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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 29, 2002

Commission File No. 1-12620

PLAYTEX PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  51-0312772
(I.R.S. Employer Identification No.)

300 Nyala Farms Road
Westport, Connecticut 06880
(Address of principal executive offices)

Telephone number: (203) 341-4000
(Registrant's telephone number, including area code)

        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 ý    No o

        At August 9, 2002 61,211,522 shares of Playtex Products, Inc. common stock, par value $.01 per share, were outstanding.



PLAYTEX PRODUCTS, INC.
INDEX

 
   
  PAGE
    PART I — FINANCIAL INFORMATION    

Item 1.

 

Condensed Consolidated Financial Statements

 

3-17

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

18-30

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

 

31

 

 

PART II — OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

32

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

32

Item 6.

 

Exhibits and Reports on Form 8-K:

 

 

 

 

(a) Exhibits

 

32

 

 

(b) Reports on Form 8-K

 

33

 

 

Signatures

 

34

2



PLAYTEX PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
  June 29,
2002

  December 29,
2001

 
 
  (Unaudited)

   
 
ASSETS              
Current assets:              
  Cash   $ 36,887   $ 34,006  
  Receivables, less allowance for doubtful accounts     35,277     32,491  
  Retained interest in receivables     63,914     51,238  
  Inventories     74,501     82,193  
  Deferred income taxes     12,104     12,097  
  Other current assets     2,760     6,793  
   
 
 
    Total current assets     225,443     218,818  
Net property, plant and equipment     119,251     124,761  
Intangible assets, net              
  Goodwill     494,187     494,187  
  Trademarks, patents and other     139,516     159,516  
Deferred financing costs     14,432     17,931  
Due from related party     80,017     80,017  
Other noncurrent assets     10,019     9,942  
   
 
 
    Total assets   $ 1,082,865   $ 1,105,172  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable   $ 24,439   $ 43,603  
  Accrued expenses     70,677     65,376  
  Income taxes payable     7,474     2,059  
  Current maturities of long-term debt     4,500      
   
 
 
    Total current liabilities     107,090     111,038  
Long-term debt     845,500     888,800  
Due to related party     78,386     78,386  
Other noncurrent liabilities     13,701     13,146  
Deferred income taxes     47,689     58,372  
   
 
 
    Total liabilities     1,092,366     1,149,742  
   
 
 
Stockholders' equity:              
  Common stock, $0.01 par value, authorized 100,000,000 shares, issued
61,209,272 shares at June 29, 2002 and 61,044,199 shares at
December 29, 2001
    612     610  
  Additional paid-in capital     525,967     524,384  
  Retained earnings (deficit)     (532,820 )   (565,675 )
  Accumulated other comprehensive earnings     (3,260 )   (3,889 )
   
 
 
    Total stockholders' equity     (9,501 )   (44,570 )
   
 
 
    Total liabilities and stockholders' equity   $ 1,082,865   $ 1,105,172  
   
 
 

See the accompanying notes to condensed consolidated financial statements.

3



PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share data)

 
  Three Months Ended
 
 
  June 29,
2002

  June 30,
2001

 
Net sales   $ 201,552   $ 198,444  
Cost of sales     87,711     87,854  
   
 
 
  Gross profit     113,841     110,590  
Operating expenses:              
  Selling, general and administrative     65,149     62,814  
  Amortization of intangibles     225     5,515  
   
 
 
    Total operating expenses     65,374     68,329  
      Operating earnings     48,467     42,261  
Interest expense, net of interest income, including related party interest expense of $3,037 for both periods presented, net of related party interest income of $3,001 for both periods presented     15,248     20,152  
Other expenses     681     1,077  
   
 
 
      Earnings before income taxes and extraordinary loss     32,538     21,032  
Income taxes     12,065     8,903  
   
 
 
      Earnings before extraordinary loss     20,473     12,129  
   
 
 
Extraordinary loss on early extinguishments of debt, net of $2,147 tax benefit in 2002 and $12,829 tax benefit in 2001     (3,735 )   (19,336 )
   
 
 
      Net earnings (loss)   $ 16,738   $ (7,207 )
   
 
 
Earnings per share—Basic:              
  Earnings before extraordinary loss   $ 0.33   $ 0.20  
  Extraordinary loss     (0.06 )   (0.32 )
   
 
 
  Earnings (loss) per share—Basic   $ 0.27   $ (0.12 )
   
 
 
Earnings per share—Diluted:              
  Earnings before extraordinary loss   $ 0.32   $ 0.20  
  Extraordinary loss     (0.06 )   (0.30 )
   
 
 
  Earnings (loss) per share—Diluted   $ 0.27   $ (0.11 )
   
 
 
Weighted average shares outstanding:              
  Basic     61,118     60,989  
   
 
 
  Diluted     64,562     63,710  
   
 
 

See the accompanying notes to condensed consolidated financial statements.

4



PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share data)

 
  Six Months Ended
 
 
  June 29,
2002

  June 30,
2001

 
Net sales   $ 398,303   $ 398,060  
Cost of sales     173,422     176,757  
   
 
 
  Gross profit     224,881     221,303  
Operating expenses:              
  Selling, general and administrative     128,883     124,628  
  Restructuring and asset impairment     7,599      
  Amortization of intangibles     451     11,030  
   
 
 
    Total operating expenses     136,933     135,658  
      Operating earnings     87,948     85,645  
Interest expense, net of interest income, including related party interest expense of $6,075 for both periods presented, net of related party interest income of $6,001 for both periods presented     31,354     41,255  
Other expenses     1,571     1,077  
   
 
 
      Earnings before income taxes, extraordinary loss and
change in accounting principles
    55,023     43,313  
Income taxes     6,010     18,340  
   
 
 
      Earnings before extraordinary loss and change in accounting principles     49,013     24,973  
   
 
 
Extraordinary loss on early extinguishments of debt, net of $2,147 tax benefit in 2002 and $12,829 tax benefit in 2001     (3,735 )   (19,336 )
   
 
 
      Earnings before change in accounting principles     45,278     5,637  
   
 
 
Cumulative effect of change in accounting principles, net of $7,141 tax benefit     (12,423 )    
   
 
 
      Net earnings   $ 32,855   $ 5,637  
   
 
 
Earnings per share—Basic:              
  Earnings before extraordinary loss and cumulative effect of
change in accounting principles
  $ 0.80   $ 0.41  
  Extraordinary loss     (0.06 )   (0.32 )
  Cumulative effect of change in accounting principles     (0.20 )    
   
 
 
  Earnings per share—Basic   $ 0.54   $ 0.09  
   
 
 
Earnings per share—Diluted:              
  Earnings before extraordinary loss and cumulative effect of
change in accounting principles
  $ 0.78   $ 0.41  
  Extraordinary loss     (0.06 )   (0.30 )
  Cumulative effect of change in accounting principles     (0.19 )    
   
 
 
  Earnings per share—Diluted   $ 0.53   $ 0.10  
   
 
 
Weighted average shares outstanding:              
  Basic     61,084     60,980  
   
 
 
  Diluted     64,206     63,687  
   
 
 

See the accompanying notes to condensed consolidated financial statements.

5



PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE EARNINGS
(Unaudited, in thousands)

 
  Common
Shares
Outstanding

  Common
Stock

  Additional
Paid-In
Capital

  Retained
Earnings
(Deficit)

  Accumulated
Other
Comprehensive
Earnings

  Total
 
Balance, December 29, 2001   61,044   $ 610   $ 524,384   $ (565,675 ) $ (3,889 ) $ (44,570 )
Net earnings               32,855         32,855  
Foreign currency translation adjustment                   629     629  
                               
 
  Comprehensive earnings                                 33,484  
Stock issued to employees exercising stock options   165     2     1,583             1,585  
   
 
 
 
 
 
 
  Balance, June 29, 2002   61,209   $ 612   $ 525,967   $ (532,820 ) $ (3,260 ) $ (9,501 )
   
 
 
 
 
 
 

6



PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

 
  Six Months Ended

 
 
  June 29,
2002

  June 30,
2001

 
Cash flows from operations:              
  Net earnings   $ 32,855   $ 5,637  
  Non-cash items included in earnings:              
    Cumulative effect of change in accounting principles, net of tax benefit     12,423      
    Asset impairment charge     4,222      
    Extraordinary loss on early extinguishment of debt, net of tax benefits     3,735     19,336  
    Depreciation     7,024     6,310  
    Amortization of deferred financing costs     1,140     1,823  
    Amortization of intangibles     451     11,030  
    Deferred income taxes     (3,530 )   7,072  
    Other, net     1,265     (292 )
  Net (increase) decrease in working capital accounts     (10,183 )   53,472  
   
 
 
      Net cash flows from operations     49,402     104,388  

Cash flows used for investing activities:

 

 

 

 

 

 

 
  Purchases of property, plant and equipment     (5,784 )   (11,455 )
  Businesses and intangible assets acquired, net         (500 )
   
 
 
      Net cash flows used for investing activities     (5,784 )   (11,955 )

Cash flows (used for) provided by financing activities:

 

 

 

 

 

 

 
  Long-term debt borrowings     450,000     850,000  
  Long-term debt repayments     (471,800 )   (881,563 )
  Net repayments under credit facilities     (17,000 )    
  Payment of financing costs     (3,522 )   (19,500 )
  Payment of debt extinguishment fees and related expenses         (21,177 )
  Issuance of shares of common stock     1,585     384  
   
 
 
      Net cash flows used for financing activities     (40,737 )   (71,856 )

Increase in cash

 

 

2,881

 

 

20,577

 
Cash at beginning of period     34,006     10,282  
   
 
 
Cash at end of period   $ 36,887   $ 30,859  
   
 
 
Supplemental disclosures of cash flow information              
  Cash paid during the periods for:              
    Interest   $ 30,874   $ 41,342  
    Income taxes, net of refunds   $ 1,979   $ 7,503  

See the accompanying notes to condensed consolidated financial statements.

7



PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Consolidated Financial Statements

        The quarterly condensed consolidated financial statements, which are a part of our Quarterly Report on Form 10-Q, are unaudited. In preparing our financial statements, we make certain adjustments (consisting of normal recurring adjustments) considered necessary in our opinion for a fair presentation of our financial position and results of operations. The results of the three and six month periods ended June 29, 2002 are not necessarily indicative of the results that you may expect for the full year. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation.

        We presume you have access to the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 29, 2001. As a result, we have not included footnote disclosures that would substantially duplicate the disclosures contained in the Form 10-K. If you do not have a copy of our Annual Report on Form 10-K, you can obtain one by contacting our Investor Relations department at (203) 341-4000 or view it on-line at the SEC's web site WWW.SEC.GOV.

2.    Impact of New Accounting Pronouncements

        In May 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." In April 2001, the EITF of the FASB reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Reseller." We adopted the requirements of these Issues effective December 30, 2001, the start of our fiscal year 2002. These issues address the recognition, measurement, and income statement classification for certain advertising, promotional and cooperative spending activities. As a result of the adoption of these issues, we reclassified certain previously reported selling, general and administrative expenses to offset net sales for the three and six month periods ended June 30, 2001 to conform to our current year presentation. These reclassifications reduced both our net sales and selling, general and administrative expenses by equal and offsetting amounts and had no impact on our reported operating earnings, net income, or earnings per share.

        Effective December 30, 2001, the beginning of our 2002 fiscal year, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This standard changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. As such, we stopped the amortization of goodwill on December 29, 2001. The standard also requires a reassessment of the useful lives of identifiable intangible assets other than goodwill and at least an annual test for impairment of goodwill and intangibles with indefinite lives.

        In accordance with the requirements of SFAS No. 142, we tested the goodwill attributable to each of our reporting units for impairment and determined that none of our goodwill is impaired. We will perform additional testing for impairment of our goodwill, based on the methodologies as outlined in SFAS No. 142, on an annual basis and more frequently if events or circumstances indicate a likelihood of impairment.

        In addition, we reassessed the useful lives of our identifiable intangible assets and determined that our trademarks have indefinite lives. As required by SFAS No. 142, we stopped the amortization of our trademarks on December 29, 2001. We will continue to amortize our patents, which are identifiable intangible assets with definite useful lives. Also, in accordance with the requirements of SFAS No. 142, we tested each of our trademarks for impairment by comparing the fair value of each trademark to its carrying value at December 30, 2001. Fair value was estimated using the relief from royalty method (a discounted cash flow methodology). Based on these impairment tests, we recorded a charge, reported as a cumulative effect of change in accounting principles, of $19.6 million ($12.4 million or $0.19 per diluted share for the six months ended June 29, 2002, net of tax) in the first quarter of 2002. This charge was to reduce the trademark carrying value of certain non-core brands, primarily Chubs and Diaparene, to their estimated fair value. We will test the carrying value of trademarks for impairment at least annually and more frequently if events or circumstances indicate a likelihood of impairment. Patents will continue to be tested for impairment under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

8


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.    Impact of New Accounting Pronouncements (Continued)

        Had we accounted for goodwill and other intangible assets under SFAS No. 142 for all periods presented, our net earnings and earnings per share would have been as follows for the three and six month periods ended June 30, 2001 (unaudited, in thousands except per share amounts):

 
  Three Months
Ended
June 30, 2001

  Six Months
Ended
June 30, 2001

Net earnings:            
  Reported net earnings (loss)   $ (7,207 ) $ 5,637
  Add back goodwill and trademark amortization expense, net of tax.     4,321     8,641
   
 
    Adjusted net earnings (loss)   $ (2,886 ) $ 14,278
   
 

Earnings per share—Basic:

 

 

 

 

 

 
  Reported earnings (loss) per share   $ (0.12 ) $ 0.09
  Impact of goodwill and trademark amortization expense, net of tax     0.07     0.14
   
 
    Adjusted earnings (loss) per share   $ (0.05 ) $ 0.23
   
 

Earnings per share—Diluted:

 

 

 

 

 

 
  Reported earnings (loss) per share   $ (0.11 ) $ 0.10
  Impact of goodwill and trademark amortization expense, net of tax     0.07     0.14
   
 
    Adjusted earnings (loss) per share   $ (0.04 ) $ 0.24
   
 

3.    Impact of New Tax Regulations

        On March 7, 2002, the U.S. Treasury issued new regulations that replace the loss disallowance rules applicable to the sale of stock of a subsidiary member of a consolidated tax group. These regulations permit us to utilize a previously disallowed $135.1 million tax capital loss that resulted from the sale of Playtex Beauty Care Inc. during fiscal 1999. We can utilize the tax capital loss associated with the sale of Playtex Beauty Care Inc. to offset capital gains during the statutory five-year carry forward period. We anticipate utilizing $40.0 million of the capital loss to offset a capital gain, in fiscal 2003, related to the retirement of our related party notes, which come due on December 15, 2003. Accordingly, we recorded a tax benefit of $14.3 million, or $.22 per diluted share for the six months ended June 29, 2002, in the first quarter of 2002. The remaining capital loss carryover will expire on December 25, 2004, if not utilized. The remaining tax benefit associated with the capital loss carryforward has been reduced by a valuation allowance as we do not currently expect to realize it. The tax benefit related to the new regulations, recorded in the first quarter, does not impact our effective tax rate for the remainder of the year. We expect our effective tax rate, for the remaining two quarters of fiscal 2002, to be approximately 37% of earnings before income taxes and cumulative effect of change in accounting principles.

4.    Restructuring and Impairment Costs

        In the first quarter of 2002, we recorded a pre-tax restructuring and asset impairment charge of $7.6 million, or $.07 per diluted share for the six months ended June 29, 2002, as a result of our decision to close our Watervliet, New York plastic molding facility. The Watervliet facility manufactures component parts primarily for our infant feeding category and employed approximately 160 people at the time of the announcement. Severance and other exit costs related to the termination of employees approximate $3.4 million and are included as a component of accrued expenses and the write-off of assets associated with the closure of the facility is approximately $4.2 million, which reduced our total property, plant and equipment. We have paid $0.2 million of expenses related to severance and other exit costs as of June 29, 2002. The net after tax cash outflow associated with this plant closing will be approximately $1.5 million.

9


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.    Comprehensive Earnings

        For the three and six months ended June 29, 2002 and June 30, 2001 foreign currency translation adjustment was the only reconciling item between net earnings and comprehensive earnings. Our comprehensive earnings were (unaudited, in thousands):

 
  Three Months Ended
  Six Months Ended
 
 
  June 29
2002

  June 30,
2001

  June 29,
2002

  June 30,
2001

 
Net earnings (loss)   $ 16,738   $ (7,207 ) $ 32,855   $ 5,637  
Foreign currency translation adjustment     522     202     629     (360 )
   
 
 
 
 
  Comprehensive earnings   $ 17,260   $ (7,005 ) $ 33,484   $ 5,277  
   
 
 
 
 

6.    Balance Sheet Components

        The components of certain balance sheet accounts are as follows (in thousands):

 
   
   
  June 29,
2002

  December 29,
2001

 
   
   
  (Unaudited)

   
Cash           $ 21,894   $ 27,103
Cash—lock box(1)             14,993     6,903
           
 
  Net           $ 36,887   $ 34,006
           
 

(1)
Cash held in lock box pending weekly settlement procedure for Receivables Facility (see Note 8).
Receivables           $ 37,663   $ 33,767  
Less allowance for doubtful accounts             (2,386 )   (1,276 )
           
 
 
    Net           $ 35,277   $ 32,491  
           
 
 
Inventories:                      
  Raw materials           $ 16,505   $ 23,715  
  Work in process             3,484     1,934  
  Finished goods             54,512     56,544  
           
 
 
    Total           $ 74,501   $ 82,193  
           
 
 
Net property, plant and equipment:                      
  Land           $ 2,326   $ 2,376  
  Buildings             39,820     41,047  
  Machinery and equipment             184,743     186,557  
           
 
 
              226,889     229,980  
  Less accumulated depreciation             (107,638 )   (105,219 )
           
 
 
    Net           $ 119,251   $ 124,761  
           
 
 
Accrued expenses:                      
  Advertising and sales promotion           $ 15,159   $ 20,687  
  Employee compensation and benefits             10,857     14,743  
  Interest             5,738     6,398  
  Insurance             2,262     3,238  
  Restructuring charge             3,197      
  Other             33,464     20,310  
           
 
 
    Total           $ 70,677   $ 65,376  
           
 
 

10


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.    Long-Term Debt

        Long-term debt consists of the following (in thousands):

 
  June 29,
2002

  December 29,
2001

 
  (Unaudited)

   
Variable rate indebtedness:            
  Term A Loan   $   $ 76,000
  Term B Loan         395,800
  Term C Loan     450,000    
  Revolving Credit Facility         17,000
Fixed rate indebtedness:            
  93/8% Senior Subordinated Notes due 2011     350,000     350,000
  6% Convertible Subordinated Notes due 2004     50,000     50,000
   
 
      850,000     888,800
  Less current maturities     (4,500 )  
   
 
    Total long-term debt   $ 845,500   $ 888,800
   
 

        On May 29, 2002, we amended our senior secured credit facility (the "Credit Facility") and issued a new $450.0 million Term C Loan and, together with $21.8 million of cash, we repaid in full our outstanding obligations under our Term A Loan and Term B Loan, which collectively totaled $471.8 million. Borrowings under the Term C Loan are less costly to us than borrowings under either the Term A Loan or Term B Loan. Under the Term C Loan, we pay LIBOR plus 2.25% for borrowings compared to LIBOR plus 2.75% for the Term A Loan and LIBOR plus 3.0% for the Term B Loan. The Term C Loan matures May 31, 2009. Scheduled principal payments on the Term C Loan are made semi-annually and amount to: approximately $2.3 million in 2002, $4.5 million per year in fiscal years 2003 through 2007, approximately $213.7 million in 2008, and $211.5 million in 2009. We recorded an extraordinary loss during the second quarter ended June 29, 2002 of $3.7 million, net of income tax benefits of $2.2 million, associated with the write-off of unamortized deferred financing costs relating to our Term A Loan and Term B Loan. We paid the administrative agent for the term loans $3.5 million to amend the Credit Facility. This amount has been deferred and is being amortized over the remaining life of the Term C Loan.

        On May 22, 2001, we completed a refinancing of our senior indebtedness (the "Refinancing Transaction"). As part of the Refinancing Transaction we issued:

In addition, we entered into a receivables purchase agreement (the "Receivables Facility") with a third party through a newly formed wholly-owned consolidated special purpose bankruptcy remote subsidiary of ours, Playtex A/R LLC. The total amount available to us under the Receivables Facility is up to $100.0 million, depending primarily on the amount of receivables generated by us, the rate of collection on those receivables, and other characteristics of the receivables pool which affects their eligibility (see Note 8). Proceeds from the initial draw down on the Receivables Facility of amounts greater than $75.0 million must be used to repay the term loan.

        The net proceeds from the Refinancing Transaction and the Receivables Facility were used to pay-off all of our then outstanding indebtedness, except for the 6% Convertible Subordinated Notes (the "Convertible Notes"). The results of the Refinancing Transaction, the Receivables Facility, and the subsequent amendment to the Credit Facility on May 29, 2002, enabled us to significantly extend our principal debt repayment obligations and reduce our borrowing costs.

11


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.    Long-Term Debt (Continued)

        We pay interest on the 93/8% Notes semi-annually on June 1 and December 1 of each year. At any time prior to June 1, 2004, we may redeem up to 35% of the principal amount of the 93/8% Notes with the proceeds of one or more equity offerings at a redemption price of 109.375% of the principal amount, plus accrued and unpaid interest to the redemption date. We do not have the option to redeem the 93/8% Notes from June 1, 2004 through May 31, 2006. At our option, we may redeem the notes on or after June 1, 2006 at the redemption prices (expressed as a percentage of principal amount) listed below plus accrued and unpaid interest to the redemption date.

Year

  Percentage
2006   104.688
2007   103.125
2008   101.563
2009 and thereafter   100.000

        The Convertible Notes are currently redeemable by us, in whole or in part, at our option at a redemption price equal to 100% of the principal amount, together with accrued and unpaid interest to the redemption date. The Convertible Notes are convertible into approximately 2.6 million shares of our common stock. The conversion price is approximately $19.15 per common share. The Convertible Notes mature on January 31, 2004.

        The rates of interest we pay under the Credit Facility vary over time depending on short-term interest rates and the credit rating assigned to the Credit Facility. We also pay fees on our Revolving Credit Facility commitments, which vary depending on our credit rating. Loans made under the Revolving Credit Facility will mature on May 22, 2007. At June 29, 2002, we had $122.8 million of unused borrowings available to us under the Revolving Credit Facility.

        Our indebtedness at June 29, 2002 consists of $400.0 million in fixed rate debt and $450.0 million of variable rate debt. Our fixed rate debt consists of the 93/8% Notes and the Convertible Notes and our variable rate debt consists of the amounts borrowed under the Term C Loan. We periodically use financial instruments, such as derivatives, to manage the impact of interest rate changes on our variable rate debt. At June 29, 2002, we were not a party to any derivative or other type of financial instrument that hedged the impact of interest rate changes on our variable rate debt. Based on our interest rate exposure at June 29, 2002, a 1% increase in interest rates would result in an estimated $4.5 million of additional interest expense on an annualized basis.

        The rates of interest we pay on our variable rate debt are, at our option, a function of various alternative short term borrowing rates.

        The provisions of the credit agreement for our Credit Facility require us to meet certain financial covenants and ratios and include limitations and restrictions, including:

•    indebtedness and liens,   •    certain dividends and other distributions,
•    major acquisitions or mergers,   •    the application of excess cash flow, and
•    capital expenditures and asset sales,   •    prepayment and modification of all
        indebtedness or equity capitalization.

        The 93/8% Notes also contain certain restrictions and requirements. Under the terms of each of these agreements, payment of cash dividends on our common stock is restricted.

12


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.    Receivables Facility

        On May 22, 2001, we entered into the Receivables Facility through a wholly-owned, special purpose bankruptcy remote subsidiary of ours; Playtex A/R LLC. Through the Receivables Facility, we sell on a continuous basis to Playtex A/R LLC substantially all of our domestic customers' trade invoices that we generate. Playtex A/R LLC sells to a third-party commercial paper conduit (the "Conduit") an undivided fractional ownership interest in these trade accounts receivable. The Conduit issues short-term commercial paper to finance the purchase of the undivided fractional interest in the receivables. The total funding available to us on a revolving basis under the Receivables Facility is up to $100.0 million, depending primarily on: the amount of receivables generated by us and sold to Playtex A/R LLC, the rate of collection on those receivables, and other characteristics of the receivables pool which affects their eligibility. Proceeds from the initial draw down on the Receivables Facility of amounts greater than $75.0 million must be used to repay the term loan. Our Retained Interest in Receivables represents our subordinated fractional undivided interest in receivables sold to Playtex A/R LLC and the net unamortized deferred financing costs incurred by Playtex A/R LLC.

        We have agreed to continue servicing the sold receivables at market rates; accordingly, no servicing asset or liability has been recorded. Playtex A/R LLC shares credit risk with the Conduit as the undivided fractional interest in the receivables are sold without recourse. We believe, however, that Playtex A/R LLC has most of the credit risk associated with customers that do not pay, as the Conduit has preferential treatment with regard to cash settlement procedures and other conditions that limit their credit exposure. Our retained interest in receivables will be negatively impacted if Playtex A/R LLC writes-off any receivable balances as uncollectible. We believe the Receivables Facility is beneficial to us as: (1) we convert trade receivables to cash faster, and (2) although we sell our invoices to Playtex A/R LLC at a discount and pay fees to the Conduit, these expenses are lower than our borrowing costs under the Credit Facility.

        At June 29, 2002, Playtex A/R LLC had approximately $132.0 million of receivables, of which $68.0 million of undivided fractional interest therein was sold to the Conduit. Since the beginning of fiscal 2002, we sold in aggregate approximately $423.0 million of accounts receivable to Playtex A/R LLC. In return, we've received from Playtex A/R LLC approximately $380.0 million of cash.

        We sell receivables at a discount, which is included in Other Expenses in the Consolidated Statements of Earnings. This discount, which was $0.7 million for the second quarter of 2002 and $1.6 million for the six months ended June 29, 2002, reflects the estimated fees required by the Conduit to purchase a fractional undivided interest in the receivables. The fees are based on the payment characteristics of the receivables, most notably their average life, interest rates in the commercial paper market and historical credit losses. Also included in Other Expenses is the impact of the amortization of deferred financing costs incurred by Playtex A/R LLC to establish the Receivables Facility.

        We account for the sale of accounts receivable to Playtex A/R LLC and related transactions with the Conduit in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." At the time the receivables are sold, the balances are removed from our balance sheet. Playtex A/R LLC pays fees on the value of the undivided interest of the receivables sold to the conduit equal to the 30 day LIBOR rate, which is reset weekly. In addition, Playtex A/R LLC pays a 0.25% per annum fee on the utilized portion of the Receivables Facility and a 0.45% per annum liquidity fee on the entire committed amount of the Receivables Facility. Because of the short-term nature, generally less than 60 days, of our trade accounts receivable sold to Playtex A/R LLC and the historically low credit risk associated with these receivables, the carrying value of our Retained Interest in Receivables approximates the fair value.

13


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.    Receivables Facility (Continued)

        Commitments under the Receivables Facility have terms of 364 days, which may be renewed annually at the option of the Conduit. In May 2002, the Receivables Facility was extended through May 2003. The Receivables Facility may be terminated prior to its term in the event of:

•    nonpayment of fees or other amounts when due,   •    bankruptcy events,
•    violation of covenants,   •    material judgments,
•    failure of any representation or warranty to be true   •    defaults under the Receivables Facility,
        in all material respects when made,   •    a servicing default, and
    •    a downgrade in the Senior Secured Credit Facility
        to less than B- by S&P and
        less than B3 by Moody's.

9.    Business Segments

        We are organized in three divisions:

        Our Personal Products Division includes Infant Care and Feminine Care products sold in the United States primarily to mass merchandisers, grocery and drug classes of trade. The Infant Care product category includes the following brands:

•    Playtex disposable nurser system, cups and reusable   •    Baby Magic infant toiletries
        hard bottles   •    Mr. Bubble children's bubble bath
•    Wet Ones hand and face towelettes   •    Baby Magic baby wipes, and
•    Diaper Genie diaper disposal system   •    Binky pacifiers.

        The Feminine Care product category includes a wide range of plastic and cardboard applicator tampons marketed under such brand names as Playtex: Gentle Glide, Silk Glide and Slimfits. In addition, the Feminine Care product category includes a personal cleansing wipe for use in feminine hygiene and a new heat therapy, introduced in the second quarter of 2002, for menstrual cramps.

        Our Consumer Products Division includes Sun Care, Household Products, and Personal Grooming products sold in the United States primarily to mass merchandisers, grocery and drug classes of trade.

Sun Care

  Household Products

•    Banana Boat   •    Playtex Gloves
    •    Woolite rug and upholstery cleaning products
Personal Grooming

   
•    Binaca breath spray and drops   •    Dentax oral care products, and
•    Ogilvie at-home permanents   •    Tek toothbrushes
•    Tussy deodorant    

        Our International/Corporate Sales Division includes:

•    Sales to specialty classes of trade in the   •    export sales
        United States including: warehouse clubs,   •    sales in Puerto Rico
        military, convenience stores,   •    results from our Canadian and
        specialty stores, and telemarketing           Australian subsidiaries
    •    sales of private label tampons

        The International/Corporate Sales Division sells the same products as are available to our U.S. customers.

14


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.    Business Segments (Continued)

        We evaluate division performance based on their product contribution excluding general corporate allocations. Product contribution is defined as gross profit less advertising and sales promotion expenses. All other operating expenses are managed at a corporate level and are not used by us to evaluate division results. We do not segregate assets, amortization, capital expenditures, or interest income and interest expense to divisions.

        The results of our divisions for the three and six months ended June 29, 2002 and June 30, 2001 are as follows (dollars in thousands):

 
  Three Months Ended
 
 
  June 29, 2002
  June 30, 2001(1)
 
 
  Net
Sales

  Product
Contrib.

  Net
Sales

  Product
Contrib.

 
Personal Products   $ 115,042   $ 57,897   $ 107,446   $ 48,613  
Consumer Products     50,610     15,046     55,598     20,469  
International/Corporate Sales     35,900     16,288     35,400     15,625  
Unallocated Charges(2)         (120 )       (147 )
   
 
 
 
 
  Total Consolidated   $ 201,552     89,111   $ 198,444     84,560  
   
 
 
 
 
Reconciliation to operating earnings:                          
Selling, distribution, research and administrative           40,419           36,784  
Restructuring and asset impairment                      
Amortization of intangibles           225           5,515  
         
       
 
  Operating earnings         $ 48,467         $ 42,261  
         
       
 
 
  Six Months Ended
 
 
  June 29, 2002
  June 30, 2001(1)
 
 
  Net
Sales

  Product
Contrib.

  Net
Sales

  Product
Contrib.

 
Personal Products   $ 218,504   $ 107,322   $ 212,565   $ 92,502  
Consumer Products     109,139     35,660     117,692     47,628  
International/Corporate Sales     70,660     32,719     67,803     30,603  
Unallocated Charges(2)         (251 )       (500 )
   
 
 
 
 
  Total Consolidated   $ 398,303     175,450   $ 398,060     170,233  
   
       
       
Reconciliation to operating earnings:                          
Selling, distribution, research and administrative           79,452           73,558  
Restructuring and asset impairment           7,599            
Amortization of intangibles           451           11,030  
         
       
 
  Operating earnings         $ 87,948         $ 85,645  
         
       
 

(1)
To conform with our current year presentation, we reclassified certain previously reported selling, general and administrative expenses to offset net sales (see Note 2) and certain costs from product contribution to selling, distribution, research and administrative.

(2)
Certain unallocated corporate charges such as business license taxes, pension expense and product liability insurance are included in consolidated gross margin, but not included in the evaluation of division performance.

15


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.    Earnings Per Share

        The following table explains how our basic and diluted Earnings Per Share ("EPS") were calculated for the three and six months ended June 29, 2002 and June 30, 2001 (unaudited, in thousands, except per share amounts):

 
  Three Months Ended
  Six Months Ended
 
 
  June 29,
2002

  June 30,
2001

  June 29,
2002

  June 30,
2001

 
Numerator:                          
Earnings before extraordinary loss and change in
    accounting principles—as reported
  $ 20,473   $ 12,129   $ 49,013   $ 24,973  
Effect of Dilutive Securities:                          
  Adjustment for interest on Convertible Notes     473     473     946     946  
   
 
 
 
 
Earnings before extraordinary loss and change in
    accounting principles adjusted for assumed
    dilutive conversions
    20,946     12,602     49,959     25,919  
Extraordinary loss     (3,735 )   (19,336 )   (3,735 )   (19,336 )
Cumulative effect of change in accounting principles             (12,423 )    
   
 
 
 
 
    Net earnings (loss)—as adjusted   $ 17,211   $ (6,734 ) $ 33,801   $ 6,583  
   
 
 
 
 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 
Weighted average shares outstanding—Basic     61,118     60,989     61,084     60,980  
Effect of Dilutive Securities:                          
  Adjustment for dilutive effect of employee stock options     833     110     511     96  
  Adjustment for dilutive effect of Convertible Notes     2,611     2,611     2,611     2,611  
   
 
 
 
 
    Weighted average shares outstanding—Diluted     64,562     63,710     64,206     63,687  
   
 
 
 
 

Earnings per share—Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 
Earnings before extraordinary loss and change in
    accounting principles
  $ 0.33   $ 0.20   $ 0.80   $ 0.41  
Extraordinary loss     (0.06 )   (0.32 )   (0.06 )   (0.32 )
Cumulative effect of change in accounting principles             (0.20 )    
   
 
 
 
 
    Earnings (loss) per share   $ 0.27   $ (0.12 ) $ 0.54   $ 0.09  
   
 
 
 
 

Earnings per share—Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 
Earnings before extraordinary loss and change in
    accounting principles
  $ 0.32   $ 0.20   $ 0.78   $ 0.41  
Extraordinary loss     (0.06 )   (0.30 )   (0.06 )   (0.30 )
Cumulative effect of change in accounting principles             (0.19 )    
   
 
 
 
 
    Earnings (loss) per share   $ 0.27   $ (0.11 ) $ 0.53   $ 0.10  
   
 
 
 
 

        Basic EPS excludes all potentially dilutive securities. Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS includes all potentially dilutive securities. Diluted EPS is computed by dividing net earnings, adjusted by the if-converted method for convertible securities, by the weighted average number of common shares outstanding for the period plus the number of additional common shares that would have been outstanding if the dilutive securities were issued. In the event the dilutive securities are anti-dilutive on earnings before extraordinary loss (have the affect of increasing EPS), the impact of the dilutive securities is not included in the computation.

16


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.    Contingent Liabilities

        In our opinion, there are no claims, commitments, guarantees or litigation pending to which we or any of our subsidiaries is a party which would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

17


\



PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with:

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

        This document includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document such as "anticipates," "intends," "plans," "believes," "estimates," "expects," and similar expressions we do so to identify forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements. These forward-looking statements are affected by risks, uncertainties, and assumptions that we make, including, among other things, the Risk Factors that are listed in Item I. of our Annual Report on Form 10-K for the year ended December 29, 2001, and:

  •    price and product changes,
•    promotional activity by competitors,
•    the loss or bankruptcy of a significant customer,
•    capacity limitations,
•    the difficulties of integrating acquisitions,
•    raw material and manufacturing costs,
•    adverse publicity and product liability claims,
  •    impact of weather conditions, especially
        on Sun Care product sales,
•    our level of debt,
•    interest rate fluctuations,
•    future cash flows,
•    dependence on key employees, and
•    highly competitive nature of consumer products
        business.

        You should keep in mind that any forward-looking statement made by us in this document, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it's impossible for us to predict these events or how they may affect us. In light of these risks and uncertainties, you should keep in mind that any forward-looking statements made in this report or elsewhere might not occur. In addition, the preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions. These estimates and assumptions affect:

Actual results may vary from our estimates and assumptions. These estimates and assumptions are based on historical results, assumptions that we make as well as third parties assumptions, primarily related to coupon redemption rates. The level of reserves for Sun Care product returns, bad debts and advertising/promotional costs are three areas of which you should be aware (see Management's Discussion and Analysis—Critical Accounting Policies). As part of our customary review and reconciliation process, we periodically record adjustments to our accounting estimates. During the second quarter of 2002, we recorded additional expenses of $2.0 million to cover higher than expected Sun Care returns from the 2001 Sun Care season. Also, we reduced our reserves for certain advertising and sales promotion programs conducted prior to 2002 by $1.7 million based on the actual costs of these programs versus our original estimates.

18


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Trademarks

        We have proprietary rights to a number of trademarks important to our business, such as: Active Sport, Baby Magic, Banana Boat, Binaca, Blasters, Big Sipster, Cool Colorz, CoolStraw, Diaper Genie, Dentax, Drop-Ins, Fast Blast, Gentle Glide, Get On The Boat, Gripster, HandSaver, Heavy Traffic, Insulator, LipPops, Most Like Mother, Mr. Bubble, Natural Action, Ogilvie, Power Shot, Precisely Right, QuickStraw, Quik Blok, Safe'N Sure, Silk Glide, SipEase, Slimfits, Sooth-A-Caine, Tub Mate, Tek, Tussy, VentAire, VitaSkin, and Wet Ones. We also own a royalty free license in perpetuity to the Playtex and Living trademarks, and to the Woolite trademark for rug and upholstery cleaning products in the United States and Canada.

Items Affecting Comparability

        Our results for the second quarter of 2002 are for the 13-week period ended June 29, 2002 and our results for the second quarter of 2001 are for the 13-week period ended June 30, 2001. All references to market share and market share data are for comparable 13-week periods and represent our percentage of the total U.S. dollar volume of products purchased by consumers in the applicable category (dollar market share, or retail consumption). This information is provided to us from the ACNielsen Company and is subject to revisions. The market share data provided in this Quarterly Report on Form 10-Q does not include scanner/consumption data from certain retailers including Wal-Mart Stores, Inc. ("Wal-Mart"), as they ceased providing this information to third parties. All prior period market share data has been revised to reflect the elimination of data from Wal-Mart.

        Effective December 30, 2001, the start of our fiscal year 2002, we adopted the Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives." and Issue No. 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Reseller." As a result of the adoption of EITF's 00-14 and 00-25, we reclassified certain previously reported selling, general and administrative expenses to offset net sales for the three and six months ended June 30, 2001 to conform to our current year presentation. These reclassifications reduced both our net sales and selling, general and administrative expenses by equal and offsetting amounts and had no impact on our reported operating earnings, net income, or earnings per share (see Note 2). We also reclassified certain expenses from the cost of sales line item to the selling, general and administrative line item to better reflect the nature of these expenses.

        We also adopted, on December 30, 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result of the adoption of SFAS 142, we ceased the amortization of: (a) all of our remaining goodwill balance and (b) trademarks that are determined to have indefinite lives. This change favorably affected our reported net income in the second quarter of 2002 by $4.3 million, or $.07 per diluted share and for the six month period ended June 29, 2002, this change favorably affected our reported net income by $8.6 million or $.14 per diluted share. Also in connection with the new requirements set forth in SFAS 142, we performed impairment tests on our indefinite-lived intangible assets based on a fair value concept. As a result of this testing, we recorded an after tax impairment in trademarks for certain non-core businesses of $12.4 million, or $.19 per diluted share, as a cumulative effect of change in accounting principles in the first quarter of 2002 (see Note 2). The adoption of SFAS 141 had no impact on us.

        On March 7, 2002, the U.S. Treasury issued new regulations that replace the loss disallowance rules applicable to the sale of stock of a subsidiary member of a consolidated tax group. These regulations permit us to utilize a previously disallowed $135.1 million tax capital loss that resulted from the sale of Playtex Beauty Care Inc., during fiscal 1999. We anticipate utilizing $40.0 million of the capital loss to offset a capital gain, in fiscal 2003, related to the retirement of our related party notes, which come due on December 15, 2003. Accordingly, we recorded a tax benefit of $14.3 million, or $.22 per diluted share, in the first quarter of 2002 (see Note 3).

19


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Results of Operations

Three Months Ended June 29, 2002 Compared To
Three Months Ended June 30, 2001

Consolidated Net Sales—Our consolidated net sales increased $3.1 million, or 2%, to $201.6 million in the second quarter of 2002. Our comparative second quarter results were favorably impacted by growth in our Feminine Care and Infant Care businesses, which more than offset sales declines in Sun Care.

20


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Consolidated Gross Profit—Our consolidated gross profit increased $3.3 million, to $113.8 million in the second quarter of 2002. As a percent of net sales, gross profit increased 0.8 percentage points, to 56.5% in the second quarter of 2002. The increase in gross profit and gross profit as a percent of net sales was due to the increase in net sales, the mix of products sold and favorable product cost.

21


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Consolidated Product Contribution—Our consolidated product contribution increased $4.6 million, or 5%, to $89.1 million in the second quarter of 2002. As a percent of net sales, product contribution increased 1.6 percentage points to 44.2% in the second quarter of 2002. The increase in product contribution and product contribution as a percent of net sales was due primarily to higher gross profit and slightly lower overall advertising and sales promotion expenses.

Consolidated Operating Earnings—Our consolidated operating earnings increased $6.2 million, or 15%, to $48.5 million in the second quarter of 2002. The increase in operating earnings was the result of our higher net sales, gross profit and product contribution, as discussed. Our operating earnings also benefited from a reduction in intangible amortization expense of $5.3 million in the second quarter of 2002. This was the result of our implementation of SFAS 142 (see Note 2). Assuming SFAS 142 was implemented on December 31, 2000, the start of our fiscal year 2001, our operating earnings would have increased $0.9 million, or 2%, which is in line with the year over year growth in net sales.

Consolidated Interest Expense—Our consolidated interest expense decreased $4.9 million, or 24%, to $15.2 million in the second quarter of 2002. The decrease in interest expense was due to the combined impact of:

Consolidated Other Expenses—Our consolidated other expenses decreased $0.4 million, or 37%, to $0.7 million in the second quarter of 2002. This decrease was due primarily to lower LIBOR rates in the second quarter of 2002 coupled with slightly lower average Receivable Facility usage in 2002. The amount charged to other expenses represents the discount offered to the third party on the sale of receivables and the amortization of deferred financing costs associated with the formation of the Receivables Facility.

22


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Consolidated Income Taxes—Our consolidated income taxes increased $3.2 million, or 36%, to $12.1 million in the second quarter of 2002. As a percent of pre-tax earnings, our effective tax rate decreased 5.3 percentage points to 37.1% of earnings before income taxes and extraordinary loss. We expect our effective tax rate, for the remaining two quarters of fiscal 2002, to be approximately 37% of earnings before income taxes. Our effective tax rate is below our historical average tax rate, because we ceased the amortization of goodwill and intangible assets with indefinite lives (see Note 2). A portion of the goodwill amortization we recorded in previous periods was non-deductible for tax purposes, which drove our effective rate up.

Extraordinary Loss—On May 29, 2002, we amended our Credit Facility and issued a new $450.0 million Term C Loan and, together with $21.8 million of cash, we repaid in full our outstanding obligations under our Term A Loan and Term B Loan, which collectively totaled $471.8 million (see Note 7). We recorded an extraordinary loss during the second quarter ended June 29, 2002 of $3.7 million, net of income tax benefits of $2.2 million, associated with the write-off of unamortized deferred financing costs relating to our Term A Loan and Term B Loan (see Note 7)..

In the second quarter of 2001, we recorded an extraordinary loss of $19.3 million, net of income tax benefits, as a result of the refinancing of our senior indebtedness (see Note 7). This extraordinary loss included cash provisions for call premiums on our retired fixed rate indebtedness, a non-cash provision for the write-off of unamortized deferred financing costs, fees for two interest rate swap agreements related to our prior credit facility and duplicative net interest expense during the period between extinguishment and redemption of the fixed rate indebtedness.

Six Months Ended June 29, 2002 Compared To
Six Months Ended June 30, 2001

Consolidated Net Sales—Our consolidated net sales were relatively flat versus the first six months of 2001, increasing $0.2 million to $398.3 million for the six months ended June 29, 2002.

Personal Products Division—Net sales increased $5.9 million, or 3%, to $218.5 million for the six months ended June 29, 2002.

23



PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Consumer Products Division—Net sales decreased $8.6 million, or 7%, to $109.1 million for the six months ended June 29, 2002.

24


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

International/Corporate Sales Division—Net sales increased $2.9 million, or 4%, to $70.7 million for the six months ended June 29, 2002. The increase was due primarily to higher Sun Care net sales to the specialty classes of trade, primarily club stores. Net sales in the U.S. specialty classes of trade increased 15% for the six months ended June 29, 2002 compared to the comparable period of 2001. We believe this growth was due primarily to the increased focus on these distribution channels.

Consolidated Gross Profit—Our consolidated gross profit increased $3.6 million, or 2%, to $224.9 million for the six months ended June 29, 2002. As a percent of net sales, gross profit increased 0.9 percentage points, to 56.5% for the six months ended June 29, 2002. The increase in gross profit and gross profit as a percent of net sales was due primarily to the mix of products sold and favorable product cost.

Consolidated Product Contribution—Our consolidated product contribution increased $5.2 million, or 3%, to $175.5 million for the six months ended June 29, 2002. As a percent of net sales, product contribution increased 1.3 percentage points to 44.0% for the six months ended June 29, 2002. The increase in product contribution and product contribution as a percent of net sales was due primarily to higher gross profit and lower overall advertising and sales promotion expenses.

Consolidated Operating Earnings—Our consolidated operating earnings increased $2.3 million, or 3%, to $87.9 million for the six months ended June 29, 2002. The increase in operating earnings was the result of our higher gross profit and product contribution, as discussed. Our operating earnings also benefited from a reduction in intangible amortization expense of $10.6 million, which was offset, in part, by a one-time restructuring and asset impairment charge of $7.6 million related to the closure of our Watervliet, New York plastic molding facility (see Note 4). The reduction in amortization expense was the result of our implementation of SFAS 142 (see Note 2). Assuming SFAS 142 was implemented on December 31, 2000, the start of our fiscal year 2001, and excluding the restructuring and asset impairment charge, our operating earnings would have decreased $0.7 million compared to the comparable period of 2001. This decrease is the result of higher selling, general and administrative expenses offset, in part, by higher product contribution, as discussed.

25


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Consolidated Interest Expense—Our consolidated interest expense decreased $9.9 million, or 24%, to $31.4 million for the six months ended June 29, 2002. The decrease in interest expense was due to the combined impact of:

Consolidated Other Expenses—Our consolidated other expenses increased $0.5 million, or 46%, to $1.6 million for the six months ended June 29, 2002. In late May 2001, we entered into a receivables purchase agreement with a third party as part of the refinancing transaction (see Notes 7 and 8). The amount charged to other expenses represents the discount offered to the third party on the sale of receivables and the amortization of deferred financing costs associated with the formation of the Receivables Facility.

Consolidated Income Taxes—Our consolidated income taxes decreased $12.3 million, or 67%, to $6.0 million for the six months ended June 29, 2002. As a percent of pre-tax earnings, our effective tax rate decreased 31.4 percentage points to 10.9% of earnings before income taxes, extraordinary loss and cumulative effect of change in accounting principles. In the first quarter of 2002, we recorded a tax benefit of $14.3 million due to new regulations issued by the U.S. Treasury on March 7, 2002 (see Note 3). The new regulations permit us to partially utilize a previously disallowed capital loss on the sale of Playtex Beauty Care Inc., which we sold during fiscal 1999. We expect our effective tax rate, for the remaining two quarters of fiscal 2002, to be approximately 37% of earnings before income taxes. This effective tax rate is below our historical average tax rate, because we ceased the amortization of goodwill and intangible assets with indefinite lives (see Note 2). A portion of the goodwill amortization we recorded in previous periods was non-deductible for tax purposes, which drove our effective rate up.

Extraordinary Loss—On May 29, 2002, we amended our Credit Facility and issued a new $450.0 million Term C Loan and, together with $21.8 million of cash, we repaid in full our outstanding obligations under our Term A Loan and Term B Loan, which collectively totaled $471.8 million (see Note 7). We recorded an extraordinary loss during the second quarter ended June 29, 2002 of $3.7 million, net of income tax benefits of $2.2 million, associated with the write-off of unamortized deferred financing costs relating to our Term A Loan and Term B Loan.

In the second quarter of 2001, we recorded an extraordinary loss of $19.3 million, net of income tax benefits, as a result of the refinancing of our senior indebtedness (see Note 7). This extraordinary loss included cash provisions for call premiums on our retired fixed rate indebtedness, a non-cash provision for the write-off of unamortized deferred financing costs, fees for two interest rate swap agreements related to our prior credit facility and duplicative net interest expense during the period between extinguishment and redemption of the fixed rate indebtedness.

26


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Financial Condition and Liquidity

        On May 29, 2002, we amended our Credit Facility and issued a new $450.0 million Term C Loan and, together with $21.8 million of cash, we repaid in full our outstanding obligations under our Term A Loan and Term B Loan, which collectively totaled $471.8 million. Borrowings under the Term C Loan are less costly to us than borrowings under either the Term A Loan or Term B Loan. The interest rate is LIBOR plus 2.25% for the Term C Loan compared to LIBOR plus 2.75% for the Term A Loan and LIBOR plus 3.0% for the Term B Loan. The Term C Loan matures May 31, 2009.

        On May 22, 2001, we completed a refinancing of our senior indebtedness (the "Refinancing Transaction"). We issued $350.0 million principal amount of 93/8% Notes, entered into a new senior secured credit facility (the "Credit Facility") consisting of a six-year $100.0 million Term A Loan, a eight-year $400.0 million Term B Loan, and a six-year $125.0 million Revolving Credit Facility. As mentioned above, on May 29, 2002 we paid-off the Term A Loan and Term B Loan by amending the Credit Facility and issuing a new $450.0 million Term C Loan. Also, as part of the Refinancing Transaction, we entered into a Receivables Facility through a newly formed special purpose bankruptcy remote subsidiary, Playtex A/R LLC. The net proceeds from the Refinancing Transaction and the Receivables Facility were used to pay-off all outstanding balances under our prior credit agreement. In addition, we extinguished our 9% Senior Subordinated Notes due 2003 (the "9% Notes") and our 87/8% Senior Notes due 2004 (the "87/8% Notes").

        At June 29, 2002, long-term debt (including current portion but excluding obligations due to related party) was $850.0 million compared to $888.8 million at December 29, 2001. We reduced our variable rate indebtedness by $38.8 million during the six months ended June 29, 2002. We paid off the $17.0 million that was outstanding on our Revolving Credit Facility at December 29, 2001 and in connection with the amendment to the Credit Facility reduced our other variable rate indebtedness by $21.8 million. Since the acquisition of the Baby Magic brand of infant-related toiletries on June 30, 1999, we have steadily decreased our outstanding indebtedness. We reduced our indebtedness by: $56.3 million in fiscal 2000; $42.8 million in fiscal 2001; and $38.8 million for the first six months of 2002. We regard debt reduction as one of our corporate objectives. Our scheduled principal repayment obligations at June 29, 2002 are (excluding amounts due to related party):

•    $2.3 million in 2002,   •    $4.5 million in 2005,
•    $4.5 million in 2003,   •    $4.5 million in 2006, and
•    $54.5 million in 2004,   •    $779.7 million thereafter.

In the event that we have excess cash flow, as defined in our credit agreement, we may, within 90 days of each year-end, be required to: make either mandatory debt repayments on the Term C Loan equal to the amount of the excess cash flow, as defined, or make deposits into the excess cash flow account equal to the amount of the excess cash flow.

        Our Revolving Credit Facility provides for borrowings of up to $125.0 million and matures on May 22, 2007. At June 29, 2002, we had $122.8 million available to borrow under the Revolving Credit Facility. At June 29, 2002, the undivided fractional interest sold by Playtex A/R LLC to a third party commercial paper conduit under the Receivables Facility was $68.0 million.

        The terms of the Credit Facility require us to meet certain financial tests and also include conditions or restrictions on:

•    new indebtedness and liens,   •    dividends and other distributions, and
•    major acquisitions or mergers,   •    the application of excess cash flow.
•    capital expenditures and asset sales,    

27


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

        At June 29, 2002, our working capital (current assets net of current liabilities) increased $10.6 million to $118.4 million compared to $107.8 million at December 29, 2001.

        Our net cash flows from operations decreased $55.0 million, to $49.4 million for the first six months of 2002 compared to the first six months of 2001. The decrease in net cash flows from operations was due primarily to the initial benefit realized from the formation of the Receivables Facility in May 2001 and the subsequent sale of an undivided fractional interest in receivables to a third party. The Receivables Facility favorably impacted our net cash flows from operations in 2001, as we were able to turn accounts receivables into cash faster.

        Capital expenditures for equipment and facility improvements were $5.8 million for the first six months of 2002. These expenditures were used primarily to support new products, expand capacity in key product areas, upgrade production equipment, invest in new technologies, and improve our facilities. Capital expenditures for 2002 are expected to be in the $20.0 million range, in line with recent full-year expenditure levels.

        We intend to fund our operating cash, capital expenditures and debt service requirements through cash flow generated from operations, proceeds from the Receivables Facility, and borrowings under the Revolving Credit Facility through fiscal 2007. However, we do not expect to generate sufficient cash flow from operations to make the 2008 and 2009 scheduled principal payments on the Term C Loan, which collectively total $425.3 million. In addition, we do not expect to generate sufficient cash flow from operations to make the $350.0 million scheduled principal payment on the 93/8% Notes due in fiscal 2011. Accordingly, we will have to either refinance our obligations, sell assets or raise equity capital to repay the principal amounts of these obligations. Historically, our cash flows from operations and refinancing activities have enabled us to meet all of our obligations. We would expect that this will continue. But, we cannot guarantee what impact certain economic conditions may have in the future on our ability to raise cash.

        We have made a number of acquisitions in the past and financed them by borrowing additional money, issuing a convertible note and shares of our Common Stock. We will continue to consider acquisitions of other companies or businesses that may require us to seek additional debt or equity financing. We would expect, based on our past experience, to be able to raise the required capital for acquisitions. However, we cannot assure you that such financing will be available.

28


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Critical Accounting Policies

        The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions. These estimates and assumptions affect:


Actual results could vary from our estimates and assumptions. These estimates and assumptions are based on historical results, assumptions that we make as well as assumptions by third parties.

The level of reserves for Sun Care product returns, bad debts and advertising and promotional costs are three areas of which you should be aware.


Recently Issued Accounting Standards

        In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("FAS 143"). FAS 143 requires that asset retirement obligations that are identifiable upon acquisition and construction, and during the operating life of a long-lived asset be recorded as a liability using the present value of the estimated cash flows. A corresponding amount would be capitalized as part of the assets carrying amount and amortized to expense over the assets useful life. We are required to adopt the provisions of FAS 143 effective December 29, 2002, the start of our fiscal year 2003. We are currently evaluating the impact of adoption of this statement.

        In April 2002, the FASB issued SFAS No. 145 ("FAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement updates, clarifies and simplifies

29


PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

existing accounting pronouncements and becomes effective for us starting in fiscal 2003. In most instances, FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under the old accounting rules. Starting in 2003, any gain or loss on extinguishment of debt previously classified, as an extraordinary item in prior periods presented that does not meet the criteria of APB 30 for such classification will be reclassified to conform to the provisions of FAS 145. We are currently reviewing the impact of FAS 145 on our financial statements.

        In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146") and nullifies EITF Issue No. 94-3. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No 94-3 had recognized the liability at the commitment date to an exit plan. We are required to adopt the provisions of FAS 146 effective for exit or disposal activities initiated after December 28, 2002. We are currently evaluating the impact of adoption of this statement

30



PLAYTEX PRODUCTS, INC.
PART I—FINANCIAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Item 3. Quantitative and Qualitative Disclosure about Market Risk

        We periodically use financial instruments, such as derivatives, to manage the impact of interest rate changes on our variable rate debt and its effect on our earnings and cash flows. Our policies prohibit the use of derivative instruments for the sole purpose of trading for profit on price fluctuations or to enter into contracts, which intentionally increase our underlying interest rate exposure. At June 29, 2002, we were not a party to any financial instruments and our total indebtedness consisted of $400.0 million in fixed rate debt and $450.0 million in variable rate debt. Based on our interest rate exposure at June 29, 2002, a 1% increase in interest rates would result in an estimated $4.5 million of additional interest expense on an annualized basis.

31




PLAYTEX PRODUCTS, INC.
PART II—OTHER INFORMATION

Item 1. Legal Proceedings

        The following should be read in conjunction with Part 1, Item 3., "Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 29, 2001.

        As of the end of July 2002, there were approximately 6 pending toxic shock syndrome claims relating to Playtex tampons, although additional claims may be made in the future.

Item 4. Submission of Matters to a Vote of Security Holders

        At the Annual Meeting of Stockholders held on May 14, 2002, the following actions were taken:

        Eleven Nominees were elected as Directors to hold office until the Annual Meeting of Stockholders in 2002 and until their successors are duly authorized and qualified.

Name

  Votes For
  Votes Withheld

Robert B. Haas

 

57,469,834

 

386,845

Michael R. Gallagher

 

57,471,424

 

385,255

Glenn A. Forbes

 

57,470,624

 

386,055

Richard C. Blum

 

57,468,674

 

388,005

Michael R. Eisenson

 

57,465,224

 

391,455

R. Jeffrey Harris

 

57,531,466

 

325,213

C. Ann Merrifield

 

57,533,574

 

323,105

Susan R. Nowakowski

 

57,487,616

 

369,063

John C. Walker

 

57,422,266

 

434,413

Wyche H. Walton

 

57,420,366

 

436,313

Douglas D. Wheat

 

57,422,626

 

434,053

 

 

 

 

 

        The selection of the firm of KPMG LLP was ratified as our independent auditors for fiscal 2002.

Votes For

  Votes Against
  Votes Withheld
57,057,112   785,079   14,488

Item 6. Exhibits and Reports on Form 8-K

a.
Exhibits:
  99.1   Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  99.2   Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32


b.
Reports on Form 8-K:

33



PLAYTEX PRODUCTS INC.
SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    PLAYTEX PRODUCTS, INC.

Date: August 12, 2002

 

By:

 

/s/  
MICHAEL R. GALLAGHER      
Michael R. Gallagher
Chief Executive Officer
(Principal Executive Officer)

Date: August 12, 2002

 

By:

 

/s/  
GLENN A. FORBES      
Glenn A. Forbes
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

34




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PLAYTEX PRODUCTS, INC. INDEX
PLAYTEX PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
PLAYTEX PRODUCTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited, in thousands except per share data)
PLAYTEX PRODUCTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited, in thousands except per share data)
PLAYTEX PRODUCTS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE EARNINGS (Unaudited, in thousands)
PLAYTEX PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
PLAYTEX PRODUCTS, INC. PART I—FINANCIAL INFORMATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PLAYTEX PRODUCTS, INC. PART I—FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS
PLAYTEX PRODUCTS, INC. PART I—FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
PLAYTEX PRODUCTS, INC. PART I—FINANCIAL INFORMATION QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PLAYTEX PRODUCTS, INC. PART II—OTHER INFORMATION
PLAYTEX PRODUCTS INC. SIGNATURES