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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 1-5439
DEL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
178 EAB PLAZA, UNIONDALE, NEW YORK 11556
----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
-------------------------
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 (X) NO ( )
The number of shares of Common Stock, $1 par value, outstanding as of May 12,
2003 was 9,147,531.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Earnings for the three
months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not present or not
present in amounts sufficient to require submission.
-2-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
(In thousands, except for share and per share data)
March 31 December 31
2003 2002
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,446 $ 501
Accounts receivable-less allowance for doubtful accounts
of $5,058 in 2003 and $4,962 in 2002 64,625 51,080
Inventories 92,535 79,913
Income taxes receivable -- 1,319
Deferred income taxes 7,934 7,934
Prepaid expenses and other current assets 2,889 2,981
--------- ---------
Total current assets 169,429 143,728
Property, plant and equipment, net 41,918 37,434
Intangibles arising from acquistions, net 8,210 8,380
Goodwill 6,282 6,282
Other assets 13,823 10,139
Deferred income taxes 5,019 5,019
--------- ---------
Total assets $ 244,681 $ 210,982
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,124 $ 8,396
Accounts payable 45,626 32,397
Accrued liabilities 27,184 21,699
Income taxes payable 653 --
--------- ---------
Total current liabilities 81,587 62,492
Long-term pension liability, less current portion 10,656 10,656
Deferred income taxes 4,348 4,348
Long-term debt, less current portion 59,870 50,588
--------- ---------
Total liabilities 156,461 128,084
--------- ---------
Shareholders' equity:
Preferred stock $.01 par value, authorized
1,000,000 shares; no shares issued -- --
Common stock $1 par value, authorized
20,000,000 shares; issued 10,000,000 shares 10,000 10,000
Additional paid-in capital 5,372 5,393
Accumulated other comprehensive loss (3,489) (4,278)
Retained earnings 90,557 86,232
--------- ---------
102,440 97,347
Less: Treasury stock at cost, 857,996 shares
in 2003 and 872,261 shares in 2002 (13,578) (13,667)
Receivables for stock options exercised (642) (782)
--------- ---------
Total shareholders' equity 88,220 82,898
--------- ---------
Total liabilities and shareholders' equity $ 244,681 $ 210,982
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands, except for share and per share data)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------
2003 2002
-------- ---------
Net sales $ 93,363 $ 79,940
Cost of goods sold 45,658 37,377
Selling and administrative expenses 39,649 35,417
----------- -----------
Operating income 8,056 7,146
Other income (expense):
Gain on sale of land -- 2,428
Interest expense, net (1,045) (1,218)
Other expense, net (80) (110)
----------- -----------
Earnings before income taxes 6,931 8,246
Income taxes 2,606 3,298
----------- -----------
Net earnings $ 4,325 $ 4,948
=========== ===========
Earnings per common share:
Basic $ 0.47 $ 0.55
=========== ===========
Diluted $ 0.46 $ 0.54
=========== ===========
Weighted average common shares outstanding:
Basic 9,132,000 8,928,000
=========== ===========
Diluted 9,456,000 9,243,000
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands)
(UNAUDITED)
March 31
--------
2003 2002
---- ----
Cash flows provided by (used in) operating activities:
Net earnings $ 4,325 $ 4,948
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,815 1,751
Provision for doubtful accounts 222 497
Gain on sale of land -- (2,428)
Other non-cash operating items 145 128
Changes in operating assets and liabilities:
Accounts receivable (13,562) (6,787)
Inventories (12,028) (1,225)
Prepaid expenses and other current assets (142) (495)
Other assets (3,655) (816)
Accounts payable 13,016 935
Accrued liabilities 5,425 2,106
Income taxes receivable / payable 2,177 254
-------- --------
Net cash used in operating activities (2,262) (1,132)
-------- --------
Cash flows provided by (used in) investing activities:
Net proceeds from sale of land 235 2,940
Property, plant and equipment additions (5,448) (1,728)
-------- --------
Net cash provided by (used in) investing activities (5,213) 1,212
-------- --------
Cash flows provided by (used in) financing activities:
Principal borrowings (payments) under revolving credit agreement, net 4,000 1,500
Principal payments under mortgages (96) (85)
Repayment of mortgage (3,865) --
Borrowings under mortgage and construction loan 8,459 --
Payment of capital lease obligations (22) --
Repayment on receivables for stock options exercised -- 3
Proceeds from the exercise of stock options 53 --
Acquisition of treasury stock (128) (206)
-------- --------
Net cash provided by financing activities 8,401 1,212
-------- --------
Effect of exchange rate changes on cash 19 (2)
-------- --------
Net increase in cash and cash equivalents 945 1,290
Cash and cash equivalents at beginning of year 501 2,688
-------- --------
Cash and cash equivalents at end of period $ 1,446 $ 3,978
======== ========
Supplemental disclosures:
Cash paid:
Interest $ 186 $ 355
Income taxes $ 464 $ 3,134
Non-cash items:
Equipment acquired under capitalized leases $ 463 $ --
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Del
Laboratories, Inc. and subsidiaries ("the Company") have been prepared
in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. Interim results are not necessarily indicative of results
for a full year.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146
requires that a liability be recognized for costs associated with an
exit or disposal activity only when the liability is incurred. SFAS No.
146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. The
adoption of SFAS No. 146 did not have any impact on the Company's
results of operations, cash flows or financial position for the first
quarter of 2003. If the Company was to commit to an exit or disposal
activity in the future, it would be subject to the new rules regarding
expense recognition.
Effective January 1, 2003, the Company adopted the provisions of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that at the
inception of the guarantee, a liability be recorded on the guarantor's
balance sheet for the fair value of the obligation undertaken in
issuing the guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued. The adoption of FIN 45 did
not have any effect on the Company's results of operations, cash flows
or financial position.
A summary of the Company's critical and significant accounting policies
are presented in its 2002 Form 10-K. Users of financial information
produced for interim periods are encouraged to refer to the footnotes
contained in the Form 10-K when reviewing interim financial results.
In the opinion of management, the accompanying interim consolidated
financial statements contain all material adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows
of the Company for interim periods.
2. STOCK OPTION PLANS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), and related
interpretations, in accounting for its fixed plan stock options. Under
APB No. 25, compensation expense would be recorded if, on the date of
grant, the market price of the underlying stock exceeded its exercise
price. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock option plans been determined based on
the fair value at the grant dates for awards under the plans,
consistent with the alternative method set forth under SFAS No. 123,
"Accounting for Stock-Based Compensation", and SFAS No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure", the Company's
net earnings and net earnings per share would have been reduced. The
following table illustrates the effect on net earnings and net earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock based employee compensation:
-6-
2. STOCK OPTION PLANS, CONTINUED
THREE MONTHS ENDED
MARCH 31
--------
2003 2002
---- ----
Net earnings, as reported $4,325 $4,948
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects $ (569) $ (282)
------ ------
Pro forma net earnings $3,756 $4,666
====== ======
Earnings per share:
Basic - as reported $0.47 $0.55
====== ======
Basic - pro forma $0.41 $0.52
====== ======
Diluted - as reported $0.46 $0.54
====== ======
Diluted - pro forma $0.40 $0.50
====== ======
The fair value of each option grant was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2003 and 2002, respectively: dividend
yields 0% and 0%; expected lives of 5.0 and 5.7 years; risk-free
interest rates of 3.08% and 4.57%; and expected volatility of 33.8% and
39.1%. The weighted-average fair value of options granted during 2003
and 2002 were $6.94 and $7.43, respectively.
On April 22, 2003, the Financial Accounting Standards Board ("FASB")
determined that stock-based compensation should be recognized as a cost
in the financial statements and that such cost be measured according to
the fair value of the stock options. The FASB has not as yet determined
the methodology for calculating fair value and plans to issue an
exposure draft later this year that could become effective in 2004. We
will continue to monitor communications on this subject from the FASB
in order to determine the impact on the Company's consolidated
financial statements.
3. INVENTORIES
Inventories are valued at the lower of cost (principally first-in /
first-out) or market value. The Company records reductions to the cost
of inventories based upon its forecasted plans to sell, historical
scrap and disposal rates and physical condition of the inventories. The
components of inventories are as follows:
March 31 December 31
2003 2002
---- ----
Raw Materials $ 48,183 $ 35,942
Work in Process 4,172 3,878
Finished Goods 40,180 40,093
-------- --------
$ 92,535 $ 79,913
======== ========
-7-
4. INTANGIBLES
Intangibles arising from acquisitions are as follows:
March 31, 2003
--------------
Gross
Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $10,558 $ 2,610 $ 7,948
Trademarks 3,000 2,738 262
------- ------- -------
$13,558 $ 5,348 $ 8,210
======= ======= =======
December 31, 2002
-----------------
Gross
Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $10,558 $2,478 $8,080
Trademarks 3,000 2,700 300
------- ------ ------
$13,558 $5,178 $8,380
======= ====== ======
Amortization expense was $170 for the three months ended March 31, 2003
and $169 for the three months ended March 31, 2002. The estimated
amortization expense for the fiscal years ended December 31, 2003,
2004, 2005, 2006 and 2007, is $678, $678, $528, $528 and $528,
respectively. The useful lives for intellectual property rights and
trademarks are 20 years.
5. LONG-TERM DEBT
March 31 December 31
2003 2002
---- ----
9.5% senior notes $32,000 $32,000
Notes payable under revolving credit agreement 26,000 22,000
Mortgages on land and buildings 9,553 4,984
Obligations under capital leases 441 --
------- -------
$67,994 $58,984
Less current portion 8,124 8,396
------- -------
$59,870 $50,588
======= =======
At December 31, 2002, the Company had an outstanding balance of $3,954
under a five-year mortgage on the land and buildings in North Carolina.
During the first quarter of 2003, the Company paid $89 of the mortgage
and refinanced the balance with a seven-year $12,480 combination
mortgage and construction loan facility. Of this facility, $3,865 was
used to pay the outstanding balance on the existing mortgage and $4,594
was used for funding of construction costs in connection with the
expansion in North Carolina. The mortgage and construction loan
facility provides construction funding as funds are expended during the
building expansion project. The mortgage includes an interest rate
based on LIBOR plus 1.75%, which totaled 3.05% as of March 31, 2003,
monthly principal payments beginning April 15, 2004 based on a 20 year
amortization schedule, a balloon payment due in March 2010, and terms
that provide for the maintenance of certain financial ratios.
6. SALE OF LAND
On February 13, 2002, the Company sold 13.5 acres of vacant land in
Farmingdale, New York to an unrelated third party for gross proceeds of
$3,335, which was reduced by $160 for closing costs. In addition, $235
of the sales price was paid by the purchaser on February 13, 2003, in
accordance with the original terms of the transaction. The land was
included in property, plant and equipment at December 31, 2001, with a
book value of $500. After transaction related costs of $407, the sale
resulted in a gain of $2,428, (approximately $1,500 after-tax, or $0.16
per basic share) which was recorded in the first quarter of 2002. In
connection with this sale, an option was granted to the buyer for the
remaining 8.5 acres of improved land and buildings owned by the
Company. The option is for a purchase price of no less than $5,000 and
cannot be exercised before December 1, 2004 or after December 1, 2005.
-8-
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders (which equals the Company's recorded net earnings)
by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock,
such as stock options, were exercised, converted into common stock or
otherwise resulted in the issuance of common stock.
On November 7, 2002, the Company's Board of Directors approved a 5%
stock dividend. As a result, 434,835 shares of treasury stock were
issued on December 27, 2002 to shareholders of record on November 29,
2002. Accordingly, the weighted-average common shares outstanding in
the consolidated statement of earnings for the quarter ended March 31,
2002, have been adjusted to reflect the dividend.
A reconciliation between the numerators and denominators of the basic
and diluted earnings per common share is as follows:
Three Months Ended
March 31
--------
2003 2002
---- ----
Net earnings (numerator) $4,325 $4,948
Weighted-average common shares
(denominator for basic earnings per share) 9,132 8,928
Effect of dilutive securities:
Employee stock options 324 315
------ ------
Weighted-average common and potential
common shares outstanding
(denominator for diluted earnings per share) 9,456 9,243
====== ======
Basic earnings per share $ 0.47 $ 0.55
====== ======
Diluted earnings per share $ 0.46 $ 0.54
====== ======
Employee stock options to purchase approximately 903,000 and 456,000
shares for the three months ended March 31, 2003 and 2002,
respectively, were not included in the net earnings per share
calculation because their effect would have been anti-dilutive.
As a result of stock options exercised during the first three months of
2003, the corresponding tax benefit of $137 was recorded as a reduction
to income taxes payable and as an increase in additional paid-in
capital.
8. COMPREHENSIVE INCOME
The components of comprehensive income for the three months ended March
31, 2003 and 2002 are as follows:
Three Months Ended
March 31
--------
2003 2002
---- ----
Net earnings $ 4,325 $ 4,948
Foreign currency translation 789 (23)
------- -------
Total comprehensive income $ 5,114 $ 4,925
======= =======
-9-
9. SEGMENT INFORMATION
The Company operates in two segments, Cosmetic and Pharmaceutical, that
have been organized by the products and services they offer. The
Cosmetic segment's principal products are nail care, nail color, color
cosmetics, beauty implements, bleaches and depilatories, personal care
products and other related cosmetic items. The Pharmaceutical segment's
principal products are proprietary oral analgesics, acne treatment
products and first aid products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates the performance of its
operating segments based on operating income. Certain assets, including
property, plant and equipment and deferred tax assets, are not
allocated to the identifiable segments; depreciation of unallocated
assets is charged to the Cosmetic segment.
For the three months ended
March 31
--------
2003 2002
---- ----
Net sales:
Cosmetic $ 76,258 $ 63,746
Pharmaceutical 17,105 16,194
-------- --------
Consolidated $ 93,363 $ 79,940
======== ========
Operating income:
Cosmetic $ 6,329 $ 4,983
Pharmaceutical 1,727 2,163
-------- --------
Consolidated $ 8,056 $ 7,146
Other income (expense):
Gain on sale of land $ -- $ 2,428
Interest expense, net $ (1,045) $ (1,218)
Other expense, net $ (80) $ (110)
-------- --------
Earnings before income taxes $ 6,931 $ 8,246
======== ========
Depreciation and amortization:
Cosmetic $ 1,727 $ 1,677
Pharmaceutical 88 74
-------- --------
Consolidated $ 1,815 $ 1,751
======== ========
10. COMMITMENTS AND CONTINGENCIES
In September 2001, the Company received notice from the Environmental
Protection Agency ("EPA") that it was, along with 81 others, a
Potentially Responsible Party regarding a Superfund Site ("the Site")
located in Glen Cove, New York. According to the notice received from
the EPA, the Company's involvement relates to empty drums coming to the
Site in 1977 and 1978. In the third quarter of 2001, the Company
recorded an estimate of $550 in selling and administrative expenses
based on information received from the EPA as to its potential
liability for the past remediation activities. In October 2001, the
Company became a member of a Joint Defense Group ("the JDG"). In the
second quarter of 2002, the EPA and the JDG agreed in principle to the
amounts of payments required to settle past and future liabilities
under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with regard to the Site. Pursuant to an
agreement among JDG members as to how to allocate such payment amounts,
the Company recorded, in the second quarter of 2002, an additional
estimate of $785 in selling and administrative expenses. The charge of
$785 had a negative impact of $0.05 per basic share on net earnings in
the second quarter of 2002 and for the year ended December 31, 2002.
During the third quarter of 2002, a trust was established with the
intention of entering into a Consent Decree with the United States and
the State of New York to settle all claims by the United States and the
State of New York for past and future response costs and future actions
at the Site. In September 2002, the Company paid $1,332 into a trust
account which will be held in escrow, together with payments by the
other members of the JDG, for the eventual settlement with the EPA of
the Company's potential liability under CERCLA. During the third
quarter of 2002, the Company also paid into the same trust account $18
for the eventual settlement of the Company's potential liability for
natural resource damages ("NRD") claims, which also are expected to be
settled in the Consent Decree.
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
(In thousands, except per share data)
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The Company makes estimates and assumptions in the preparation of its financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ significantly from those
estimates under different assumptions and conditions. The Company believes that
the following discussion addresses the Company's most critical accounting
policies, which are those that are most important to the portrayal of the
Company's financial condition and results of operations and which require
management's most difficult and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The following is a brief discussion of the more critical accounting
policies employed by the Company.
REVENUE RECOGNITION
The Company sells its products to chain drug stores, mass volume retailers,
supermarkets, wholesalers and overseas distributors. Sales of such products are
denominated in U.S. dollars and sales in Canada are denominated in Canadian
dollars. The Company's accounts receivable reflect the granting of credit to
these customers. The Company generally grants credit based upon an analysis of
the customer's financial position and previously established buying and selling
patterns. The Company does not bill customers for shipping and handling costs
and, accordingly, classifies such costs as selling and administrative expense.
Revenues are recognized and discounts are recorded when merchandise is shipped.
Net sales are comprised of gross revenues less returns, various promotional
allowances and trade discounts and allowances. The Company allows customers to
return their unsold products when they meet certain criteria as outlined in the
Company's sales policies. The Company regularly reviews and revises, as deemed
necessary, its estimate of reserves for future sales returns based primarily
upon actual return rates by product and planned product discontinuances. The
Company records estimated reserves for future sales returns as a reduction of
sales, cost of sales and accounts receivable. Returned products which are
recorded as inventories are valued based on estimated realizable value. The
physical condition and marketability of the returned products are the major
factors considered by the Company in estimating realizable value. Actual
returns, as well as estimated realizable values of returned products, may differ
significantly, either favorably or unfavorably, from estimates if factors such
as economic conditions, customer inventory levels or competitive conditions
differ from expectations.
PROMOTIONAL ALLOWANCES AND CO-OPERATIVE ADVERTISING
The Company has various performance-based arrangements with retailers to
reimburse them for all or a portion of their promotional activities related to
the Company's products. These sales incentives offered voluntarily by the
Company to customers, without charge, that can be used in or that are
exercisable by a customer as a result of a single exchange transaction, are
recorded as a reduction of net sales at the later of the sale or the offer, and
primarily allow customers to take deductions against amounts owed to the Company
for product purchases. The Company also has co-operative advertising
arrangements with retail customers to reimburse them for all or a portion of
their advertising of the Company's products. The estimated liabilities for these
co-operative advertising arrangements are recorded as advertising expense as
incurred, or in the period the related revenue is recognized, depending on the
terms of the agreement, and included in selling and administrative expenses,
since the Company receives an identifiable benefit from retail customers for an
amount equal to or less than the fair value of such advertising cost. These
arrangements primarily allow retail customers to take deductions against amounts
owed to the Company for product purchases. The Company regularly reviews and
revises the estimated accruals for these promotional allowance and cooperative
advertising programs. Actual costs incurred by the Company may differ
significantly, either favorably or unfavorably, from estimates if factors such
as the level and success of the retailers' programs or other conditions differ
from our expectations.
-11-
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is principally
determined by the first-in, first-out method. The Company records a reduction to
the cost of inventories based upon its forecasted plans to sell, historical
scrap and disposal rates and the physical condition of the inventories. These
reductions are estimates, which could vary significantly, either favorably or
unfavorably, from actual requirements if future economic conditions, the timing
of new product introductions, customer inventory levels, fashion-oriented color
cosmetic trends or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
estimated useful lives or the lease term. Changes in circumstances, such as
technological advances, changes to the Company's business model or changes in
the Company's capital strategy could result in the actual useful lives differing
from the Company's estimates. In those cases where the Company determines that
the useful life of property, plant and equipment should be shortened, the
Company would depreciate the net book value in excess of the salvage value, over
its revised remaining useful life, thereby increasing depreciation expense.
Factors such as changes in the planned use of equipment, fixtures, software or
planned closing of facilities could result in shortened useful lives.
Long-lived assets, other than goodwill, are reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The estimate of cash
flow is based upon, among other things, certain assumptions about expected
future operating performance. The Company's estimates of undiscounted cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions, changes to its business model or changes in its
operating performance. If the sum of the undiscounted cash flows (excluding
interest) is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the asset.
The remaining useful lives of intangible assets subject to amortization are
evaluated each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of amortization. If the estimate of
an intangible asset's remaining useful life is changed, the remaining carrying
amount of the intangible asset should be amortized prospectively over that
revised remaing useful life.
Goodwill must be tested annually for impairment at the reporting unit level. The
Company's reporting units are its Cosmetic and Pharmaceutical segments. If an
indication of impairment exists, the Company is required to determine if such
reporting unit's implied fair value is less than its carrying value in order to
determine the amount, if any, of the impairment loss required to be recorded.
The testing performed as of January 1, 2003, indicated that there was no
impairment to goodwill.
PENSION BENEFITS
The Company sponsors pension and other retirement plans in various forms
covering all eligible employees. Several statistical and other factors which
attempt to anticipate future events are used in calculating the expense and
liability related to the plans. These factors include assumptions about the
discount rate, expected return on plan assets and rate of future compensation
increases as determined by the Company, within certain guidelines and in
conjunction with its actuarial consultants. In addition, the Company's actuarial
consultants also use subjective factors such as withdrawal and mortality rates
to estimate the expense and liability related to these plans. The actuarial
assumptions used by the Company may differ significantly, either favorably or
unfavorably, from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants.
-12-
RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 2003 VERSUS MARCH 31, 2002
Consolidated net sales for the first quarter of 2003 were $93,363, an increase
of 16.8% compared to $79,940 for the first quarter of 2002.
The Cosmetic segment net sales for the first quarter of 2003 were $76,258, an
increase of 19.6% compared to $63,746 for the first quarter of 2002. The
increase was primarily due to volume growth in the Sally Hansen family of brands
and the introduction of Sally Hansen Healing Beauty, a new line of skincare
makeup. These increases were partially offset by a reduction in volume and
increased returns of the Naturistics Cosmetics brand. The product mix within
this brand is being repositioned in order to facilitate the introduction of a
sub-brand of lip gloss items called Miss Kiss. As reported by ACNielsen, Sally
Hansen, the core brand of the Cosmetic segment, remains the number one brand in
the mass market nail care category, increasing its share of market to 26% for
the quarter. The Pharmaceutical segment net sales for the first quarter of 2003
were $17,105, an increase of 5.6% compared to $16,194 for the first quarter of
2002. The increase was primarily attributable to increased sales in the
Dermarest brand of psoriasis and eczema treatments, the Gentle Naturals line of
naturally-based baby care products and DiabetAid, a line of products designed to
treat the common everyday health care needs of problems associated with
diabetes. Sales of Orajel for the first quarter of 2003 were below sales for the
first quarter of 2002 due to a reduction of inventory levels by wholesalers and
retailers. However, Orajel, the core brand of the Pharmaceutical segment,
continued its leadership position in the oral analgesics category, with a 27%
share of market for the quarter, as reported by Information Resources, Inc.
Cost of goods sold for the first quarter of 2003 were $45,658 or 48.9% of net
sales, compared to $37,377 or 46.8% of net sales for the first quarter of 2002.
The increase in cost of goods sold as a percentage of net sales is primarily
attributable to higher product returns of Naturistics Cosmetics as a result of
the repositioning of this line, and a change in sales mix within the
Pharmaceutical segment primarily attributable to increased volume of the new
Gentle Naturals and DiabetAid brands.
Selling and administrative expenses for the first quarter of 2003 were $39,649
or 42.5% of net sales, compared to $35,417 or 44.3% of net sales for the first
quarter of 2002. The increase in selling and administrative expenses of $4,232
in the first quarter of 2003 as compared to the first quarter of 2002 is
primarily attributable to higher advertising and selling expenses, and higher
freight expense related to the increase in volume. The improvement in selling
and administrative expenses, as a percentage of net sales, is attributable to
sales increasing at a higher rate than increases in expenses.
Operating income for the first quarter of 2003 was $8,056 or 8.6% of net sales,
compared to $7,146 or 8.9% of net sales in 2002. The increase in operating
income is attributable to the net sales increase of 19.6% in the Cosmetic
segment. The operating income of the Cosmetic segment for the first quarter of
2003 was $6,329 or 8.3% of net sales, compared to $4,983 or 7.8% of net sales
for the first quarter of 2002. The operating income of the Pharmaceutical
segment for the first quarter of 2003 was $1,727 or 10.1% of net sales, compared
to $2,163 or 13.4% of net sales for the first quarter of 2002. The lower
operating income of the Pharmaceutical segment in the first quarter of 2003
compared to the first quarter of 2002 is due to higher advertising expenses and
the change in sales mix which negatively impacted cost of goods sold.
In the first quarter of last year, the Company sold 13.5 acres of vacant land in
Farmingdale, New York to an unrelated third party for gross proceeds of $3,335
which was reduced by $160 for closing costs. In addition, $235 of the sales
price was paid by the purchaser on February 12, 2003 in accordance with the
original terms of the transaction. The land was included in property, plant and
equipment at December 31, 2001, with a book value of $500. After transaction
related costs of $407, a gain of $2,428 was recorded in the first quarter of
last year. The gain of $2,428, or $1,457 after tax, increased basic earnings per
share by $0.16 for the first quarter of last year. In connection with this sale,
an option was granted to the buyer for the remaining 8.5 acres of improved land
and buildings owned by the Company. The option is for a purchase price of no
less than $5,000 and cannot be exercised before December 1, 2004 or after
December 1, 2005.
Interest expense, net of interest income, for the first quarter of 2003 was
$1,045, a 14% reduction of $173 from the net interest expense of $1,218 reported
for the first quarter of 2002. The decrease in interest expense is due to a
reduction of approximately $1,750 in average outstanding borrowings, and a
reduction of approximately 93 basis points in average borrowing rates.
-13-
Income taxes for the first quarter of 2003 are based on the Company's expected
annual 2003 effective tax rate of 37.6%. The decrease from the rate of 40% used
in the first quarter of 2002 is primarily due to a decrease in the amount of
permanent non-deductible expenses and the reduced effect of such non-deductible
expenses on taxable income.
Net earnings for the first quarter of 2003 were $4,325 or $0.47 per basic share,
an increase of 24% when compared to net earnings of $3,491 or $0.39 per basic
share, excluding the after-tax land sale gain of $1,457 or $0.16 per basic
share, reported for the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003 the Company had cash and cash equivalents of $1,446 compared
to $501 at December 31, 2002 and $3,978 at March 31, 2002.
Net cash used in operating activities was $2,262 for the three months ended
March 31, 2003. Increases of $13,562 in accounts receivable and $12,028 in
inventories were partially offset by net earnings of $4,325, increases of
$13,016 in accounts payable and $5,425 in accrued liabilities. The increase in
accounts receivable is attributable to the timing of shipments during the first
quarter. The increases in inventories and accounts payable are due to the timing
of purchases of raw materials and components to support projected sales levels.
The increase in accrued liabilities is primarily due to increased advertising,
pension and interest expenses incurred during the first quarter but not paid at
March 31, 2003.
Net cash used in investing activities was $5,213 for the three months ended
March 31, 2003, is principally due to construction related to the expansion of
the manufacturing and distribution facility located in North Carolina. On
February 12, 2003, the Company received $235 representing the remaining proceeds
due from the sale of vacant land in the first quarter of last year. The sale
resulted in an after-tax gain of $1,457 ($0.16 per basic share) which was
recorded in the first quarter of last year. In connection with this sale, an
option was granted to the buyer for the remaining 8.5 acres of improved land and
buildings owned by the Company. The option is for a purchase price of no less
than $5,000 and cannot be exercised before December 1, 2004 or after December 1,
2005.
Net cash provided by financing activities was $8,401 for the three months ended
March 31, 2003 principally due to an additional $4,000 of net borrowings under
the revolving credit agreement and the refinancing of the mortgage on the land
and buildings in North Carolina. At December 31, 2002, the Company had an
outstanding balance of $3,954 under a five-year mortgage on the land and
buildings in North Carolina. During the first quarter of 2003, the Company paid
$89 of the mortgage and refinanced the balance with a seven-year $12,480
combination mortgage and construction loan facility. Of this facility, $3,865
was used to pay the outstanding balance on the existing mortgage and $4,594 was
used for funding of construction costs in connection with the expansion in North
Carolina. The mortgage and construction loan facility provides construction
funding as funds are expended during the building expansion project. The
mortgage includes an interest rate based on LIBOR plus 1.75%, which totaled
3.05% as of March 31, 2003, monthly principal payments beginning April 15, 2004
based on a 20 year amortization schedule, a balloon payment due in March 2010,
and terms that provide for the maintenance of certain financial ratios.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of March 31, 2003, the
Company has included the following table.
Payments Due By Period
----------------------------------------------------------
Less Than 1 - 2 2 - 3 3 - 5 After
Total 1 Year Years Years Years 5 Years
----- ------ ----- ----- ----- -------
Long-term debt $41,553 $ 8,031 $ 9,981 $16,947 $ 3,021 $ 3,573
Revolving credit agreement 26,000 -- 26,000 -- -- --
Capital lease 441 93 99 106 143 --
Operating leases 4,297 2,307 1,532 254 204 --
Construction commitment (a) 4,722 4,722 -- -- -- --
------- ------- ------- ------- ------- -------
Total contractual obligations $77,013 $15,153 $37,612 $17,307 $ 3,368 $ 3,573
======= ======= ======= ======= ======= =======
(a) The timing of the payments are based on the current construction timetable.
-14-
The Company believes that cash flows from operations, cash on hand and amounts
available from the credit facility and the combination mortgage and construction
loan will be sufficient to enable the Company to meet its anticipated cash
requirements during 2003. However, there can be no assurance that the
combination of cash flow from future operations, cash on hand and amounts
available from the credit facility and the combination mortgage and construction
loan will be sufficient to meet the Company's cash requirements. Additionally,
in the event of a decrease in demand for its products or reduced sales, such
developments, if significant, would reduce the Company's cash flow from
operations and could adversely affect the Company's ability to achieve certain
financial covenants under the senior note and revolving credit agreements. If
the Company is unable to satisfy such financial covenants, the Company could be
required to adopt one or more alternatives, such as reducing or delaying certain
operating expenditures and/or delaying capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 requires that if an
entity has a controlling financial interest in a variable interest entity, the
assets, liabilities and results of activities of the variable interest entity
should be included in the consolidated financial statements of the entity. FIN
No. 46 requires that its provisions are effective immediately for all
arrangements entered into after January 31, 2003. As the Company does not have
any variable interest entities, the adoption of FIN No. 46 did not have an
impact on the Company's consolidated results of operations, cash flows or
financial position.
On April 22, 2003, the Financial Accounting Standards Board ("FASB") determined
that stock-based compensation should be recognized as a cost in the financial
statements and that such cost be measured according to the fair value of the
stock options. The FASB has not as yet determined the methodology for
calculating fair value and plans to issue an exposure draft later this year that
could become effective in 2004. We will continue to monitor communications on
this subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial
Condition and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends, certain risks, uncertainties and other factors that
could cause actual results to differ materially from any future results implied
by such forward-looking statements. Factors that might cause such a difference
include, but are not limited to: delays in introducing new products or failure
of consumers to accept new products; actions by competitors which may result in
mergers, technology improvement or new product introductions; the dependence on
certain national chain drug stores, food stores and mass merchandiser
relationships due to the concentration of sales generated by such chains;
changes in fashion-oriented color cosmetic trends; the effect on sales of lower
retailer inventory targets; the effect on sales of political and/or economic
conditions; the Company's estimates of costs and benefits, cash flow from
operations and capital expenditures; interest rate or foreign exchange rate
changes affecting the Company and its market sensitive financial instruments
including the Company's qualitative and quantitative estimates as to market risk
sensitive instruments; changes in product mix to products which are less
profitable; shipment delays; depletion of inventory and increased production
costs resulting from disruptions of operations at any of our manufacturing or
distribution facilities; foreign currency fluctuations affecting our results of
operations and the value of our foreign assets and liabilities; the relative
prices at which we sell our products and our foreign competitors sell their
products in the same market; our operating and manufacturing costs outside of
the United States; changes in the laws, regulations and policies, including
changes in accounting standards, that effect, or will effect, us in the United
States and/or abroad; and trends in the general economy. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Without limitation, use of the following words is
intended to identify forward-looking statements: "may," "will," "should,"
"expect," "anticipate," "look forward to," "estimate," "indications," "intend,"
"plan," "momentum," or "continue" or the negative thereof or other variations
thereon.
-15-
FORWARD - LOOKING STATEMENTS (CONTINUED)
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission pursuant to the Exchange Act.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the filing of this report, the Company evaluated,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13(a)-14 and 15(d)-14). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting management to material information required to be included in
the Company's periodic Securities and Exchange Commission filings.
(b) Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC, dated April
28, 2003 to report under Item 9 of that Form that a
press release was issued on April 25, 2003 announcing
earnings for the three months ended March 31, 2003. A
copy of the press release was filed as an exhibit to the
Form 8-K.
-16-
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.
DEL LABORATORIES, INC.
(Registrant)
DATE: MAY 12, 2003 /S/ DAN K. WASSONG
- ---------------------- ------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
DATE: MAY 12, 2003 /S/ ENZO J. VIALARDI
- ------------------- --------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
-17-
CERTIFICATIONS
I, Dan K. Wassong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Del Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a 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
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 most 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 registrant's 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/ DAN K. WASSONG
------------------
Dan K. Wassong
Chief Executive Officer
-18-
CERTIFICATIONS
I, Enzo J. Vialardi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Del Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a 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
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 most 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 registrant's 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/ ENZO J. VIALARDI
--------------------
Enzo J. Vialardi
Chief Financial Officer
-19-