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 SEPTEMBER 30, 2004
|_| 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, PO BOX 9357, UNIONDALE, NEW YORK 11553-9357
(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 November
8, 2004 was 9,754,549.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Earnings for the three and nine
months ended September 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 4. Controls and Procedures 24
Part II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30 December 31
2004 2003
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,365 $ 2,113
Accounts receivable, less allowance for doubtful accounts
of $1,703 in 2004 and $4,391 in 2003 81,241 75,130
Inventories 101,160 92,518
Deferred income taxes 8,042 8,042
Prepaid expenses and other current assets 4,143 2,671
---------- ----------
Total current assets 196,951 180,474
Property, plant and equipment, net 46,805 49,274
Intangibles arising from acquistions, net 7,250 7,761
Goodwill 6,282 6,282
Other assets 14,248 13,262
Deferred income taxes 6,159 6,159
---------- ----------
Total assets $ 277,695 $ 263,212
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 489 $ 8,760
Accounts payable 47,455 43,872
Accrued liabilities 21,702 25,023
Income taxes payable 200 307
---------- ----------
Total current liabilities 69,846 77,962
Long-term pension liability, less current portion 9,767 9,767
Deferred income taxes 5,205 5,205
Deferred liability 1,403 1,334
Long-term debt, less current portion 74,304 63,373
---------- ----------
Total liabilities 160,525 157,641
---------- ----------
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 9,296 8,823
Accumulated other comprehensive loss (2,291) (2,594)
Retained earnings 106,208 95,309
---------- ----------
123,213 111,538
Less: Treasury stock at cost, 250,065 shares
in 2004 and 289,308 shares in 2003 (5,541) (5,325)
Receivables for stock options exercised (502) (642)
---------- ----------
Total shareholders' equity 117,170 105,571
---------- ----------
Total liabilities and shareholders' equity $ 277,695 $ 263,212
========== ==========
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 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 115,552 $ 99,716 $ 301,565 $ 291,055
Cost of goods sold 58,641 49,017 152,226 141,845
Selling and administrative expenses 44,267 41,931 126,996 121,735
Severance expenses (note 8) 14 119 17 1,969
Merger expenses (note 12) 1,150 -- 1,366 --
------------ ------------ ------------ ------------
Operating income 11,480 8,649 20,960 25,506
Other income (expense):
Loss on sale of land and building (105) -- (146) --
Interest expense, net (812) (954) (2,561) (3,008)
Other income (expense), net 336 (31) (128) (4)
------------ ------------ ------------ ------------
Earnings before income taxes 10,899 7,664 18,125 22,494
Income taxes 4,437 3,013 7,226 8,578
------------ ------------ ------------ ------------
Net earnings $ 6,462 $ 4,651 $ 10,899 $ 13,916
============ ============ ============ ============
Earnings per common share:
Basic $ 0.66 $ 0.48 $ 1.12 $ 1.45
============ ============ ============ ============
Diluted $ 0.62 $ 0.46 $ 1.05 $ 1.38
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 9,742,000 9,692,000 9,731,000 9,628,000
============ ============ ============ ============
Diluted 10,432,000 10,209,000 10,392,000 10,064,000
============ ============ ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30
------------
2004 2003
---- ----
Cash flows provided by (used in) operating activities:
Net earnings $ 10,899 $ 13,916
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,209 6,051
Amortization of display fixtures 6,552 4,611
Provision (recovery) on allowance for doubtful accounts 32 (167)
Tax benefit on stock options exercised 624 1,467
Loss on sale of land and building 146 --
Other non-cash operating items (32) 140
Changes in operating assets and liabilities:
Accounts receivable (5,996) (15,671)
Inventories (8,334) (5,561)
Prepaid expenses and other current assets (1,596) (636)
Other assets (7,516) (9,099)
Accounts payable 3,557 6,371
Accrued liabilities (3,693) 2,456
Deferred liability 69 1,271
Income taxes receivable / payable (89) 994
---------- ----------
Net cash provided by operating activities 832 6,143
---------- ----------
Cash flows provided by (used in) investing activities:
Net proceeds from sale of land and building 4,816 235
Property, plant and equipment additions (7,637) (14,601)
---------- ----------
Net cash used in investing activities (2,821) (14,366)
---------- ----------
Cash flows provided by (used in) financing activities:
Principal borrowings under revolving credit agreement, net 3,000 11,000
Principal payments under mortgages (289) (113)
Principal payment under senior notes -- (8,000)
Repayment of mortgage -- (3,865)
Borrowings under mortgage and construction loan -- 12,312
Payment of capital lease obligations (83) (78)
Proceeds from the exercise of stock options 244 100
Acquisition of treasury stock (611) (1,408)
---------- ----------
Net cash provided by financing activities 2,261 9,948
---------- ----------
Effect of exchange rate changes on cash (20) 26
---------- ----------
Net increase in cash and cash equivalents 252 1,751
Cash and cash equivalents at beginning of year 2,113 501
---------- ----------
Cash and cash equivalents at end of period $ 2,365 $ 2,252
========== ==========
Supplemental disclosures:
Cash paid for:
Interest $ 2,285 $ 2,480
Income taxes $ 6,960 $ 6,161
Non-cash transactions:
Shares tendered by optionees to exercise stock options $ 1,886 $ 5,722
Equipment acquired under capitalized leases $ -- $ 543
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)
(UNAUDITED)
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 U.S. generally accepted accounting principles 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 U.S.
generally accepted accounting principles for complete financial
statements. Interim results are not necessarily indicative of results for
a full year.
A summary of the Company's critical and significant accounting policies
are presented in its 2003 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 January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to
significant interpretation by the FASB, and was revised and reissued in
December 2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has a
controlling financial interest in a variable interest entity, the assets,
the liabilities and results of activities of the variable interest entity
should be included in the consolidated financial statements of the entity.
The provisions of FIN No. 46 and FIN No. 46R are applicable for all
entities that are considered special purpose entities ("SPE") by the end
of the first reporting period ending after December 15, 2003. The
provisions of FIN No. 46R are applicable to all other types of variable
interest entities for reporting periods ending after March 15, 2004. The
adoption of FIN No. 46 and FIN No. 46R did not have a material impact on
the Company's consolidated financial statements.
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.
Certain reclassifications were made to prior year amounts in order to
conform to the current year presentation. Amortization of display
fixtures, previously included in the cash flow statements in other assets
as net cash provided by operating activities, has been reclassified as a
separate line item, amortization of display fixtures, in net cash provided
by operating activities.
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 Nine Months Ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings, as reported $ 6,462 $ 4,651 $ 10,899 $ 13,916
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects $ (459) $ (574) $ (1,496) $ (1,722)
-------- -------- -------- --------
Pro forma net earnings $ 6,003 $ 4,077 $ 9,403 $ 12,194
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.66 $ 0.48 $ 1.12 $ 1.45
======== ======== ======== ========
Basic - pro forma $ 0.62 $ 0.42 $ 0.97 $ 1.27
======== ======== ======== ========
Diluted - as reported $ 0.62 $ 0.46 $ 1.05 $ 1.38
======== ======== ======== ========
Diluted - pro forma $ 0.58 $ 0.40 $ 0.90 $ 1.21
======== ======== ======== ========
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 the third quarter of 2003: dividend yield
0%; expected lives of 5.0 years; risk-free interest rate of 2.60%; and
expected volatility of 33.2%. The weighted-average fair value of options
granted during the third quarter of 2003 was $7.97. The Company did not
issue any new stock options during the third quarter of 2004.
Weighted-average assumptions for the first nine months of 2003, were:
dividend yield 0%; expected lives of 5.0 years; risk-free interest rate of
2.51%; and expected volatility of 33.2%. The weighted-average fair value
of options granted during the first nine months of 2003 was $7.42. The
Company did not issue any new stock options during the first nine months
of 2004.
During the first quarter of 2004, the Financial Accounting Standards Board
("FASB") issued an exposure draft, "Share-Based Payment, an amendment of
FASB Statements No. 123 and 95." This exposure draft would require
stock-based compensation to employees to be recognized as a cost in the
financial statements and that such cost be measured according to the fair
value of the stock options. In the absence of an observable market price
for the stock awards, the fair value of the stock options would be based
upon a valuation methodology that takes into consideration various
factors, including the exercise price of the option, the expected term of
the option, the current price of the underlying share, the expected
volatility of the underlying share price, the expected dividends on the
underlying share and the risk-free interest rate. The proposed
requirements in the exposure draft would be effective for the first
reporting period beginning after June 15, 2005. The Company 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 were as follows:
September 30 December 31
2004 2003
---- ----
Raw Materials $ 56,847 $ 40,586
Work in Process 5,455 4,856
Finished Goods 38,858 47,076
-------- --------
$101,160 $ 92,518
======== ========
7
4. INTANGIBLES
Intangibles arising from acquisitions were as follows:
September 30, 2004
------------------
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $ 10,558 $ 3,402 $ 7,156
Trademarks and other 3,060 2,966 94
-------- -------- --------
$ 13,618 $ 6,368 $ 7,250
======== ======== ========
December 31, 2003
-----------------
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $ 10,558 $ 3,006 $ 7,552
Trademarks and other 3,060 2,851 209
-------- -------- --------
$ 13,618 $ 5,857 $ 7,761
======== ======== ========
Amortization expense was $171 and $170 for the three months ended
September 30, 2004 and 2003, respectively, and amounted to $511 and $509
for the nine months ended September 30, 2004 and 2003, respectively. The
estimated amortization expense for the fiscal years ending December 31,
2004, 2005, 2006, 2007 and 2008, is $681, $531, $531, $531 and $531,
respectively. The useful lives for intellectual property rights,
trademarks and other are 20 years.
5. LONG - TERM DEBT
Long - term debt consisted of the following:
September 30 December 31
2004 2003
---- ----
Senior notes $ 24,000 $ 24,000
Notes payable under revolving credit agreement 37,000 34,000
Mortgages on land and buildings 13,437 13,694
Obligations under capital leases 356 439
-------- --------
$ 74,793 $ 72,133
Less current portion 489 8,760
-------- --------
$ 74,304 $ 63,373
======== ========
On May 18, 2004, the mortgage covering the property in North Carolina was
amended. The maturity of the mortgage was extended from March 15, 2010 to
March 18, 2011 and the interest rate was fixed at 6.39%.
On April 13, 2004, the senior notes were amended and restated. The
maturity of the notes was extended to April 15, 2011 with annual principal
payments of $6,000 required on April 15, 2008, April 15, 2009, April 15,
2010 and April 15, 2011. The interest rate was reduced from 9.5% to 5.56%
payable semi-annually on October 15 and April 15 of each year. The amended
agreement is unsecured and includes covenants which provide, among other
things, for the maintenance of certain financial ratios.
8
On April 13, 2004, the revolving credit agreement was amended and
restated. The amended facility provides credit of $45,000, and extends the
expiration to April 13, 2009. Under the terms of the agreement, interest
rates on borrowings are based on LIBOR or prime rates at the Company's
option. The terms of the agreement include a commitment fee based on
unutilized amounts and an annual agency fee. The deferred financing fees
associated with the April 13, 2004 amendment and unamortized deferred
financing fees associated with the March 2002 and February 2000 amendments
are being amortized over the term of the new agreement. Covenants provide,
among other things, for the maintenance of certain financial ratios. The
agreement is unsecured and no compensating balances are required.
On April 1, 2004, the lender under the mortgage covering the property in
Barrie, Ontario agreed to extend the maturity of the mortgage from March
1, 2005 to April 1, 2009 and to reduce the interest rate from 8.38% to
6.37%.
6. EMPLOYEE PENSION PLANS
The Company maintains two non-contributory defined benefit pension plans
covering all U.S. eligible employees. The Del Non-Union Plan formula is
based on years of service and the employee's compensation during the five
years before retirement. The Del LaCross Union Plan formula is based on
years of service. The LaCross Plan covers former employees of the
Company's Newark, New Jersey facility which ceased operations during 2002.
As a result of this closure, more than 20% of plan participants in the
LaCross Plan were terminated, which resulted in a partial termination of
the plan. Due to the partial termination of the plan, all affected
participants became fully vested in their accrued benefits at their
termination date. Assets held by these plans consist of cash and cash
equivalents, fixed income securities consisting of U.S. government and
corporate bonds and common stocks. The Company also has a defined benefit
supplemental executive retirement plan (SERP) for certain of its
executives. The SERP is a non-qualified plan under the Internal Revenue
Code. The assets in the SERP trust are considered assets of the Company,
not plan assets, and as such, are included in other assets on the
accompanying consolidated balance sheets. The assets of the SERP, which
consist of cash and cash equivalents, are held-to-maturity securities and,
as such, are carried at cost plus accrued interest.
COMPONENTS OF NET PERIOD BENEFIT COST
The components of net periodic benefit costs for the Company's domestic
plans are set forth in the following tables:
Three Months Ended
September 30, 2004
-------------------------------------
Del Non- Del Lacross
Union Plan Plan Serp
---------- ---- ----
Service Cost $ 770 $ -- $ 13
Interest Cost 578 19 106
Expected return on plan assets (516) (18) --
Recognized prior service cost 13 -- 37
Recognized net (gain) loss 191 4 (3)
-------- -------- --------
Net periodic cost $ 1,036 $ 5 $ 153
======== ======== ========
9
Nine Months Ended
September 30, 2004
-------------------------------------
Del Non- Del Lacross
Union Plan Plan Serp
---------- ---- ----
Service Cost $ 2,310 $ -- $ 39
Interest Cost 1,734 57 318
Expected return on plan assets (1,548) (54) --
Recognized prior service cost 39 -- 111
Recognized net (gain) loss 573 12 (9)
-------- -------- --------
Net periodic cost $ 3,108 $ 15 $ 459
======== ======== ========
Three Months Ended
September 30, 2003
-------------------------------------
Del Non- Del Lacross
Union Plan Plan Serp
---------- ---- ----
Service Cost $ 648 $ -- $ 13
Interest Cost 514 21 103
Expected return on plan assets (394) (26) --
Recognized prior service cost 12 -- 69
Recognized net (gain) loss 182 3 (22)
-------- -------- --------
Net periodic cost $ 962 $ (2) $ 163
======== ======== ========
Nine Months Ended
September 30, 2003
-------------------------------------
Del Non- Del Lacross
Union Plan Plan Serp
---------- ---- ----
Service Cost $ 1,944 $ -- $ 39
Interest Cost 1,542 63 309
Expected return on plan assets (1,182) (78) --
Amortization of unrecognized transition asset (1) -- --
Recognized prior service cost 37 -- 207
Recognized net (gain) loss 546 9 (66)
-------- -------- --------
Net periodic cost $ 2,886 $ (6) $ 489
======== ======== ========
10
CONTRIBUTIONS
The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it expects to contribute in 2004
approximately $5,215 and $808, to its Non-Union Plan and SERP
respectively, and did not anticipate that a contribution would be made to
the LaCross Plan. As of September 30, 2004, $3,505 and $11 of
contributions have been made to the Non-Union Plan and SERP, respectively,
and no contributions have been made to the LaCross Plan. The Company
presently anticipates contributing an additional $772 to fund its
Non-Union Plan for a total of $4,277, contributing an additional $4 to
fund its SERP for a total of $15 and making no additional contributions to
the LaCross Plan. The decrease in the expected contribution to the
Non-Union Plan for 2004 is due to a change, in April 2004, in the minimum
funding requirement rules for 2004. The significant decrease in the
expected contribution to the SERP is due to the fact that participants
over 65 who were assumed to be retiring during the first quarter of 2004
did not retire.
7. SALE OF LAND AND BUILDINGS
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. 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 which was exercised by
the buyer on June 30, 2004. The improved land and buildings were sold for
gross proceeds of $5,000, which was reduced by $320 for closing costs and
increased by $136 for other closing adjustments, resulting in net proceeds
of $4,816. The improved land and buildings had a book value at June 30,
2004 of $4,513. After closing costs of $320 and other transaction related
expenses of $313, the sale resulted in a loss of $146 ($88 after-tax).
8. CLOSURE OF FARMINGDALE PLANT
On May 30, 2003, the Company announced the formal plan for the transfer of
its principal manufacturing operations, for both the Cosmetic and
Pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale,
New York. Pursuant to the Company's formal severance policy for non-union
employees and, severance benefits due under the union contract resulting
from the plant closure, a charge of $1,850 for severance costs and related
benefits for approximately 360 union and non-union employees associated
with this move was recorded during the six months ended June 30, 2003.
Additional severance benefits earned by employees being terminated will be
recognized as a charge in the financial statements as such severance
benefits are earned. During the first quarter of 2004, a provision of $56
was recorded for such earned severance benefits, net of adjustments of $66
to the initial accrual, which resulted in a net recovery of $10. During
the second quarter of 2004, a provision of $18 was recorded for such
earned severance benefits, net of adjustments of $5 to the initial
accrual, which resulted in a net provision of $13. During the third
quarter of 2004, a provision of $12 was recorded for such earned severance
benefits, plus adjustments of $2 to the initial accrual, which resulted in
a total provision of $14. During 2004 and 2003, $135 and $127,
respectively, of relocation and other move related costs were expensed as
incurred. The Company estimates that a total of approximately $3 (Cosmetic
segment - $2; Pharmaceutical segment - $1), will be incurred for
additional severance, relocation and other move related costs during the
fourth quarter of 2004. As of September 30, 2004, 359 union and non-union
employees have been terminated and $1,916 in severance benefits was paid.
A summary of the activity in the accrual for the plant closure was as
follows:
Balance December 31, 2003 $ 1,714
Provision 86
Payments (1,597)
Adjustments (69)
--------
Balance September 30, 2004 $ 134
========
11
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders (which for the Company equals its 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 20, 2003, the Company's Board of Directors approved a 5% stock
dividend. As a result, 462,998 shares of treasury stock were issued on
December 29, 2003 to shareholders of record on December 1, 2003.
Accordingly, the weighted-average common shares outstanding in the
consolidated statement of earnings for the three and nine months ended
September 30, 2003, have been adjusted to reflect the dividend.
A reconciliation between the numerators and denominators of the basic and
diluted earnings per common share were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (numerator) $ 6,462 $ 4,651 $ 10,899 $ 13,916
-------- -------- -------- --------
Weighted-average common shares
(denominator for basic earnings per share) 9,742 9,692 9,731 9,628
Effect of dilutive securities:
Employee stock options 690 517 661 436
-------- -------- -------- --------
Weighted-average common and potential
common shares outstanding
(denominator for diluted earnings per share) 10,432 10,209 10,392 10,064
======== ======== ======== ========
Basic earnings per share $ 0.66 $ 0.48 $ 1.12 $ 1.45
======== ======== ======== ========
Diluted earnings per share $ 0.62 $ 0.46 $ 1.05 $ 1.38
======== ======== ======== ========
Employee stock options of approximately 484,000 shares for the nine months
ended September 30, 2003 were not included in the net earnings per share
calculation because their effect would have been anti-dilutive. There were
no anti-dilutive shares for the three and nine months ended September 30,
2004 and for the three months ended September 30, 2003.
As a result of stock options exercised during the nine months ended
September 30, 2004, the corresponding tax benefit of $624 was recorded as
a reduction to income taxes payable and as an increase in additional
paid-in capital.
10. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months ended
September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings $ 6,462 $ 4,651 $ 10,899 $ 13,916
Foreign currency translation gain / (loss) 532 (8) 303 1,828
-------- -------- -------- --------
Total comprehensive income $ 6,994 $ 4,643 $ 11,202 $ 15,744
======== ======== ======== ========
12
11. 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, baby care products and first aid
products. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the
Company's 2003 Form 10-K. 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.
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales:
Cosmetic $ 93,187 $ 79,641 $240,503 $234,475
Pharmaceutical 22,365 20,075 61,062 56,580
-------- -------- -------- --------
Consolidated $115,552 $ 99,716 $301,565 $291,055
======== ======== ======== ========
Operating income:
Cosmetic $ 6,727 $ 5,283 $ 10,467 $ 17,042
Pharmaceutical 4,753 3,366 10,493 8,464
-------- -------- -------- --------
Consolidated $ 11,480 $ 8,649 $ 20,960 $ 25,506
Other income (expense):
Loss on sale of land and building $ (105) $ -- $ (146) $ --
Interest expense, net $ (812) $ (954) $ (2,561) $ (3,008)
Other income (expense), net $ 336 $ (31) $ (128) $ (4)
-------- -------- -------- --------
Earnings before income taxes $ 10,899 $ 7,664 $ 18,125 $ 22,494
======== ======== ======== ========
Depreciation and amortization:
Cosmetic $ 1,917 $ 1,918 $ 5,872 $ 5,757
Pharmaceutical 113 107 337 294
-------- -------- -------- --------
Consolidated $ 2,030 $ 2,025 $ 6,209 $ 6,051
======== ======== ======== ========
Amortization of display fixtures:
Cosmetic $ 2,261 $ 1,714 $ 6,552 $ 4,611
Pharmaceutical -- -- -- --
-------- -------- -------- --------
Consolidated $ 2,261 $ 1,714 $ 6,552 $ 4,611
======== ======== ======== ========
For the three months ended September 30, 2004, severance expenses of $14
was included in the operating income of the segments, as follows: Cosmetic
- $9 and Pharmaceutical - $5. For the nine months ended September 30,
2004, severance expense of $17 was included in the operating income of the
segments, as follows: Cosmetic - $11 and Pharmaceutical - $6. For the
three months ended September 30, 2003, severance expenses of $119 was
included in the operating income of the segments as follows: Cosmetic -
$77 and Pharmaceutical - $42. For the nine months ended September 30,
2003, severance expenses of $1,969 was included in the operating income of
the segments as follows: Cosmetic - $1,280 and Pharmaceutical - $689.
Operating income for 2003 includes an estimated recovery of $511 related
to a 2001 charge for the K-Mart Chapter XI bankruptcy filing, recorded in
the second quarter of 2003. Of this amount, $431 was attributable to the
Cosmetic segment and $80 was attributable to the Pharmaceutical segment.
13
12. MERGER AGREEMENT
On July 2, 2004, the Company announced it signed a definitive merger
agreement to be acquired by DLI Holding Corp. in a cash transaction.
Subsequent to the merger, DLI Holding Corp. will be owned by affiliates of
Kelso & Company along with certain members of the Company's current
management. An affiliate of Church & Dwight Co., Inc. will own non-voting
preferred stock. Under the merger agreement, each outstanding share of Del
Laboratories, Inc. common stock will be converted into the right to
receive $35 per share in cash, without interest. Following the close of
the transaction, which is expected to occur in the fourth quarter of 2004
or in January 2005, Del Laboratories, Inc. will become a wholly owned
subsidiary of DLI Holding Corp. and will cease to be a publicly traded
company. Financing commitments for the acquisition have been received by
Kelso & Company. Consummation of the transaction is subject to
satisfaction of certain conditions, including approval by the Company's
shareholders and receipt by DLI of the necessary financing proceeds. DLI's
financing is subject to certain conditions including the reasonable
satisfaction of DLI's financing sources that the Company has achieved a
minimum of $46 million in consolidated EBITDA for the 12 month periods
ended on the last day of the most recent fiscal quarter, for which
financial statements are available, and the last day of the most recent
fiscal month, for which financial statements are available, prior to
consummation of the merger. If the closing occurred as of the date hereof
using financial information at September 30, 2004, the Company believes
that the minimum EBITDA level would be achieved. DLI's financing sources
are not required to confirm whether this condition has been satisfied
until the closing. Expenses related to the merger of approximately $1.2
million for legal and advisory fees were incurred in the third quarter of
2004 and $216 were incurred in the second quarter.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On July 2, 2004, the Company announced it signed a definitive merger agreement
to be acquired by DLI Holding Corp. in a cash transaction. Subsequent to the
merger, DLI Holding Corp. will be owned by affiliates of Kelso & Company along
with certain members of the Company's current management. An affiliate of Church
& Dwight Co., will own non-voting preferred stock. Under the merger agreement,
each outstanding share of Del Laboratories, Inc. common stock will be converted
into the right to receive $35 per share in cash, without interest. Following the
close of the transaction, which is expected to occur in the fourth quarter of
2004, Del Laboratories, Inc. will become a wholly owned subsidiary of DLI
Holding Corp. and will cease to be a publicly traded company. Financing
commitments for the acquisition have been received by Kelso & Company.
Consummation of the transaction is subject to satisfaction of certain
conditions, including approval by the Company's shareholders and receipt by DLI
of the necessary financing proceeds. DLI's financing is subject to certain
conditions including the reasonable satisfaction of DLI's financing sources that
the Company has achieved a minimum of $46 million in consolidated EBITDA for the
12 month periods ended on the last day of the most recent fiscal quarter, for
which financial statements are available, and the last day of the most recent
fiscal month, for which financial statements are available, prior to
consummation of the merger. If the closing occurred as of the date hereof using
financial information at September 30, 2004, the Company believes that the
minimum EBITDA level would be achieved. DLI's financing sources are not required
to confirm whether this condition has been satisfied until the closing. Expenses
related to the merger of approximately $1.2 million for legal and advisory fees
were incurred in the third quarter of 2004 and $216 were incurred in the second
quarter.
Del Laboratories, Inc. is a fully integrated marketing and manufacturing company
operating in two major segments of the packaged consumer products business:
cosmetics and over-the-counter pharmaceuticals. Each of the Company's marketing
divisions is responsible for branded lines fitting into one of these general
categories and develops its own plans and goals consistent with its operating
environment and the Company's corporate objectives.
The Company owns a portfolio of highly recognized branded products which are
competitively priced. As reported by ACNielsen, many of the Company's brands
have leading market positions in their product categories. In our cosmetics
segment, the Sally Hansen brand is the number one brand in the mass market nail
care category with market leadership positions in nail color, nail treatment,
and bleaches and depilatories. The Sally Hansen LaCross brand is the leader in
nail and beauty implements providing a line of high quality beauty implements
including nail clippers, files, scissors, tweezers and eyelash curlers. N.Y.C.
New York Color is one of the most successful new cosmetics brands in the mass
market. This highly recognizable brand of value cosmetics offers a complete
collection of high quality products at opening price points. In our
over-the-counter pharmaceutical segment, the Orajel brand is the leading oral
analgesic in the mass market channels, as reported by Information Resources,
Inc. The Orajel family of products has been developed with unique formulations
specifically targeted at distinct oral pain and baby care indications. Our
Dermarest brand is a complete line of non-prescription products for relief of
psoriasis and eczema and is the market share leader in the psoriasis/eczema
treatment category.
The Company believes it has strong customer relationships with a diversified
group of prominent retailers across multiple distribution channels including
mass merchandisers, drug chains, drug wholesalers and food retailers and
wholesalers. The Company has a strong track record of developing innovative new
products and successful brand extensions. An in-house research and development
department focuses on product development, clinical and regulatory affairs and
quality control.
15
RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS SEPTEMBER 30, 2003
Consolidated net sales for the third quarter ended September 30, 2004 were
$115.6 million, an increase of $15.8 million (15.9%) compared to net sales of
$99.7 million for the third quarter of 2003. Consolidated net sales for the nine
months ended September 30, 2004 were $301.6 million versus $291.1 million for
the first nine months of 2003, an increase of $10.5 million or 3.6%. Sales for
the nine months ended September 30, 2004 were negatively impacted by production
start-up problems during the first and second quarters of 2004 in connection
with the transfer of the Company's principal manufacturing operations, for both
the cosmetic and pharmaceutical segments, to Rocky Point, North Carolina from
Farmingdale, New York. As previously reported in the Form 10Q for the second
quarter ended June 30, 2004, the Company estimates that due to the production
start-up problems, net sales for the first quarter of 2004 were negatively
impacted by approximately $14.1 million, and net sales for the second quarter
were negatively impacted by approximately $13.8 million. The Company has
continued to make steady improvement in its production processes and is
currently achieving the manufacturing efficiency levels that were anticipated
prior to the relocation, and expects to continue to achieve these efficiency
levels.
The cosmetic segment of the business generated net sales for the third quarter
ended September 30, 2004 of $93.2 million, an increase of approximately $13.5
million, or 17.0% compared to net sales of $79.6 million in the third quarter of
2003. Net sales for the nine months ended September 30, 2004 were $240.5
million, compared to net sales of $234.5 million for the nine months ended
September 30, 2003. The Company estimates that due to the production start-up
problems, net sales for the first nine months of 2004 were negatively impacted
by approximately $11.0 million in the first quarter and $11.0 million in the
second quarter of 2004. The Company's core cosmetics business remains strong,
and as reported by ACNielsen, the Sally Hansen brand remains the number one
brand in the mass market nail care category with a 27.0% share of market for the
quarter ended September 30, 2004.
The over-the-counter pharmaceutical segment of the business generated net sales
for the third quarter ended September 30, 2004 of $22.4 million, an increase of
$2.3 million, or 11.4% compared to net sales of $20.1 million in the third
quarter of 2003. Net sales for the nine months ended September 30, 2004 were
$61.1 million, an increase of $4.5 million, or 7.9% compared to net sales of
$56.6 million for the nine months ended September 30, 2003. The Company
estimates that due to the production start-up problems, net sales for the first
nine months of 2004 were negatively impacted by approximately $3.1 million in
the first quarter and $2.8 million in the second quarter of 2004. The
over-the-counter pharmaceutical business continues to grow and as reported by
Information Resources, Inc., Orajel, the core brand of the pharmaceutical
segment continues its leadership position in the oral analgesics category with a
30.4% share of market for the quarter.
Cost of goods sold for the third quarter ended September 30, 2004 was $58.6
million, or 50.7% of net sales, compared to $49.0 million, or 49.2% of net sales
for the quarter ended September 30, 2003. Cost of goods sold for the nine months
ended September 30, 2004 were $152.2 million, or 50.5% of net sales compared to
$141.8 million, or 48.7% of net sales for the nine months ended September 30,
2003. The increase in cost of goods sold as a percentage of net sales for the
third quarter ended September 30, 2004 is primarily due to a change in product
sales mix within the cosmetic segment. The increase in cost of goods sold as a
percentage of net sales for the nine months ended September 30, 2004 is
primarily due to higher production costs as a result of start-up problems during
the first and second quarters of 2004 in connection with the transfer of
manufacturing operations from Farmingdale, New York to Rocky Point, North
Carolina.
16
Selling and administrative expenses were $44.3 million, or 38.3% of net sales
for the quarter ended September 30, 2004 compared to $41.9 million, or 42.1% of
net sales for the third quarter of 2003. Selling and administrative expenses for
the nine months ended September 30, 2004 were $127.0 million, or 42.1% of net
sales compared to $121.7 million, or 41.8% of net sales for the nine months
ended September 30, 2003. The decrease in selling and administrative expenses as
a percentage of net sales for the three months ended September 30, 2004 compared
to the prior year is primarily due to the increase in net sales. The increase in
selling and administrator expenses as a percentage of net sales for the nine
months ended September 30, 2004 compared to the prior year is primarily due to
increased patent and trademark litigation costs during the first six months of
2004.
Expenses of $1.2 million were incurred in the third quarter of 2004 and $1.4
million were incurred for the nine months ended September 30, 2004, primarily
related to legal and advisory fees incurred in connection with the proposed
merger.
Net interest expense for the three months ended September 30, 2004 of $0.8
million was approximately $0.1 million lower than the third quarter of 2003.
Interest expense for the nine months ended September 30, 2004 was $2.6 million,
or $0.4 million lower than the $3.0 million for the nine months ended September
30, 2003. The decrease in interest expense for the nine months ended September
30, 2004 is primarily due to the reduction of $4.4 million of average
outstanding debt related to the senior notes and a reduction in average
borrowing rates of approximately 137 basis points. The decrease was partially
offset by an increase in average borrowings of $5.8 million under the revolving
credit agreement, an increase of $2.3 million in average outstanding borrowings
under the bank line of credit, and an increase of $3.9 million in average
outstanding borrowings under the mortgage on the North Carolina property.
Other income (net) for the three months ended September 30, 2004 was $0.3
million, an improvement of $0.4 million compared to the three months ended
September 30, 2003 due primarily to gains on foreign exchange transactions.
Income taxes for the nine months ended September 30, 2004 are based on the
Company's expected annual effective tax rate of 39.9% for 2004. The increase
from the effective tax rate of 38.1% used for the nine months ended September
30, 2003, is due primarily to an increase in state and local income taxes
resulting from the reduction of available investment tax credits, an increase in
the amount of permanent non-deductible expenses and the effect of such
non-deductible expenses on taxable income for the period.
Net earnings for the three months ended September 30, 2004 were $6.5 million, or
$0.66 per basic share, compared to $4.7 million, or $0.48 per basic share for
the third quarter of 2003. The third quarter of 2004 includes an after-tax
charge of approximately $1.1 million, or $0.11 per basic share for costs related
to the definitive merger agreement announced on July 2, 2004.
Net earnings for the nine months ended September 30, 2004 were $10.9 million, or
$1.12 per basic share compared to $13.9 million, or $1.45 per basic share for
the nine months ended September 30, 2003. The decrease in net earnings for the
nine months of 2004 as compared to prior year is directly attributable to higher
production costs as a result of start-up problems during the first and second
quarters of 2004 in connection with the transfer of the Company's principal
manufacturing operations from Farmingdale, New York to Rocky Point, North
Carolina. The nine month results of 2004 include an after-tax charge of
approximately $1.2 million, or $0.13 per basic share for costs related to the
definitive merger agreement. The nine months of 2003 include after-tax charges
of approximately $1.2 million, or $0.13 per basic share for severance and
related costs in connection with the transfer of the Company's principal
manufacturing operations to Rocky Point, North Carolina from Farmingdale, N.Y.
17
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
Cash and cash equivalents of $2.4 million at September 30, 2004 was
approximately $0.2 million higher than the balance at December 31, 2003. For the
nine months ended September 30, 2004 approximately $2.3 million was provided by
financing activities, $0.8 million was provided by operating activities, and
$2.8 million was used in investing activities. Cash of approximately $7.6
million used for property, plant and equipment additions was partially offset by
net proceeds of $4.8 million received from the sale of land and buildings.
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine months ended September
30, 2004 of $0.8 million was primarily due to net earnings of $10.9 million,
depreciation and amortization of $6.2 million, amortization of display fixtures
of $6.6 million, and an increase in accounts payable of $3.6 million, partially
offset by increases in accounts receivable of $6.0 million, inventories of $8.3
million, and accrued liabilities of $3.7 million. The increase in inventories
and accounts payable is due to the timing of material purchases to support
projected sales levels and the inability in the first and second quarters to
ship unfilled orders due to start-up production problems.
On May 30, 2003, the Company announced the formal plan for the transfer of its
principal manufacturing operations, for both the Cosmetic and Pharmaceutical
segments, to Rocky Point, North Carolina from Farmingdale, New York. Pursuant to
the Company's formal severance policy for non-union employees and severance
benefits due under the union contract resulting from the plant closure, a charge
of $2.0 million for severance costs and related benefits for approximately 360
union and non-union employees associated with this move was recorded in 2003.
Additional severance benefits earned by employees being terminated will be
recognized as a charge in the financial statements as such severance benefits
are earned. As of September 30, 2004, 359 union and non-union employees have
been terminated and $1.9 million in severance benefits were paid. It is
anticipated that approximately $87 thousand will be paid during the last three
months of 2004.
INVESTING ACTIVITIES
Net cash used in investing activities of $2.8 million was due to expenditures of
$7.6 million related to tooling, plates & dies, and machinery and equipment,
partially offset by net proceeds of $4.8 million from the sale of land and
building. The Company estimates that capital spending related to tooling, plates
& dies, and machinery and equipment will approximate $9.0 million for fiscal
year ending December 31, 2004.
FINANCING ACTIVITIES
Net cash provided by financing activities of $2.3 million was principally due to
borrowings of $3.0 million under the revolving credit facility, partially offset
by $0.6 million related to the acquisition of treasury stock in connection with
the exercise of stock options.
On April 13, 2004, the $24.0 million senior notes were amended and restated. The
maturity of the notes was extended to April 15, 2011, the interest rate was
reduced to 5.56% payable semi-annually on October 15 and April 15 of each year,
and principal payments of $6.0 million are due annually on April 15, 2008
through April 15, 2011. The amended agreement is unsecured and includes
covenants, which provide among other things, for the maintenance of certain
financial ratios.
18
On April 13, 2004, the $45.0 million revolving credit agreement with banks was
amended and restated. The amended facility provides credit of $45.0 million,
extends the expiration to April 13, 2009, eliminates all fixed dollar covenants,
and reduces the interest rate pricing to a range of 75 - 125 basis points over
LIBOR depending on certain financial ratios. The Company has the option to
borrow at prime rates or LIBOR. Covenants provide, among other things, for the
maintenance of certain financial ratios. The agreement is unsecured and no
compensating balances are required.
On April 1, 2004, the lender under the mortgage covering the property in Barrie,
Ontario agreed to extend the maturity of the mortgage from March 1, 2005 to
April 1, 2009 and to reduce the interest rate from 8.38% to 6.37%.
On May 18, 2004, the mortgage covering the property in North Carolina was
amended. The maturity of the mortgage was extended from March 15, 2010 to March
18, 2011 and the interest rate was fixed at 6.39%.
The Company does not use any off-balance sheet financing arrangements.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of September 30, 2004, the
Company has included the following table:
PAYMENTS DUE BY PERIOD
----------------------
(In thousands)
Less 1 - 2 2 - 3 3 - 5 After 5
Total 1 Year Years Years Years Years
----- ------ ----- ----- ----- -----
Long-term debt $ 37,437 $ 370 $ 404 $ 434 $ 13,900 $ 22,329
Revolving credit agreement 37,000 -- -- -- 37,000 --
Capital leases 356 119 126 105 6 --
Operating leases 31,546 3,894 3,432 2,969 5,530 15,721
-------- -------- -------- -------- -------- --------
Total contractual obligations (a) $106,339 $ 4,383 $ 3,962 $ 3,508 $ 56,436 $ 38,050
======== ======== ======== ======== ======== ========
(a) The Company expects to contribute approximately $4.3 million in fiscal year
2004 to fund its pension plans. These expected pension contributions are not
included in the above table.
FUTURE CAPITAL REQUIREMENTS
The Company's near-term cash requirements are primarily related to the funding
of operations, capital expenditures and interest obligations on outstanding
debt. The Company believes that cash flows from operating activities, cash on
hand and amounts available from the credit facility will be sufficient to enable
the Company to meet its anticipated cash requirements for 2005. 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 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.
19
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company makes estimates and assumptions in the preparation of its financial
statements in conformity with U.S. generally accepted accounting principles.
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.
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 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 estimates 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 expenses as
incurred, or in the period the related revenue is recognized, depending on the
terms of the arrangement, 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 costs. 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 co-operative
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.
20
ACCOUNTS RECEIVABLE
In estimating the collectibility of our trade receivables, the Company evaluates
specific accounts when it becomes aware of information indicating that a
customer may not be able to meet its financial obligations due to a
deterioration of its financial condition, lower credit ratings or bankruptcy.
The Company also reviews the related aging of past due receivables in assessing
the realization of these receivables. The allowance for doubtful accounts is
determined based on the best information available to us on specific accounts
and is also developed by using percentages applied to certain receivables.
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.
Intangible assets with determinable lives and other 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. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. 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 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.
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 annual testing performed as of January 1, 2004, indicated that there was no
impairment to goodwill.
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 remaining useful life.
21
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 actuarial valuation
incorporates 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to
significant interpretation by the FASB, and was revised and reissued in December
2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has a controlling
financial interest in a variable interest entity, the assets, the liabilities
and results of activities of the variable interest entity should be included in
the consolidated financial statements of the entity. The provisions of FIN No.
46 and FIN No. 46R are applicable for all entities that are considered special
purpose entities ("SPE") by the end of the first reporting period ending after
December 15, 2003. The provisions of FIN No. 46R are applicable to all other
types of variable interest entities for reporting periods ending after March 15,
2004. The adoption of FIN No. 46 and FIN No. 46R did not have a material impact
on the Company's consolidated financial statements.
During the first quarter of 2004, the Financial Accounting Standards Board
("FASB") issued an exposure draft, "Share-Based Payment, an amendment of FASB
Statements No. 123 and 95." This exposure draft would require stock-based
compensation to employees to be recognized as a cost in the financial statements
and that such cost be measured according to the fair value of the stock options.
In the absence of an observable market price for the stock awards, the fair
value of the stock options would be based upon a valuation methodology that
takes into consideration various factors, including the exercise price of the
option, the expected term of the option, the current price of the underlying
share, the expected volatility of the underlying share price, the expected
dividends on the underlying share and the risk-free interest rate. The proposed
requirements in the exposure draft would be effective for the first reporting
period beginning after June 15, 2005. The Company will continue to monitor
communications on this subject from the FASB in order to determine the impact on
the Company's consolidated financial statements.
22
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; trends in the general economy; and Del's failure to
consummate the merger with DLI Holding Corp. 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.
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.
23
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by 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 13a - 15(e) and 15d - 15(e).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the Company's internal control over
financial reporting to determine whether any changes occurred during the quarter
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. Based on
that evaluation, there has been no such change during the quarter covered by
this report.
The Company is continuing to perform the systems and process evaluation testing
of its internal controls over financial reporting, as required by Section 404 of
the Sarbanes-Oxley Act, in order to allow management to report on, and our
Registered Independent Public Accounting Firm to attest to, our internal
controls over financial reporting. As a result, the evaluation and testing
continues to require significant costs and management time. In the course of its
ongoing evaluation and testing, management has identified certain deficiencies
and implemented remediation plans or is in the process of planning remediation
for the deficiencies.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
(or Units) Purchased
Total Number of Shares Average Price Paid per as Part of Publicly
Period (or Units) Purchased Share (or Unit) Announced Programs
July 309 $34.26 --
August -- -- --
September 37,930 $33.68 --
-------------------- -------------------- --------------------
Total 38,239 (1) $33.71 (2)
==================== ==================== ====================
(1) Represents shares tendered by employees to pay for stock options
exercised and shares withheld from options exercised to satisfy income tax
liabilities on gains resulting from the exercise.
(2) The Company does not have any publicly announced share repurchase
program.
24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC, dated July 2, 2004 to
report under Item 5 of that Form that the Company entered into an
Agreement and Plan of Merger with DLI Holding Corp. and DLI
Acquisition Corp., a direct wholly-owned subsidiary of DLI Holding
Corp., as of July 1, 2004. The Company also issued a press release
dated July 2, 2004, announcing that it had entered into the Merger
Agreement. Copies of the Agreement and Plan of Merger and press
release were filed as exhibits to the Form 8-K.
The Company filed a Form 8-K with the SEC, dated July 30, 2004 to
report under Item 12 of that Form that a press release was issued on
July 29, 2004 announcing earnings for the three and six months ended
June 30, 2004. A copy of the press release was filed as an exhibit
to the Form 8-K.
The Company filed a Form 8-K with the SEC, dated October 28, 2004 to
report under Item 12 of that Form that a press release was issued on
October 27, 2004 announcing earnings for the three and nine months
ended September 30, 2004. A copy of the press release was filed as
an exhibit to the Form 8-K.
25
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: NOVEMBER 8, 2004 /S/ DAN K. WASSONG
------------------------- ------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
DATE: NOVEMBER 8, 2004 /S/ ENZO J. VIALARDI
---------------------- --------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
26