pro forma net income per share for the
first quarter of 2003 and 2002 are as follows:
Quarter Ended
(In thousands, except for per share data) Mar. 28, 2003 Mar. 29, 2002
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Net Income
As reported..................................................................... $ 20,946 $ 14,923
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects................. -- --
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects.... (941) (865)
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Pro forma....................................................................... 20,005 14,058
Net Income per Share: basic
As reported..................................................................... $0.52 $0.38
Pro forma....................................................................... $0.50 $0.36
Net Income per Share: diluted
As reported..................................................................... $0.50 $0.36
Pro forma....................................................................... $0.48 $0.34
6. Segment Information
Segment sales and income from operations for the first quarter of 2003 and 2002
are as follows:
Unconsolidated
Affiliates and
(In thousands) Consumer Specialty Eliminations Total
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Net Sales
First quarter 2003.......................... $ 303,170 $ 54,803 $ (109,675) $ 248,298
First quarter 2002.......................... 300,059 53,246 (96,503) 256,802
Income from Operations
First quarter 2003.......................... $ 49,911 $ 5,056 $ (26,186) $ 28,781
First quarter 2002.......................... 31,620 7,095 (11,488) 27,227
Both Consumer and Specialty net sales and income from operations include 100
percent of the results of unconsolidated affiliates.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Product line net sales data for the first quarter periods are as follows:
Three Months Ended March 28, 2003 Three Months Ended March 29, 2002
--------------------------------------------- ----------------------------------------------
Unconsol. CHD and Unconsol. CHD and
CHD Affiliates Elim.** Affiliates CHD Affiliates Elim.** Affiliates
Deodorizing and
Cleaning Products $ 53,164 $ -- $ -- $ 53,164 $ 62,632 $ -- $ -- $ 62,632
Laundry Products.... 100,615 -- -- 100,615 100,210 -- -- 100,210
Personal Care Products 42,593 52,148 -- 94,741 41,583 48,627 -- 90,210
International....... 7,904 47,505 (759) 54,650 8,406 38,745 (144) 47,007
--------- -------- -------- -------- --------- --------- ------- ---------
Total Consumer...... 204,276 99,653 (759) 303,170 212,831 87,372 (144) 300,059
Specialty Products Division 44,022 11,933 (1,152) 54,803 43,971 10,019 (744) 53,246
---------- --------- ---------- ---------- --------- --------- ------- --------
Total Net Sales..... $ 248,298 $ 111,586 $ (1,911) $ 357,973 $ 256,802 $ 97,391 $ (888) $ 353,305
========== ========= ======== ========= ========= ========= ========= =========
**Includes elimination of intercompany sales
7. Armkel LLC
The following table summarizes financial information for Armkel LLC. The Company
accounts for its 50% interest under the equity method.
Quarter Ended
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March 28, March 29,
(In thousands) 2003 2002
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Income statement data:
Net sales........................................................................... $ 99,654 $ 87,372
Gross profit........................................................................ 58,485 42,138
Net income ......................................................................... 15,219 308
Equity in affiliate ................................................................ 7,610 308
March 28, December 31,
(In thousands) 2003 2002
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Balance sheet data:
Current assets...................................................................... $ 216,377 $ 246,307
Noncurrent assets................................................................... 561,534 562,207
Short-term debt..................................................................... 7,657 28,556
Current liabilities (excluding short-term debt)..................................... 87,744 110,224
Long-term debt...................................................................... 407,597 411,634
Other long-term liabilities......................................................... 29,366 28,420
Partners' equity.................................................................... 245,547 229,680
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 29, 2001, the date of the acquisition. The
Company is entitled to 100% of the profits up till an amount equal to the
accumulated excess losses it recorded. As a result, the Company recorded 50% of
the first quarter net income of $15.2 million as compared to 100% of the prior
year results.
During the quarter, Armkel closed on its previously announced sale of its
Italian subsidiary for a sales price of approximately $22.6 million. Armkel
recognized a pretax gain on the sale of approximately $1.9 million.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company invoiced Armkel $6.4 million and $3.5 million for primarily
administrative and management oversight services (which is included as a
reduction of selling, general and administrative expenses), and purchased $.7
million and $5.4 million of deodorant anti-perspirant inventory produced by
Armkel in the first quarter 2003 and 2002, respectively. The Company sold Armkel
$.8 million and $.1 million of Arm & Hammer products to be sold in international
markets in the first quarter of 2003 and 2002, respectively. The Company has an
open receivable from Armkel at March 28, 2003 and March 29, 2002 of
approximately $3.5 million and $6.0 million, respectively, that primarily
related to administrative services, partially offset by amounts owed for
inventory.
8. Goodwill, Tradenames and Other Intangible Assets
The following tables discloses the carrying value of all intangible assets:
(In thousands) March 28, 2003 December 31, 2002
------------------------------------ --------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Net Amount Amort. Net
------ ------ --- ------ ------ ---
Amortized intangible assets:
- ---------------------------
Tradenames...................... $ 36,970 $ (5,707) $ 31,263 $ 36,970 $ (5,182) $ 31,788
Formulas........................ 6,281 (1,007) (5,274 6,281 (866) 5,415
Non Compete Agreement........... 1,143 (146) 997 1,143 (117) 1,026
--------- --------- --------- -------- -------- --------
Total........................... $ 44,394 $ (6,860) $ 37,534 $ 44,394 $ (6,165) $ 38,229
========= ========= ========= ======== ======== ========
Unamortized intangible assets - Carrying value
Tradenames...................... $ 51,807 $ 51,807
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Total........................... $ 51,807 $ 51,807
========= ========
Intangible amortization expense amounted to $.7 million in the current quarter
and $.3 million for the same period of a year ago. The estimated intangible
amortization for each of the next five years is approximately $2.9 million.
The changes in the carrying amount of goodwill for the quarter ended March 28,
2003 is as follows:
(In thousands) Consumer Specialty Total
Balance December 31, 2002......................................... $ 182,498 $ 19,890 $ 202,388
Additional purchase price......................................... -- 3,424 3,424
Foreign exchange/other............................................ 10 (70) (60)
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Balance March 28, 2003............................................ $ 182,508 $ 23,244 $ 205,752
=========== ========== ===========
Based upon the terms of the Biovance purchase agreement, an additional payment
of $3.4 million was made during the quarter contingent upon 2002 operating
performance and was recorded as goodwill in the accompanying balance sheet. An
additional payment will be required based on 2003 operating performance which
cannot exceed $8.6 million and will be accounted for as additional purchase
price.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Comprehensive Income
The following table presents the Company's Comprehensive Income for the three
months ended March 28, 2003 and March 29, 2002:
Three Months Ended
------------------
March 28, March 29,
(In thousands) 2003 2002
---- ----
Net Income................................................................. $ 20,946 $ 14,923
Other Comprehensive Income, net of tax:
Minimum pension liability.............................................. (1,648) --
Foreign exchange translation adjustments............................... 872 (231)
Interest rate swap agreements.......................................... 103 1,046
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Comprehensive Income....................................................... $ 20,273 $ 15,738
========= ========
10. Accounts Receivable Securitization
During the first quarter of 2003, the Company entered into a receivables
purchase agreement with an issuer of receivables-backed commercial paper in
order to refinance a portion, $60,000,000, of its primary credit facility. Under
this arrangement, the Company sold, and will sell from time to time, throughout
the 3 year term of the agreement, its trade accounts receivable to a
wholly-owned, consolidated, special purpose finance subsidiary, Harrison Street
Funding LLC, a Delaware limited liability company ("Harrison"). Harrison in turn
sold, and will sell on an ongoing basis, to the commercial paper issuer an
undivided interest in the pool of accounts receivable. The transactions were
entered into to reduce certain expenses associated with the credit facility in
addition to lowering the Company's financing costs by accessing the commercial
paper market. Consequently, the receivables assets and the short-term borrowings
of Harrison are included in the consolidated financial statements of the
Company. However, under these agreements, as was the case under the credit
facility, such assets will not be available to satisfy claims of creditors other
than the commercial paper issuer.
11. Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company has assessed SFAS No. 143 has
determined there is no material impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair market value of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of the Interpretation apply
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure provisions were effective for financial statements of interim or
annual periods ending after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in connection
with other Board projects dealing with financial instruments, and (3) in
connection with implementation issues raised in relation to the application of
the definition of a derivative, in particular, the meaning of an initial net
investment that is
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the meaning of
underlying, and the characteristics of a derivative that contains financing
components. This Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. In addition, except as stated below, all
provisions of this Statement should be applied prospectively. The provisions of
this Statement that relate to Statement 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
certain provisions, which relate to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to both
existing contracts and new contracts entered into after June 30, 2003. The
Company will adopt the provisions of the statement on its effective date.
12. 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 $2.1 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. On February 28, 2003 a class action suit was filed against the Company
and Armkel, and two unrelated condom manufacturers, in the Superior Court
of New Jersey alleging injuries sustained due to the use of condoms with
N-9. The Company continues to believe that condoms with N-9 provide an
acceptable added means of contraceptive protection, however, the Company
cannot predict the outcome of this litigation.
c. The Company has commitments to acquire approximately $13 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.
d. 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.
13. Reclassification
Certain prior year amounts have been reclassified in order to conform with the
current year presentation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
- ---------------------
For the quarter ended March 28,2003, the Company reported net income of $ 20.9
million or diluted net income per share of $0.50. Net income in the year ago
quarter was $14.9 million or $0.36 per diluted share, including a $0.06 per
share accounting charge related to the step up of opening inventory of Armkel
LLC.
Net sales of $ 248.3 million were $8.5 million or 3.3% lower than last year.
Sales of Personal Care and Liquid Laundry Detergent were higher, however this
increase was more than offset by lower Deodorizing and Cleaning Products and
International sales. The decrease in these two product lines was a result of
discontinuing in 2002 certain pet care products acquired from Carter Wallace and
candle and cleaner products related to the USA Detergent acquisition.
International sales were lower due to certain export operations transferred to
Armkel. Specialty products sales were unchanged from the year ago quarter at $44
million.
Gross Profit was $73.8 million or 29.7% of net sales compared to $73.2 million
or 28.5 % of net sales, an increase of 120 basis points. This increase is
primarily due to lower costs associated with the products acquired from Carter
Wallace which were manufactured at the higher cost former Carter Wallace
Cranbury NJ facility in 2002. These savings are partially offset by higher
manufacturing costs associated with animal nutrition products.
Marketing expenses were virtually unchanged versus last year. Higher costs for
Personal Care products were slightly offset by lower expenses associated with
Laundry Products.
Selling, general and administrative expenses of $28.1 million was approximately
$1.0 million lower than last year. This is a result of lower Information Systems
costs which includes integration costs in 2002 related to the Carter-Wallace
acquisition, partially offset by higher personnel related expenses.
Equity in earnings of affiliates increased $7.2 million as a result of higher
earnings by Armkel primarily as a result of the 2002 inventory step up charge
and the gain of the sale of its Italian subsidiary in 2003.
Investment earnings were lower as a result of lower interest rates.
Interest expense was lower due to lower interest rates and lower amount of debt
outstanding.
The tax rate for the current quarter was 34.6%, compared to 33.1% a year ago.
This increase is a result of a higher state tax rate and taxes associated with
Armkel's sale of its Italian subsidiary in 2003.
Segment Results
Sales and operating results in affiliate companies over which the Company exerts
significant influence, but does not control the financial and operating
decisions, are reported for segment purposes in a manner similar to consolidated
subsidiaries. The effect of this convention is eliminated to adjust management
reporting results to the amounts in the financial statements. The sales and
operating results are presented in this manner as a result of the way the chief
decision maker of the Company (the CEO) manages the Company.
Unconsolidated
Affiliates and
(In thousands) Consumer Specialty Eliminations Total
-------- --------- ------------ -----
Net Sales
First quarter 2003.......................... $ 303,170 $ 54,803 $ (109,675) $ 248,298
First quarter 2002.......................... 300,059 53,246 (96,503) 256,802
Income from Operations
First quarter 2003.......................... $ 49,911 $ 5,056 $ (26,186) $ 28,781
First quarter 2002.......................... 31,620 7,095 (11,488) 27,227
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Consumer Products
Combined Consumer Product sales of the Company and its affiliates grew 1% to
$303 million. Last year sales included sales of pet care, candle and cleaner
products acquired from USA Detergents and Carter-Wallace in 2001 and
discontinued during 2002, and certain export operations subsequently transferred
to Armkel. At the product line level, strong growth in liquid laundry detergent
and moderately higher sales of toothpaste, condoms and pregnancy kits were
offset by lower sales of powder laundry detergent, fabric softeners and
household cleaners. In addition, sales increased due to foreign exchange gains
of affiliates abroad as well as higher oral and skin care sales in Europe and
condoms in Mexico.
Operating profit increased $18.3 million or 58% to $49.9 million due to the
prior year $8.1 million charge for the remaining step-up of opening inventory
values established as part of purchase accounting and lower costs associated
with the products acquired from Carter-Wallace which were manufactured at the
higher cost Cranbury facility.
Specialty Products
Combined Specialty Products sales grew $1.6 million or 2.9% in the current
quarter due to higher specialty chemicals sales, partially offset by lower
animal nutrition products.
Operating profit declined $2.0 million or 29% to $5.1 million primarily as a
result of higher manufacturing costs in certain animal nutrition and specialty
chemical products .
Liquidity and Capital Resources
The Company had outstanding total debt of $340.0 million, and cash of $67.2
million, for a net debt position of $272.8 million at March 28, 2003. This
compares to $292.1 million at December 31, 2002.
In the fourth quarter of 2001, the Company financed its investment in Armkel,
the acquisition of USA Detergents and the Anti-perspirant and Pet Care
businesses from Carter-Wallace with a $410 million credit facility consisting of
$410 million in 5 and 6 year term loans. The entire amount of the term loans was
drawn at closing and a $100 million revolving credit facility remains fully
un-drawn. The term loans pay interest at 200 and 250 basis points over LIBOR,
depending on the ratio of total debt to EBITDA. EBITDA is a required component
of the financial covenants contained in the Company's primary credit facility
and management believes that the presentation of EBITDA is useful to investors
as a financial indicator of the Company's ability to service its indebtedness.
Financial covenants include a leverage ratio and an interest coverage ratio,
which if not met, could result in an event of default and trigger the early
termination of the credit facility, if not remedied within a certain period of
time. EBITDA, as defined by the Company's loan agreement, was approximately
$36.5 million. The leverage ratio at March 28, 2003 per the loan agreement,
therefore, was approximately 2.25 versus the agreement's maximum 3.5, and the
interest coverage ratio was 6.38 versus the agreement's minimum of 4.25. This
credit facility is secured by a blanket lien on all of the Company's assets. The
reconciliation of Net Cash Provided by Operating Activities to the Company's key
liquidity measure, "EBITDA", per the term loan agreement, is as follows (in
millions):
Net Cash Provided by Operating Activities..................... $ 28.7
Plus:
Interest Expense...................................... 5.2
Current Income Tax Provision.......................... 7.2
Distributions from Affiliates......................... .7
Less:
Decrease in Working Capital........................... (2.9)
Interest Income....................................... (.3)
Other................................................. (2.1)
----------
EBITDA (per loan agreement)................................... $ 36.5
==========
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
During the first quarter of 2003, operating cash flow was $28.7 million. Major
factors contributing to the cash flow from operating activities included
operating earnings before non-cash charges for depreciation and amortization,
and a reduction in working capital, particularly accounts receivable, offset by
the net non-cash impact from the equity in earnings of affiliates. Operating
cash flow was used for additions to property, plant and equipment and to make an
additional payment related to the Biovance acquisition. Operating cash together
with proceeds from stock options exercised, were used to make both voluntary and
mandatory debt repayments and to pay cash dividends.
Also during the first quarter of 2003, the Company entered into a receivables
purchase agreement with an issuer of receivables-backed commercial paper in
order to refinance a portion, $60,000,000, of its primary credit facility. Under
this arrangement, the Company sold, and will sell from time to time, throughout
the 3 year term of the agreement, its trade accounts receivable to a
wholly-owned, consolidated, special purpose finance subsidiary, Harrison Street
Funding LLC, a Delaware limited liability company ("Harrison"). Harrison in turn
sold, and will sell on an ongoing basis, to the commercial paper issuer an
undivided interest in the pool of accounts receivable. The transactions were
entered into to reduce certain expenses associated with the credit facility in
addition to lowering the Company's financing costs by accessing the commercial
paper market. Consequently, the receivables assets and the short-term borrowings
of Harrison are included in the consolidated financial statements of the
Company. However, under these agreements, as was the case under the credit
facility, such assets will not be available to satisfy claims of creditors other
than the commercial paper issuer.
Recent Accounting Pronouncements
- --------------------------------
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company has assessed SFAS No. 143 has
determined there is no material impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair market value of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of the Interpretation apply
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure provisions were effective for financial statements of interim or
annual periods ending after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in connection
with other Board projects dealing with financial instruments, and (3) in
connection with implementation issues raised in relation to the application of
the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying, and the characteristics of a derivative that contains
financing components. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions, which relate to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company will adopt the provisions of the statement on
its effective date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At current prices, the Company expects to incur over $10 million in energy and
other commodity-based cost increases for the year, for materials such as resin,
surfactants and palm oil. While these cost increases will slow down gross margin
growth, the Company still expects to achieve a gross margin improvement for the
year, through reductions in other raw and packaging materials costs, and
improved manufacturing and distribution efficiencies.
For additional information, refer to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
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 the Chief Executive Officer's and Chief Financial Officer'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.
Cautionary Note on Forward-Looking Statements
- ---------------------------------------------
This report contains forward-looking statements relating, among others, to
short- and long-term financial objectives, sales growth, cash flow and cost
improvement programs. These statements represent the intentions, plans,
expectations and beliefs of the Company, and are subject to risks, uncertainties
and other factors, many of which are outside the Company's control and could
cause actual results to differ materially from such forward-looking statements.
The uncertainties include assumptions as to market growth and consumer demand
(including the effect of political and economic events on consumer demand), raw
material and energy prices, the financial condition of major customers, and the
Company's determination and ability to exercise its option to acquire the
remaining 50% interest in Armkel, LLC. With regard to the new product
introductions referred to in this report, there is particular uncertainty
relating to trade, competitive and consumer reactions. Other factors, which
could materially affect the results, include the outcome of contingencies,
including litigation, pending regulatory proceedings, environmental remediation
and the acquisition or divestiture of assets.
The Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures the Company makes
on related subjects in its filings with the U.S. Securities and Exchange
Commission. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
PART II - Other Information
ITEM 4. RESULTS OF VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 8, 2003. The
following nominees were elected to the Company's Board of Directors for a term
of three years:
Nominee For Withheld
- ------- ---------- ---------
John D. Leggett, III, PH.D. 52,817,068 665,295
John F. Maypole 52,851,367 630,996
Robert A. McCabe 50,256,784 3,225,579
Burton B. Staniar 50,439,245 3,043,118
The results of voting on the following additional items are as follows:
Approval of the appointment of Deloitte & Touche LLP as independent auditors of
the Company's 2003 financial statements.
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
49,787,430 2,801,815 893,117 0
Approval of an amendment to the Company's Restated Certificate of Incorporation
to limit the ability to call special meeting of the Company's stockholders to
the Chief Executive Officer or a majority of the Directors then in office.
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
38,618,637 13,894,514 969,212 0
Approval of an amendment to the Company's Restated Certificate of Incorporation
to require advance notice to the Company of stockholder nominations and
proposals.
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
45,197,184 3,260,832 913,700 4,110,647
Approval of an amendment to the Company's Amended and Restated 1998 Stock Option
Plan to permit grants of other types of incentive compensation awards.
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
38,341,969 14,153,532 986,861 0
Approval of an amendment to the Company's Restated Certificate of Incorporation
to eliminate time-phased voting.
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
44,779,170 3,330,874 1,129,749 4,242,570
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(11) Computation of earnings per share
(99.1) 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) 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
b. Reports on Form 8-K
On January 30, 2003, a report on Form 8-K was filed to announce
that the Company, through a wholly owned special purpose finance
subsidiary, Harrison Street Funding, LLC, a Delaware limited
liability company ("Harrison") has refinanced a portion,
$60,000,000, of its primary credit facility.
On February 10, 2003, a report on Form 8-K was filed to announce
that the Company issued a press release relating to earnings for
the quarter and year ended December 31, 2002 and the Company's
investor and analyst conference that was held on Monday, February
10, 2003.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
EXHIBIT 11 - Computation of Earnings Per Share
(In thousands except per share amounts)
Three Months Ended
------------------
March 28, March 29,
2003 2002
---- ----
BASIC:
Net Income........................................................... $ 20,946 $ 14,923
Weighted average shares outstanding........................................ 39,945 39,267
Basic earnings per share................................................... $0.52 $0.38
DILUTED:
Net Income........................................................... $ 20,946 $ 14,923
Weighted average shares outstanding........................................ 39,945 39,267
Incremental shares under stock option plans.......................... 1,907 2,221
---------- ----------
Adjusted weighted average shares outstanding............................... 41,852 41,488
---------- ----------
Diluted earnings per share................................................. $0.50 $0.36
EXHIBIT 99.1
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Church & Dwight Co., Inc.
(the "Company") certifies to his knowledge that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period
ended March 28, 2003 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in that Form 10-Q fairly presents, in all material
respects, the financial conditions and results of operation of the Company.
May 12, 2003 /s/ Robert A. Davies, III
- --------------------------- -----------------------------------------
Date Robert A. Davies, III
Chairman and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Church & Dwight Co., Inc.
(the "Company") certifies to his knowledge that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period
ended March 28, 2003 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in that Form 10-Q fairly presents, in all material
respects, the financial conditions and results of operation of the Company.
May 12, 2003 /s/ Zvi Eiref
- --------------------------- -----------------------------------------
Date Zvi Eiref
Chief Financial Officer
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: May 12, 2003 /s/ Zvi Eiref
------------------------------ ------------------------------------------------
ZVI EIREF
VICE PRESIDENT FINANCE
DATE: May 12, 2003 /s/ Gary P. Halker
------------------------------ ------------------------------------------------
GARY P. HALKER
VICE PRESIDENT FINANCE
AND TREASURER
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 others 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 (or 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: May 12, 2003
-----------------
/s/ Robert A. Davies, III
---------------------------------------
Robert A. Davies, III
Chairman and 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 others 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 (or 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: May 12, 2003
-----------------
/s/ Zvi Eiref
------------------------------------------
Zvi Eiref
Chief Financial Officer