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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 June 27, 2003
Commission file Number 333-73160
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ARMKEL, LLC
(Exact name of registrant as specified in its certificate of formation)
Delaware 13-4181336
(State or other jurisdiction (I.R.S Employer Identification No.)
of incorporation or organization)
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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act
Yes |_| No |X|
As of August 8, 2003, all of the 10,000 outstanding membership interests in
Armkel, LLC were held by affiliates.
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TABLE OF CONTENTS
PART I
ITEM PAGE
1. Financial Statements 3
2. Management's Discussion and Analysis 17
3. Quantitative and Qualitative Disclosure About Market Risk 20
4. Controls and Procedures 20
PART II
6. Exhibits and Reports on Form 8-K 22
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN MEMBERS' EQUITY
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
(Dollars in thousands) June 27, June 28, June 27, June 28,
2003 2002 2003 2002
-------- -------- -------- ---------
Net Sales................................................. $ 113,477 $ 104,431 $ 213,130 $ 191,803
Cost of goods sold........................................ 48,950 45,551 90,119 90,785
---------- --------- ---------- ---------
Gross Profit.............................................. 64,527 58,880 123,011 101,018
Marketing expenses........................................ 19,746 12,932 31,755 24,381
Selling, general and administrative expenses.............. 25,810 20,884 46,852 41,305
Patent infringement...................................... (13,050) -- (12,717) --
-------- --------- ---------- ---------
Income from Operations.................................... 32,021 25,064 57,121 35,332
Interest expense.......................................... (8,717) (8,888) (17,606) (18,267)
Interest income........................................... 239 268 520 553
Other income (expense).................................... 1,404 1,202 1,119 1,130
---------- --------- ---------- ---------
Income before taxes....................................... 24,947 17,646 41,154 18,748
Income taxes.............................................. 2,427 2,989 5,530 4,353
---------- --------- ---------- ---------
Income from continuing operations ........................ 22,520 14,657 35,624 14,395
Income from discontinued operations....................... -- 928 254 1,498
Gain on disposition of discontinued operations............ -- -- 1,862 --
---------- --------- ---------- ---------
Net Income................................................ 22,520 15,585 37,740 15,893
Other comprehensive income (loss) ........................ 1,929 (23) 2,576 (1,154)
---------- --------- ---------- ---------
Total comprehensive income ............................... 24,449 15,562 40,316 14,739
Members' Equity at Beginning of Period.................... 245,547 202,763 229,680 203,586
---------- --------- ---------- -------
Members' Equity at End of Period.......................... $ 269,996 $ 218,325 $ 269,996 $ 218,325
========== ========= ========== ==========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) June 27, 2003 Dec. 31, 2002
------------- -------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents....................................................... $ 44,398 $ 54,780
Accounts receivable, less allowances of $1,865 and $2,177....................... 110,385 75,864
Patent infringement receivable.................................................. 18,000 --
Inventories..................................................................... 60,622 53,427
Prepaid expenses................................................................ 5,080 5,557
Assets of discontinued operations............................................... -- 42,079
Net assets held for sale........................................................ 11,500 14,600
----------- -----------
Total Current Assets............................................................ 249,985 246,307
Property, Plant and Equipment (Net)............................................. 74,639 72,867
Tradenames and Patents.......................................................... 259,025 261,275
Goodwill........................................................................ 205,844 205,467
Deferred Financing Costs........................................................ 15,661 17,380
Other Assets.................................................................... 5,475 5,218
----------- -----------
Total Assets.................................................................... $ 810,629 $ 808,514
=========== ===========
Liabilities and Members' Equity
Current Liabilities
Short-term borrowings........................................................... $ -- $ 55
Accounts payable and accrued expenses........................................... 98,912 85,036
Liabilities of discontinued operations.......................................... -- 23,582
Current portion of long-term debt............................................... 7,217 28,501
Taxes payable................................................................... 5,351 1,606
----------- -----------
Total Current Liabilities....................................................... 111,480 138,780
Long-term Debt.................................................................. 398,888 411,634
Deferred Income Taxes........................................................... 9,234 8,500
Deferred and Other Long-term Liabilities........................................ 21,031 19,920
Commitments and Contingencies
Members' Equity
Net contributed capital......................................................... 220,500 220,500
Retained earnings............................................................... 53,306 15,566
Accumulated other comprehensive loss............................................ (3,810) (6,386)
----------- -----------
Total Members' Equity........................................................... 269,996 229,680
----------- -----------
Total Liabilities and Members' Equity........................................... $ 810,629 $ 808,514
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
----------------
June 27, June 28,
(Dollars in thousands) 2003 2002
---- ----
Cash Flow From Operating Activities:
Net Income...................................................................... $ 37,740 $ 15,893
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization ............................................... 7,946 8,355
Unrealized gain on foreign exchange transactions............................. (1,239) (999)
Fair market value adjustment of assets held for sale......................... 3,100 --
Net income from discontinued operations...................................... (254) (1,498)
Net gain on sale of discontinued operations.................................. (1,862) --
Change in assets and liabilities:
(Increase) in accounts receivable............................................ (26,430) (23,570)
(Increase) in patent infringement receivable................................. (18,000) --
(Increase) Decrease in inventories........................................... (3,554) 10,613
Decrease in prepaid expenses and other current assets............. 646 163
Increase (Decrease) in accounts payable and other accrued expenses........... 8,556 (18,405)
(Increase) Decrease in other................................................. (1,475) 581
----------- -----------
Net Cash Provided by (Used in) Operating Activities............................. 5,174 (8,867)
----------- -----------
Cash Flow From Investing Activities:
Additions to property, plant and equipment...................................... (3,791) (4,435)
Proceeds from divestiture....................................................... 22,573 --
Payment of acquisition-related costs ........................................... -- (1,132)
----------- -----------
Net Cash Provided by (Used in) Investing Activities............................. 18,782 (5,567)
----------- -----------
Cash Flow From Financing Activities:
Repayment of syndicated bank credit facility.................................... (36,597) (750)
Payment of deferred financing costs............................................. -- (459)
----------- -----------
Net Cash Used in Financing Activities........................................... (36,597) (1,209)
------------ -----------
Effect of exchange rate changes on cash and cash equivalents.................... 2,259 404
----------- -----------
Net Change in Cash and Cash Equivalents......................................... (10,382) (15,239)
Cash and Cash Equivalents at Beginning of Period................................ 54,780 55,617
----------- -----------
Cash and Cash Equivalents at End of Period...................................... $ 44,398 $ 40,378
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The condensed consolidated balance sheet as of June 27, 2003, the condensed
consolidated statements of income and changes in members' equity for the three
and six months ended June 27, 2003 and June 28, 2002, and the condensed
consolidated statement of cash flows for the six months ended June 27, 2003 and
June 28, 2002 have been prepared by Armkel, LLC and subsidiaries (the "Company")
and are unaudited. 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 June 27, 2003 and for all
periods presented have been made.
Fifty-percent (50%) of the membership interests in the Company is owned by each
of Church & Dwight Co., Inc. ("C&D") and certain affiliates of Kelso & Company,
L.P. ("Kelso").
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
required Form 10-K filing. Certain items previously reported in specific
captions in the accompanying financial statements have been reclassed to conform
with current period classification. The financial statement effect of the
recently divested Italian operations is recognized as discontinued operations in
all periods. The results of operations for the period ended June 27, 2003 are
not necessarily indicative of the operating results for the full year.
2. Inventories consist of the following:
June 27, 2003 Dec. 31, 2002
------------- -------------
(In thousands)
Raw materials and supplies............................................. $ 15,778 $ 10,561
Work in process........................................................ 5,863 5,983
Finished goods......................................................... 38,981 36,883
---------- ---------
$ 60,622 $ 53,427
========== =========
3. Property, Plant and Equipment consist of the following:
June 27 2003 Dec. 31, 2002
------------ -------------
(In thousands)
Land................................................................... $ 7,223 $ 7,067
Buildings and improvements............................................. 22,698 21,620
Machinery and equipment................................................ 46,378 44,946
Office equipment and other assets...................................... 4,599 3,800
Construction in progress............................................... 7,267 4,716
---------- ---------
88,165 82,149
Less accumulated depreciation and amortization......................... 13,526 9,282
---------- ---------
Net Property, Plant and Equipment...................................... $ 74,639 $ 72,867
========== =========
4. Goodwill and Intangible Assets
The following tables disclose the carrying value of all intangible assets:
June 27, 2003 December 31, 2002
-------------- -----------------
Gross Carrying Accum. Gross Carrying Accum.
(In thousands) Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets:
Patents $ 27,500 $ 7,875 $ 19,625 $ 27,500 $ 5,625 $ 21,875
========= ======== ========== ========== ======= =========
Unamortized intangible assets - Carrying value
- -----------------------------
Tradenames $ 239,400 $ 239,400
========= ==========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible amortization expense amounted to $2.25 million for the six months
ended June 27, 2003 and June 28, 2002. The estimated intangible amortization is
approximately $4.5 million per year over the remaining amortization period. The
weighted average amortization period for patents is 6.4 years.
The changes in the carrying amount of goodwill for the six months ended June 27,
2003 is as follows:
(In thousands) Domestic International Total
-------- ------------- -------
Balance December 31, 2002..................................... $173,006 $ 32,461 $ 205,467
Foreign exchange/other........................................ -- 377 377
-------- ---------- -----------
Balance June 27, 2003......................................... $173,006 $ 32,838 $ 205,844
======== ========== ===========
5. Related Party Transactions
Arrangements with Church & Dwight
- ---------------------------------
C&D charged the Company $7.6 million and $14.0 million for primarily
administrative and management oversight services for the three and six months
ended June 27, 2003. C&D charged the Company $5.4 million and $10.1 million for
primarily administrative and management services for the three and six months
ended June 28, 2002. The Company sold $0.7 and $1.4 million of
deodorant/antiperspirant inventory to C&D at its cost during the three and six
months ended June 27, 2003., compared with $0.0 and $5.4 million of
deodorant/antiperspirant during the three and six months ended June 28, 2002.
The Company purchased $0.5 million and $1.3 million of Arm & Hammer products to
be sold in international markets during the three and six months ended June 27,
2003., compared with $0.0 million and $0.1 million during the three and six
months ended June 28, 2002. During the three and six months ended June 28, 2002,
the Company charged C&D $0.1 and $1.1 million of transition administrative
services. The Company had a net payable to C&D at June 27, 2003 and December 31,
2002 of approximately $4.9 million and $4.8 million, respectively, that
primarily related to administration fees and invoices paid by C&D on behalf of
Armkel, offset by amounts owed for inventory.
Arrangements with Kelso
- -----------------------
Kelso provides the Company with financial advisory services for which the
Company pays an annual fee of $1.0 million. The Company indemnifies Kelso
against certain liabilities and reimburses expenses in connection with its
engagement. The Company prepaid Kelso's 2003 annual fee at the end of December
2002. For the three and six months ended June 27, 2002, the Company paid Kelso
$0.3 and $0.5 million.
6. Contingencies
On January 17, 2002, a petition for appraisal, Cede & Co., Inc. and GAMCO
Investors, Inc. v. Medpointe Healthcare Inc., Civil Action No. 19354, was filed
in the Court of Chancery of the State of Delaware demanding a determination of
the fair value of shares of Medpointe. The action was brought by purported
former shareholders of Carter-Wallace in connection with the merger on September
28, 2001 of MCC Acquisition Sub Corporation with and into Carter-Wallace. The
merged entity subsequently changed its name to Medpointe. The petitioners seek
an appraisal of the fair value of their shares in accordance with Section 262 of
the Delaware General Corporation Law. The matter was heard on March 10 and 11,
2003, at which time the petitioners purportedly held approximately 2.3 million
shares of Medpointe. No decision has yet been rendered by the court.
Medpointe and certain former Carter-Wallace shareholders are party to an
indemnification agreement pursuant to which such shareholders will be required
to indemnify Medpointe from a portion of the damages, if any, suffered by
Medpointe in relation to the exercise of appraisal rights by other former
Carter-Wallace shareholders in the merger. Pursuant to the agreement, the
shareholders have agreed to indemnify Medpointe for 40% of any Appraisal Damages
(defined as the recovery greater than the per share merger price times the
number of shares in the appraisal class) suffered by Medpointe in relation to
the merger; provided that if the total amount of Appraisal Damages exceeds $33.3
million, then the indemnifying stockholders will indemnify Medpointe for 100% of
any damages suffered in excess of that amount. The Company, in turn, is party to
an agreement with Medpointe pursuant to which it has agreed to indemnify
Medpointe and certain related parties against 60% of any Appraisal Damages for
which Medpointe remains liable. The maximum liability to the Company pursuant to
the indemnification agreement and prior to any indemnification from C&D, as
described in the following sentence is $12 million. C&D is party to an agreement
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with the Company pursuant to which it has agreed to indemnify the Company for
17.4% of any Appraisal Damages, or up to a maximum of $2.1 million for which the
Company becomes liable.
The Company, Medpointe and the indemnifying shareholders believe that the
consideration offered in the merger was fair to the former Carter-Wallace
shareholders and have vigorously defended the petitioner's claim. However, the
Company cannot predict the outcome of the proceedings.
On March 27, 2003, GAMCO Investors, Inc. filed another complaint in the New York
Supreme Court seeking damages from MedPointe Healthcare Inc., the former
directors of Carter-Wallace, and one of the former shareholders of
Carter-Wallace. The complaint alleges breaches of fiduciary duty in connection
with certain employment agreements with former Carter-Wallace executives, the
sale of Carter Wallace's consumer products business to the Company (some of the
products acquired by the Company were subsequently sold by the Company to C&D)
and the merger of MCC Acquisition Sub Corporation with and into Carter-Wallace.
The complaint seeks monetary damages and equitable relief, including among other
things, invalidation of the transactions. The defendants have moved to dismiss
the complaint. The Company has not been named as a defendant in this action and
believes it has no liability.
On August 26, 2002, the Company filed suit against Pfizer in the District Court
of New Jersey to redress infringement of two (2) of the Company's patents
directed to pregnancy diagnostic devices. The suit claimed that Pfizer's "ept"
product infringes these patents. On June 23, 2003 the Company agreed to a
settlement with Pfizer resulting in a gain, after attorney's fees and costs, of
$12.7 million. As part of the settlement the Company granted Pfizer a fully
paid-up non-exclusive worldwide license to practice and use the Company's
pregnancy test kit patents until July 1, 2004.
In 2002, a purported class action suit, Sandra J. Wagner v. Church & Dwight Co.,
Inc., et al, was filed against the Company and C&D in the Superior Court of New
Jersey. The lawsuit alleged that the Company's ovulation test kits ("OTK") are
being marketed in a misleading manner because they do not advise women with
certain ovarian conditions that test results may be inaccurate. The plaintiffs
seek monetary damages as well as injunctive relief against the OTK's marketing
materials. The products in question have been cleared for marketing as medical
devices under applicable FDA regulations. The Company is vigorously defending
the action but cannot predict the outcome of the proceedings. If the Company is
not successful in defending against a claim, the Company could be liable for
substantial damages or may be prevented from offering some of the Company's
products. These events could harm the Company's financial condition and results
of operations.
The Company's distribution of condoms under the Trojan and other trademarks is
regulated by the U.S. Food and Drug Administration (FDA). Certain of Armkel's
condoms and similar condoms sold by Armkel's major competitors, contain the
spermicide nonoxynol-9 (N-9). The World Health Organization and other interested
groups have issued reports suggesting that N-9 should not be used rectally or
for multiple daily acts of vaginal intercourse, given the ingredient's potential
to cause irritation to human membranes. The Company expects the FDA to issue
non-binding draft guidance concerning the labeling of condoms with N-9, although
the timing of such draft guidance is uncertain. The Company believes that
condoms with N-9 provide an acceptable added means of contraceptive protection
and is cooperating with the FDA concerning the appropriate labeling revisions,
if any. However, the Company cannot predict the outcome of the FDA review. While
awaiting further FDA guidance, the Company has implemented interim labeling
revisions that caution against rectal use and more-than-once-a-day vaginal use
of N-9-containing condoms, and has launched a public information campaign to
communicate these messages to the affected communities. If the FDA or state
governments promulgate rules which prohibit or restrict the use of N-9 in
condoms (such as new labeling requirements), the financial condition and
operating results of the Company could suffer.
In February 2003, two members of the California Assembly introduced a
non-binding resolution calling on FDA to ban condoms containing N-9. The
proposed resolution has not yet been scheduled for committee discussion. The
Company has provided the Assemblymen and the Assembly Speaker with information
explaining why a ban would be inappropriate and outlining the interim labeling
revisions and public information efforts the Company has implemented. If the
resolution is passed, while not legally binding, it could impair public
perception of the product with resultant impairment of operating results of the
Company.
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Relating to this issue, on February 28, 2003 a class action suit, Lisette Velez
v. Church & Dwight Co., Inc., et als including Armkel, LLC, was filed against
the Company and C&D, and two other condom manufacturers, in the Superior Court
of New Jersey. The lawsuit alleged that condoms lubricated with N-9 are being
marketed in a misleading manner because the makers of such condoms claim they
aid in the prevention of sexually transmitted diseases whereas, according to the
plaintiffs, public health organizations have found that N-9 usage can under some
circumstances increase the risk of transmission of disease. In June 2003, the
plaintiffs voluntarily dismissed the suit after defendants filed a motion to
dismiss on the ground that their compliance with comprehensive federal medical
device regulations precluded recovery.
The Company, in the ordinary course of its business, is the subject of, or 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 financial position or results of operation.
7. Reorganization Reserve
As of September 28, 2001, the date of the acquisition of the Carter-Wallace
Consumer Business (the "Predecessor"), the Company started to implement a plan
to reorganize the operation of the acquired consumer business. The main
components of the plan included rationalizing facilities for which the Company
had incurred lease termination costs, environmental remediation costs and work
force rationalization costs. The plan was finalized in 2002 and the Company
expects to complete the plan in 2003 except for certain long-term contractual
obligations related to benefits for certain former executives of Carter-Wallace,
Inc. and certain environmental remediation activities.
The Company established an accrual for severance to reflect the purchase of
various services from C&D in lieu of obtaining such services through continued
employment of certain personnel by the Company. The accrued severance is for
identified employees from various areas including executives, administrative
support and corporate functions (finance, human resources, legal, MIS, R&D,
logistics, marketing, sales and purchasing).
The following table summarizes the activity in the Company's reorganization
accruals:
Reserves at Payments and Reserves at
(In thousands) Dec. 31, 2002 Adjustments June 27, 2003
------------- ----------- -------------
Severance and other charges....................................... $ 6,005 $ (2,785) $ 3,220
Environmental remediation costs................................... 1,828 (89) 1,739
Lease termination costs........................................... 110 (25) 85
--------- ----------- ----------
$ 7,943 $ (2,899) $ 5,044
========= =========== =========
8. Assets Held for Sale
In the third quarter of 2002, the Company made a commitment to sell its land and
buildings, excluding the research and development building, at its Cranbury, New
Jersey location and, as such, has classified these assets as held for sale. In
the second quarter of 2003, a $3.1 million reduction to fair market value was
recorded based on a recent proposal for sale of the property. This property,
with a current fair market value of $11.5 million, will likely be sold to land
developers who would use it for purposes other than manufacturing.
9. Discontinued Operations
At the end of December 2002, the Company signed a definitive agreement to sell
its Italian operations. On February 20, 2003, the sale was completed with
proceeds of $22.6 million. The Company recorded an after-tax gain on the sale of
these operations of approximately $1.9 million. As part of this transaction, the
Company recorded a $0.5 million guarantee reserve which was the estimated fair
value of the contractual indemnification obligation of the Company to the buyer
of the Italian operations. In June 2003, the Company signed an agreement which
effectively reduced the selling price by requiring the payment of 0.1 million
euros by the Company to the buyer in the third quarter of 2003 in return for a
release from any indemnification obligations that might arise with respect to
certain tax matters under the definitive sales agreement. Upon payment of the
0.1 million euros the guarantee reserve will be reduced accordingly. Exposure
under such indemnification obligation is capped at 1.5 million Euros.
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 27, 2003, net sales from the Italian
operations was $10.0 and $10.0 million as compared to $11.4 and $20.5 million
for the same period in 2002 and income from discontinued operations was $0.3 and
$0.0 million (net of taxes of $0.0 and $0.3 million) in 2003 as compared to $0.9
and $1.5 million (net of taxes of $0.7 and $1.1million) for the same period in
2002. The proceeds were used to pay down the term loan debt and costs associated
with the divestiture. The financial statements of the comparable periods of a
year ago in this report have been reclassified for discontinued operations.
10. Patent Infringement
On August 26, 2002, the Company filed suit against Pfizer in the District Court
of New Jersey to redress infringement of two (2) of the Company's patents
directed to pregnancy diagnostic devices. The suit claimed that Pfizer's "ept"
product infringes these patents. On June 23, 2003 the Company agreed to a
settlement with Pfizer resulting in a gain, after attorney's fees and costs, of
$12.7 million. As part of the settlement the Company granted Pfizer a fully
paid-up non-exclusive worldwide license to practice and use the Company's
pregnancy test kit patents until July 1, 2004. The patent infringement
settlement required Pfizer to pay the Company $18.0 million within 45 days. The
payment was received on August 7, 2003. The Company has incurred approximately
$5.3 million in legal and related settlement expenses. There are no future
substantive performance requirements with respect to recognizing the gain on the
$18.0 million as of June 2003.
11. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
The Company will adopt the provisions of the statement on its effective date and
does not anticipate a material impact to its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which aims to
eliminate diversity in practice by requiring that the "freestanding" financial
instruments be reported as liabilities by their issuers.
The provisions of SFAS 150, which also include a number of new disclosure
requirements, are effective for instruments entered into or modified after May
31, 2003 and for pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. The Company adopted the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
12. Segments and Supplemental Information
Segment Information
- -------------------
The Company has two operating segments: Domestic Consumer Products Division and
International Consumer Products Division.
Measurement of Segment Results and Assets
- -----------------------------------------
The accounting policies of the segments are generally the same as those noted in
Note 1.
Supplemental Financial Information of Domestic and International Operations
- ---------------------------------------------------------------------------
The senior subordinated notes registered by the Company are fully and
unconditionally guaranteed by the domestic subsidiaries of the Company on a
joint and several basis. The following information is being presented to comply
with SEC Regulation SX, Item 3-10 and to provide required segment disclosures.
Supplemental information for condensed consolidated balance sheets at June 27,
2003, condensed consolidated income statements for the three and six months
ended June 27, 2003 and June 28, 2002, and consolidated cash flows for the six
month periods ended June 27, 2003 and June 28, 2002 is summarized as follows
(amounts in thousands):
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Income
For The Three Months Ended June 27, 2003
----------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Net sales........................................ $ 59,265 $ 55,924 $ (1,712) $ 113,477
Cost of goods sold............................... 24,075 26,587 (1,712) 48,950
----------- ------------- ------------ -----------
Gross profit..................................... 35,190 29,337 -- 64,527
Operating expenses............................... 12,786 19,720 -- 32,506
----------- ------------- ----------- -----------
Income from operations........................... 22,404 9,617 -- 32,021
Interest expense................................. (8,450) (267) -- (8,717)
Interest income.................................. 72 167 -- 239
Intercompany accounts............................ 1,426 (1,426) -- --
Other income (expense)........................... 2,733 (1,329) -- 1,404
----------- -------------- ----------- -----------
Income before taxes.............................. 18,185 6,762 -- 24,947
Income taxes..................................... -- 2,427 -- 2,427
----------- ------------- ----------- -----------
Income from continuing operations................ 18,185 4,335 -- 22,520
Income from discontinued operations.............. -- -- -- --
Gain on disposition of discontinued operations... -- -- -- --
----------- ------------- ----------- -----------
Net Income.................................. $ 18,185 $ 4,335 $ -- $ 22,520
=========== ============= =========== ===========
For the Three Months Ended June 28, 2002
----------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales......................................... $ 60,470 $ 46,147 $ (2,186) $ 104,431
Cost of goods sold................................ 24,970 22,767 (2,186) 45,551
----------- ------------ ----------- -----------
Gross profit...................................... 35,500 23,380 -- 58,880
Operating expenses................................ 20,404 13,412 -- 33,816
----------- ------------ ---------- -----------
Income from operations............................ 15,096 9,968 -- 25,064
Interest expense.................................. (8,621) (267) -- (8,888)
Interest income................................... 137 131 -- 268
Intercompany accounts............................. 1,589 (1,589) -- --
Other income (expense)............................ 4,501 (3,299) -- 1,202
----------- ------------- ---------- -----------
Income before taxes............................... 12,702 4,944 -- 17,646
Income taxes...................................... -- 2,989 -- 2,989
----------- ------------ ---------- -----------
Income from continuing operations................. 12,702 1,955 -- 14,657
Income from discontinued operations............... -- 928 -- 928
Gain on disposition of discontinued operations.... -- -- -- --
----------- ------------ ---------- -----------
Net Income................................... $ 12,702 $ 2,883 $ -- $ 15,585
=========== ============ ========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Income
For The Six Months Ended June 27, 2003
--------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales................................... $ 112,970 $ 103,449 $ (3,289) $ 213,130
Cost of goods sold.......................... 44,312 49,096 (3,289) 90,119
----------- ------------ ------------ -----------
Gross profit................................ 68,658 54,353 -- 123,011
Operating expenses.......................... 31,166 34,724 -- 65,890
----------- ------------ ----------- -----------
Income from operations...................... 37,492 19,629 -- 57,121
Interest expense............................ (17,042) (564) -- (17,606)
Interest income............................. 170 350 -- 520
Intercompany accounts....................... 2,810 (2,810) -- --
Other income (expense)...................... 2,703 (1,584) -- 1,119
----------- ------------- ----------- -----------
Income before taxes......................... 26,133 15,021 -- 41,154
Income taxes................................ -- 5,530 -- 5,530
----------- ------------ ----------- -----------
Income from continuing operations........... 26,133 9,491 -- 35,624
Income from discontinued operations......... -- 254 -- 254
Gain on disposition of discontinued operations -- 1,862 -- 1,862
----------- ------------ ----------- ----------
Net Income............................... $ 26,133 $ 11,607 $ -- $ 37,740
============ ============ =========== ==========
For The Six Months Ended June 28, 2002
--------------------------------------
Total
Domestic International Eliminations Consolidated
Net sales................................... $ 111,902 $ 84,859 $ (4,958) $ 191,803
Cost of goods sold.......................... 53,667 42,076 (4,958) 90,785
---------- ----------- ------------ -----------
Gross profit................................ 58,235 42,783 -- 101,018
Operating expenses.......................... 37,409 28,277 -- 65,686
--------- ----------- ----------- -----------
Income from operations...................... 20,826 14,506 -- 35,332
Interest expense............................ (17,736) (531) -- (18,267)
Interest income............................. 294 259 -- 553
Intercompany accounts....................... 3,065 (3,065) -- --
Other income (expense)...................... 3,807 (2,677) -- 1,130
---------- ------------ ----------- -----------
Income before taxes......................... 10,256 8,492 -- 18,748
Income taxes................................ -- 4,353 -- 4,353
---------- ----------- ----------- -----------
Income from continuing operations........... 10,256 4,139 -- 14,395
Income from discontinued operations......... -- 1,498 -- 1,498
Gain on disposition of discontinued operations -- -- -- --
---------- ---------- ---------- -----------
Net Income................................ $ 10,256 $ 5,637 $ -- $ 15,893
========== ========== ========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Balance Sheet June 27, 2003
----------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Cash and cash equivalents.................. $ 19,501 $ 24,897 $ -- $ 44,398
Accounts receivable, less allowances....... 34,263 76,122 -- 110,385
Patent infringement receivable............. 18,000 -- -- 18,000
Inventories................................ 25,777 34,845 -- 60,622
Prepaid expenses........................... 1,584 3,496 -- 5,080
Net assets held for sale................... 11,500 -- -- 11,500
----------- ----------- ----------- ----------
Total current assets.................... 110,625 139,360 -- 249,985
Property, plant and equipment (net)........ 49,418 25,221 -- 74,639
Intercompany notes receivable.............. 66,688 -- (66,688) --
Investment in subsidiaries................. 53,761 -- (53,761) --
Tradenames and patents..................... 220,825 38,200 -- 259,025
Goodwill................................... 173,006 32,838 -- 205,844
Deferred financing costs................... 15,661 -- -- 15,661
Other assets............................... 2,878 2,597 -- 5,475
----------- ----------- ----------- ----------
Total assets............................ $ 692,862 $ 238,216 $ (120,449) $ 810,629
=========== =========== =========== ==========
Accounts payable and accrued expenses...... $ 45,923 $ 52,989 $ -- $ 98,912
Intercompany accounts...................... (2,295) 2,295 -- --
Current portion of long-term debt.......... 4,312 2,905 -- 7,217
Taxes payable.............................. -- 5,351 -- 5,351
----------- ----------- ----------- ----------
Total current liabilities............... 47,940 63,540 -- 111,480
Long-term debt............................. 384,073 14,815 -- 398,888
Deferred income taxes...................... -- 9,234 -- 9,234
Intercompany notes payable................. -- 78,639 (78,639) --
Deferred and other long-term liabilities... 10,801 10,230 -- 21,031
---------- ----------- ----------- ----------
Total liabilities....................... 442,814 176,458 (78,639) 540,633
Members' Equity and Subsidiary Capital
Net contributed capital.................... 220,500 42,264 (42,264) 220,500
Retained earnings.......................... 34,567 18,739 -- 53,306
Accumulated other comprehensive loss....... (5,019) 755 454 (3,810)
----------- ----------- ----------- ----------
Total members' equity and subsidiary capital 250,048 61,758 (41,810) 269,996
----------- ----------- ----------- ----------
Total liabilities and members' equity... $ 692,862 $ 238,216 $ (120,449) $ 810,629
=========== =========== =========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Balance Sheet December 31, 2002
-----------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Cash and cash equivalents................... $ 35,093 $ 19,687 $ -- $ 54,780
Accounts receivable, less allowances........ 21,885 53,979 -- 75,864
Inventories................................. 22,948 30,479 -- 53,427
Prepaid expenses............................ 1,428 4,129 -- 5,557
Net assets of discontinued operations....... -- 42,079 -- 42,079
Net assets held for sale ................... 14,600 -- -- 14,600
----------- ----------- ----------- -----------
Total current assets.................... 95,954 150,353 -- 246,307
Property, plant and equipment (net)......... 48,646 24,221 -- 72,867
Investment in subsidiaries.................. 58,591 -- (58,591) --
Notes receivable............................ 63,557 -- (63,557) --
Tradenames and patents...................... 223,075 38,200 -- 261,275
Goodwill.................................... 173,006 32,461 -- 205,467
Deferred financing costs.................... 17,380 -- -- 17,380
Other assets................................ 2,665 2,553 -- 5,218
----------- ----------- ----------- -----------
Total assets............................ $ 682,874 $ 247,788 $ (122,148) $ 808,514
========== =========== =========== ===========
Short-term borrowings....................... $ -- $ 55 $ -- $ 55
Accounts payable and accrued expenses....... 44,762 40,274 -- 85,036
Intercompany accounts....................... (3,633) 3,633 -- --
Net liabilities of discontinued operations . -- 23,582 -- 23,582
Current portion of long-term debt........... 9,541 18,960 -- 28,501
Taxes payable............................... -- 1,606 -- 1,606
---------- ---------- ----------- ----------
Total current liabilities............... 50,670 88,110 -- 138,780
Long-term debt.............................. 397,838 13,796 -- 411,634
Deferred income taxes....................... -- 8,500 -- 8,500
Notes payable............................... -- 69,138 (69,138) --
Deferred and other long-term liabilities.... 10,705 9,215 -- 19,920
---------- ---------- ----------- ----------
Total liabilities....................... 459,213 188,759 (69,138) 578,834
Members' Equity and Subsidiary Capital
Net contributed capital..................... 220,500 52,061 (52,061) 220,500
Retained earnings........................... 8,434 7,132 -- 15,566
Accumulated other comprehensive loss........ (5,273) (164) (949) (6,386)
---------- ----------- ----------- -----------
Total members' equity and subsidiary capital 223,661 59,029 (53,010) 229,680
---------- ----------- ----------- -----------
Total liabilities and members' equity... $ 682,874 $ 247,788 $ (122,148) $ 808,514
========== =========== =========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statement of Cash Flows For The Six Months Ended June 27, 2003
--------------------------------------
Total
Domestic International Consolidated
-------- ------------- ------------
Cash Flow From Operating Activities:
Net Income.............................................................. $ 26,133 $ 11,607 $ 37,740
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................................... 5,952 1,994 7,946
Unrealized (gain) loss on foreign exchange transactions............. (2,892) 1,653 (1,239)
Fair market value adjustment of assets held for sale................ 3,100 -- 3,100
Net income from discontinued operations............................. -- (254) (254)
Net gain on sale of discontinued operations......................... -- (1,862) (1,862)
Change in assets and liabilities:
(Increase) in accounts receivable................................... (12,884) (13,546) (26,430)
(Increase) in patent infringement receivable........................ (18,000) -- (18,000)
(Increase) in inventories........................................... (2,829) (725) (3,554)
(Increase) Decrease in prepaid expenses and other current assets.... (200) 846 646
(Decrease) Increase in accounts payable and other accrued expenses.. (481) 9,037 8,556
(Decrease) Increase in other........................................ 1,602 (3,077) (1,475)
--------- --------- ----------
Net Cash (Used in) Provided by Operating Activities..................... (499) 5,673 5,174
--------- --------- ----------
Cash Flow From Investing Activities:
Additions to property, plant & equipment............................ (2,551) (1,240) (3,791)
Proceeds from divestiture........................................... -- 22,573 22,573
--------- --------- ----------
Net Cash (Used in) Provided by Investing Activities..................... (2,551) 21,333 18,782
--------- --------- ----------
Cash Flow from Financing Activities:
Repayment of syndicated bank credit facility........................ (19,073) (17,524) (36,597)
Intercompany capital contribution................................... 9,797 (9,797) --
Intercompany debt transactions...................................... (3,266) 3,266 --
--------- --------- ----------
Net Cash Used in Financing Activities................................... (12,542) (24,055) (36,597)
--------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents............ -- 2,259 2,259
--------- --------- ----------
NET CHANGE IN CASH & CASH EQUIVALENTS................................... (15,592) 5,210 (10,382)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 35,093 19,687 54,780
--------- --------- ----------
CASH & CASH EQUIVALENTS AT END OF PERIOD................................ $ 19,501 $ 24,897 $ 44,398
========= ========= ==========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statement of Cash Flows For The Six Months Ended June 28, 2002
--------------------------------------
Total
Domestic International Consolidated
-------- ------------- ------------
Cash Flow From Operating Activities:
Net Income ............................................................. $ 10,256 $ 5,637 $ 15,893
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................................... 6,603 1,752 8,355
Unrealized (gain) loss on foreign exchange transactions............. (3,891) 2,892 (999)
Net income from discontinued operations............................. -- (1,498) (1,498)
Change in assets and liabilities:
(Increase) in accounts receivable................................... (13,346) (10,224) (23,570)
Decrease (Increase) in inventories.................................. 10,904 (291) 10,613
(Increase) Decrease in prepaid expenses and other current assets.... 196 (33) 163
(Decrease) Increase in accounts payable and other accrued expenses.. (21,197) 2,792 (18,405)
(Decrease) Increase in other........................................ (1,524) 2,105 581
-------- --------- ---------
Net Cash (Used in) Provided by Operating Activities..................... (11,999) 3,132 (8,867)
-------- --------- ---------
Cash Flow From Investing Activities:
Additions to property, plant & equipment............................ (3,633) (802) (4,435)
Payment of acquisition-related costs................................ (1,132) -- (1,132)
-------- --------- ---------
Net Cash Used in Investing Activities................................... (4,765) (802) (5,567)
-------- --------- ---------
Cash Flow from Financing Activities:
Repayment of syndicated bank credit facility........................ (750) -- (750)
Payment of deferred financing costs................................. (459) -- (459)
-------- --------- ---------
Net Cash Used in Financing Activities................................... (1,209) -- (1,209)
-------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents............ -- 404 404
-------- --------- ---------
NET CHANGE IN CASH & CASH EQUIVALENTS................................... (17,973) 2,734 (15,239)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 40,444 15,173 55,617
-------- --------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD................................ $ 22,471 $ 17,907 $ 40,378
======== ========= =========
The following table sets forth the Company's principal product lines and related
data for the three and six month periods ended June 27, 2003 and June 28, 2002.
Three Months Ended Six Months Ended
------------------ ----------------
Net Sales (In thousands) June 27, 2003 June 28, 2002 June 27, 2003 June 28, 2002
------------- ------------- ------------- -------------
Products
Family Planning(1).......................... $ 50,104 $ 48,610 $ 94,816 $ 90,973
Depilatories and waxes; face and skincare... 29,805 27,529 53,213 45,888
Oral care................................... 9,293 8,061 17,846 14,226
OTC Products................................ 12,444 10,080 24,976 22,713
Other consumer products..................... 11,831 10,151 22,279 18,003
----------- ----------- ----------- -------------
Total net sales............................. $ 113,477 $ 104,431 $ 213,130 $ 191,803
========== ========== =========== =============
- ----------------
(1) Family Planning includes condom product sales and pregnancy and ovulation
kits.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Armkel, LLC (the "Company") is an equally owned joint venture formed by
Church & Dwight Co., Inc. ("C&D") and affiliates of Kelso & Company, L.P.
("Kelso"). On September 28, 2001, the Company acquired certain of the domestic
consumer product assets of Carter-Wallace (the "Acquisition"), primarily Trojan
condoms, Nair depilatories, and First Response and Answer test kits, and the
international subsidiaries of Carter-Wallace. Initial financing was obtained on
August 28, 2001, however operations did not commence until the Acquisition was
consummated on September 28, 2001. The remainder of Carter-Wallace, comprised of
its healthcare and pharmaceuticals businesses, was merged with MedPointe, Inc.
("MedPointe") after the completion of the Acquisition. Simultaneously with the
consummation of the Acquisition, the Company sold the remainder of the consumer
products businesses, Arrid antiperspirant in the U.S and Canada and the
Lambert-Kay line of pet care products, to C&D (the "Disposed Businesses").
In December 2002, the Company entered into an agreement to sell its Italian
subsidiary to a group, comprising local management and private equity investors.
The sale closed in February 2003 for a purchase price of $22.6 million including
the repayment of $12.8 million of intercompany debt. The Company retained
ownership of certain Italian pregnancy kit and oral care product lines with
sales of approximately $3 million. The remainder of the Italian subsidiary's
business included a high percentage of distributor sales as well as hospital
diagnostic and other products not related to the Company's core business. The
Company reported a $1.9 million gain on the sale and $0.3 million income (net of
tax) from discontinued operations in the first quarter of 2003. The financial
statements have been reclassified to reflect the Italian business as a
discontinued operation in 2003 and prior financial statements.
The following section discusses comparisons to the three-month and six-month
period ended June 27, 2003 compared to the same period in the prior year. This
section does not include the income from discontinued operations.
Results of Continuing Operations
- --------------------------------
Three and Six Month Comparison
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
---- ---- ---- ----
(in millions)
Net sales............................................ $ 113.5 $ 104.4 $ 213.1 $ 191.8
Cost of goods sold................................... 49.0 45.5 90.1 90.8
----------- ----------- ---------- -----------
Gross Profit......................................... 64.5 58.9 123.0 101.0
Marketing expenses.................................. 19.7 12.9 31.8 24.4
Selling, general & administrative expenses (1)....... 12.8 20.9 34.1 41.3
Interest expense & other income...................... 7.1 7.5 16.0 16.6
----------- ----------- ---------- -----------
Income before taxes from continuing operations....... $ 24.9 $ 17.6 $ 41.1 $ 18.7
========== ========== ========= ==========
(1) In 2003, selling, general and administrative expenses were reduced by
the net gain from the Pfizer patent infringement settlement and increased
by the writedown of the Cranbury facility, which are discussed further in
this section.
The results of operations for the period from January 1, 2003 to June 27,
2003 are affected by moderate acquisition related expenses amounting to $1.6
million primarily for the cost to carry the Cranbury facility. The prior year
results are affected by $4.2 million in transition expenses and an $8.1 million
inventory step-up charge.
Net Sales
---------
Net sales for the quarter increased $9.1 million, or 8.7%, to $113.5
million in the period ended June 27, 2003 from $104.4 million in the six months
ended June 28, 2002. Domestic net sales (net of intercompany eliminations)
decreased $0.7 million, or 1.2%, to $57.6 million from $58.3 million. This
decrease in Domestic net sales is due to decreased sales of Nair depilatories
primarily related to poor weather conditions during the peak depilatory season,
somewhat offset by increases for Trojan condoms. International net sales
increased $9.8 million, or 21.2%, to $55.9 million from $46.1 million. The
increase in International net sales is due to higher UK export sales and
stronger sales of Lineance skin care in France and Taky depilatories in Spain,
as well as foreign exchange gains which accounted for $5.9 million of the
increase.
Net sales for the six months ended June 27, 2003 increased $21.3 million,
or 11.1%, to $213.1 million from $191.8 million in the same period last year.
Domestic net sales increased $2.7 million, or 2.5%, to $109.7 million from
$107.0 million for the six months ended June 27, 2003. This increase in Domestic
net sales (net of intercompany eliminations) is primarily due to the continued
growth in the domestic condoms, depilatories behind two brands, Nair
depilatories and Lineance depilatories, and pregnancy test kits. International
net sales increased $18.6 million, or 21.9%, to $103.4 million from $84.8
million primarily due to higher sales of Arm & Hammer dentifrice in the UK,
higher export sales from the UK, stronger sales of Lineance depilatories and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Nair depilatories in France, as well as a favorable foreign exchange translation
gain of $9.3 million.
Cost of Goods Sold
------------------
Cost of goods sold for the quarter increased $3.5 million, or 7.7%, to
$49.0 million for the quarter from $45.5 million in the same period last year.
As a percentage of net sales, cost of goods sold decreased to 43.2% from 43.6%
in 2002. The 0.4 percentage point improvement over the 2002 results is primarily
due to the movement of the manufacturing operations of Nair products from the
Cranbury facility to the C&D Lakewood facility and to production of domestic
Nair products at our facility in Spain, which reduced costs from domestic
contract manufacturers.
Cost of goods sold for the six months ended June 27, 2003 decreased $0.7
million or 0.8% to $90.1 million from $90.8 million in the same period last
year. This decrease in cost of goods sold is due to the first quarter 2002 $8.1
million charge relating to inventory step-up adjustments incurred at the
Acquisition. Excluding these adjustments in 2002, cost of goods sold, as a
percentage of net sales, would be reduced to 43.1% of net sales for 2002. As a
percentage of net sales, cost of goods sold year to date decreased to 42.3%. The
0.8 percentage point improvement over the adjusted 2002 results is primarily
related to the increased domestic and international manufacturing efficiencies
on Nair.
Operating Costs excluding Interest Expense and Other Income
-----------------------------------------------------------
Total operating expenses for the quarter excluding interest expense and
other income decreased $1.3 million, or 3.8%, to $32.5 million from $33.8
million in the same period last year. Total operating expenses for the six
months ended June 28, 2002, excluding interest expense and other income,
increased $0.2 million, or 0.3%, to $65.9 million from $65.7 million in the six
months ended June 28, 2002. The operating expense changes are addressed below.
Marketing expenses for the quarter increased by $6.8 million, or 52.7%, to
$19.7 million from $12.9 million in 2002. Marketing expenses in the six months
ended June 27, 2003 increased by $7.4 million, or 30.3%, to $31.8 million from
$24.4 million in the same period last year. The increase in marketing expenses
for the six months ended June 27, 2003, consists of $4.4 million in the
International division primarily behind advertising for Arm & Hammer Dental Care
in the UK, Lineance skin care in France and other initiatives and $3.0 million
behind introductory marketing spending behind the launch of Lineance as a
depilatory in the United States.
Selling, general and administrative expenses for the quarter decreased $8.1
million, or 38.8%, to $12.8 million in the quarter from $20.9 million in 2002.
Selling, general and administrative expenses in the six months ended June 27,
2003 decreased $7.2 million, or 17.4%, to $34.1 million from $41.3 million in
the same period last year. The decrease in expenses, for the three and six
months ended June 27, 2003, is related to a net gain from the settlement of
patent infringement with Pfizer of $12.7 million net of legal expenses and costs
partially offset by the $3.1 million write-down for the Cranbury facility.
Adjusting for these items selling, general and administrative expense would
increase to $43.7 million for the six months ended June 27, 2003. The year to
date increase over prior year is primarily related to an increase in R&D
spending to support current and future initiatives.
Interest Expense and Other Income
---------------------------------
Interest expense was $8.7 million in the quarter compared to $8.9 million
for the prior year. Interest expense for the six months ended June 27, 2003 was
$17.6 million compared to $18.3 million for the same period last year. This
reduction in interest expense is related to the lower debt position from prior
year and lower interest rates on the Company's term loans. Interest income of
$0.2 million and $0.5 million for the quarter and six months ended June 27, 2002
remains unchanged from last year.
Other income was $1.4 million for the quarter compared to $1.2 million last
year, and remained unchanged from last year at $1.1 million for the six months
ended June 27, 2003 and primarily relates to foreign exchange remeasurement on
intercompany loans with certain of its subsidiaries.
Liquidity and Capital Resources
- -------------------------------
The Company had outstanding total debt of $406.1 million, and cash of $44.4
million, for a net debt position of $361.7 million at June 27, 2003. This
compares to the net debt position of $385.4 at December 31, 2002. The decrease
in net debt is attributable to the use of proceeds from the divestiture of the
Italian operation and voluntary debt repayments.
Interest payments on the notes and on borrowings under the senior credit
facilities affect the Company's liquidity requirements. Borrowings under the
term loans and the revolving credit facility bear interest at variable rates
plus any applicable margin. The interest rates on the term loans are dependent
on the attainment of certain covenants 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, a material agreement to the Company, 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 $66.2
million for the six months ended June 27, 2003. The leverage ratio as defined in
the term loan agreement was 3.28 versus the agreement's maximum 5.25, and the
interest coverage ratio was 3.53 versus the agreement's minimum of 2.25. 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) for the six months ended June 27, 2003:
Net Cash Provided by Operating Activities.................... $ 5.2
Interest Expense (1).................................... 15.8
Interest Income......................................... (0.5)
Current Income Tax Provision............................ 5.5
Increase in Working Capital(2).......................... 38.8
Other................................................... 1.4
---------
EBITDA(3).................................................... $ 66.2
=========
(1) Interest expense excludes the amortization of deferred financing costs.
(2) The increase in working capital is primarily due to an increase in accounts
receivable, patent infringement receivable and inventories which are offset
by an increase in accounts payable and other accrued expenses.
(3) Bank EBITDA includes the net gain of $12.7 million from the patent
infringement settlement. Without this gain EBITDA would be $53.5 million.
Cash flows from operating activities was $5.2 million for the six months
ended June 27, 2003 which includes $10.7 million in interest payments, $2.8
million in severance payments, and an increase in working capital primarily due
to seasonality, partially offset by net income.
Cash flows from investing activities was $18.8 million for the six months
ended June 27, 2003. The net cash flows provided by investing activities
includes the proceeds from the Italian divestiture of $22.6 million partially
offset by $3.8 million in capital expenditures.
Cash flows used in financing activities was $36.6 million which includes a
$21.6 million payment of debt from proceeds of the Italian sale and $15.0
million in voluntary debt repayments.
The Company incurred severance and other change in control related
liabilities to certain employees. Since the Acquisition the Company paid $44.7
million in severance payments, including $2.8 million paid in the six months
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ended June 27, 2003. The Company estimates that the total severance payments
will be approximately $48.0 million. The Company anticipates the remaining $3.3
million in severance and related costs to be principally paid out in 2003 with a
small balance being carried into future years for medical and life insurance
payments for three former Carter-Wallace executives.
The Company expects that the total capital expenditures will be
approximately $16 million in 2003.
The Company expects that funds provided from operations and available
borrowing of $85 million under its six-year revolving credit facility, none of
which was drawn on June 27, 2003, will provide sufficient funds to operate its
businesses, to make expected capital expenditures, to make expected severance
payments, and to meet foreseeable liquidity requirements.
Recent Accounting Pronouncements
- --------------------------------
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
The Company will adopt the provisions of the statement on its effective date and
does not anticipate a material impact to its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which aims to eliminate diversity in practice by requiring that the
"freestanding" financial instruments be reported as liabilities by their
issuers.
The provisions of SFAS 150, which also include a number of new disclosure
requirements, are effective for instruments entered into or modified after May
31, 2003 and for pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. The Company adopted the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have not been any material changes during the three month period
ended June 27, 2003. For further information, please refer to the Company's
December 31, 2002 Annual Report on Form 10-K.
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 to, among other
things, 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 risk, 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 and the financial condition of major customers. With
regard to the new product introductions referred to in this report, there is
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 6. Exhibits and Reports on Form 8-K
a. Exhibits
(99.1) Certification of the CEO of Armkel, LLC 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 Armkel, LLC Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002
b. No reports on Form 8-K were filed for the three months ended June
27, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ARMKEL, LLC.
-------------------------------
(REGISTRANT)
DATE: August 8, 2003 /s/ Maureen K. Usifer
------------------------------ -------------------------------
MAUREEN K. USIFER
CHIEF FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
DATE: August 8, 2003 /s/ Zvi Eiref
------------------------------ -------------------------------
ZVI EIREF
DIRECTOR
CERTIFICATION
I, Robert A. Davies, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Armkel, LLC;
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: August 8, 2003
-----------------
/s/ Robert A. Davies, III
-----------------------------
Robert A. Davies, III
Chief Executive Officer
CERTIFICATION
I, Maureen K. Usifer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Armkel, LLC;
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: August 8, 2003
---------------
/s/ Maureen K. Usifer
-----------------------------
Maureen K. Usifer
Chief Financial Officer