Back to GetFilings.com



Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 1, 2004

 

Commission file Number 1-10585

 


 

CHURCH & DWIGHT CO., INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   13-4996950

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

469 North Harrison Street, Princeton, N.J.   08543-5297
(Address of principal executive office)   (Zip Code)

 

Registrant’s telephone number, including area code: (609) 683-5900

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  x    No  ¨

 

As of November 5, 2004, there were 62,379,765 shares of Common Stock outstanding.

 



Table of Contents

TABLE OF CONTENTS

 

ITEM


       PAGE

    PART I     

1.

  Financial Statements    3

2.

  Management’s Discussion and Analysis    21

3.

  Quantitative and Qualitative Disclosure About Market Risk    26

4.

  Controls and Procedures    26
    PART II     

6.

  Exhibits    27

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(Unaudited)

 

     Three Months Ended

    Nine Months Ended

 

(Dollars in thousands, except per share data)

 

   Oct. 1, 2004

    Sept. 26, 2003

    Oct. 1, 2004

    Sept. 26, 2003

 

Net Sales

   $ 420,310     $ 265,566     $ 1,057,086     $ 770,127  

Cost of sales

     259,721       185,024       680,259       536,178  
    


 


 


 


Gross Profit

     160,589       80,542       376,827       233,949  

Marketing expense

     51,019       22,905       111,325       66,136  

Selling, general and administrative expenses

     56,169       28,763       132,213       85,109  
    


 


 


 


Income from Operations

     53,401       28,874       133,289       82,704  

Equity in earnings of affiliates

     1,143       5,164       13,759       25,844  

Investment earnings

     860       256       1,699       910  

Loss on early extinguishment of debt

     —         —         (7,995 )     —    

Other income (expense), net

     551       (83 )     860       534  

Interest expense

     (17,786 )     (4,821 )     (29,336 )     (14,716 )
    


 


 


 


Income before taxes and minority interest

     38,169       29,390       112,276       95,276  

Income taxes

     10,764       9,861       35,379       30,160  

Minority interest

     4       7       17       22  
    


 


 


 


Net Income

     27,401       19,522       76,880       65,094  

Retained earnings at beginning of period

     478,603       406,748       435,677       367,211  
    


 


 


 


       506,004       426,270       512,557       432,205  

Dividends paid

     3,708       3,223       10,261       9,258  
    


 


 


 


Retained earnings at end of period

   $ 502,296     $ 423,047     $ 502,296     $ 423,047  
    


 


 


 


Weighted average shares outstanding - Basic

     62,005       60,477       61,641       60,198  
    


 


 


 


Weighted average shares outstanding - Diluted

     64,935       63,372       64,754       63,087  
    


 


 


 


Earnings Per Share:

                                

Net income per share - Basic

   $ 0.44     $ 0.32     $ 1.25     $ 1.08  
    


 


 


 


Net income per share - Diluted

   $ 0.42     $ 0.31     $ 1.19     $ 1.03  
    


 


 


 


Dividends Per Share

   $ 0.06     $ 0.05     $ 0.17     $ 0.15  
    


 


 


 


 

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands)

 

   Oct. 1, 2004

    Dec. 31, 2003

 
     (Unaudited)        

Assets

                

Current Assets

                

Cash and cash equivalents

   $ 145,440     $ 75,634  

Accounts receivable, less allowances of $3,176 and $1,969

     198,141       107,553  

Inventories

     152,666       84,176  

Deferred income taxes

     10,285       14,109  

Note receivable – current

     1,015       942  

Net assets held for sale

     11,000       —    

Prepaid expenses

     8,231       6,808  
    


 


Total Current Assets

     526,778       289,222  
    


 


Property, Plant and Equipment (Net)

     330,827       258,010  

Note Receivable

     7,751       8,766  

Equity Investment in Affiliates

     13,223       152,575  

Long-term Supply Contracts

     5,078       5,668  

Tradenames and Other Intangibles

     372,444       119,374  

Goodwill

     565,573       259,444  

Other Assets

     43,705       26,558  
    


 


Total Assets

   $ 1,865,379     $ 1,119,617  
    


 


Liabilities and Stockholders’ Equity

                

Current Liabilities

                

Short-term borrowings

   $ 105,210     $ 62,337  

Accounts payable and accrued expenses

     249,087       148,958  

Current portion of long-term debt

     6,948       3,560  

Income taxes payable

     17,193       17,199  
    


 


Total current liabilities

     378,438       232,054  
    


 


Long-term Debt

     789,676       331,149  

Deferred Income Taxes

     80,460       61,000  

Deferred and Other Long Term Liabilities

     66,242       40,723  

Postretirement and Postemployment Benefits

     18,571       15,900  

Minority Interest

     284       297  

Commitments and Contingencies

                

Stockholders’ Equity

                

Preferred Stock-$1.00 par value
Authorized 2,500,000 shares, none issued

     —         —    

Common Stock-$1.00 par value
Authorized 100,000,000 shares, issued 69,991,482 shares

     69,991       46,661  

Additional paid-in capital

     39,598       51,212  

Retained earnings

     502,296       435,677  

Accumulated other comprehensive (loss)

     (7,941 )     (13,962 )
    


 


       603,944       519,588  

Common stock in treasury, at cost:

                

7,637,954 shares in 2004 and 8,812,445 shares in 2003

     (72,236 )     (81,094 )
    


 


Total Stockholders’ Equity

     531,708       438,494  
    


 


Total Liabilities and Stockholders’ Equity

   $ 1,865,379     $ 1,119,617  
    


 


 

See Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

     Nine Months Ended

 

(Dollars in thousands)

 

   Oct 1, 2004

    Sept. 26, 2003

 

Cash Flow From Operating Activities

                

Net Income

   $ 76,880     $ 65,094  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation, depletion and amortization

     28,891       22,300  

Equity in earnings of affiliates

     (13,759 )     (25,844 )

Deferred income taxes

     13,209       10,120  

Plant impairment charge and other asset write-offs

     2,208       —    

Net loss on early extinguishment of debt

     7,995       —    

Other

     (138 )     26  

Change in assets and liabilities:

                

Decrease in accounts receivable

     6,725       10  

(Increase) decrease in inventories

     (1,527 )     5,511  

Decrease in prepaid expenses

     2,183       1,615  

Increase (decrease) in accounts payable

     16,953       (11,947 )

Increase in income taxes payable

     4,177       11,221  

Decrease in other liabilities

     166       752  
    


 


Net Cash Provided By Operating Activities

     143,963       78,858  
    


 


Cash Flow From Investing Activities

                

Additions to property, plant and equipment

     (22,364 )     (22,474 )

Armkel acquisition (net of cash acquired)

     (194,375 )     —    

Proceeds from note receivable

     942       870  

Distributions from affiliates

     4,301       3,629  

Contingent acquisition payments

     (5,068 )     (3,424 )

Other long-term assets

     (1,615 )     (1,440 )

Proceeds from sale of fixed assets

     1,131       —    
    


 


Net Cash Used In Investing Activities

     (217,048 )     (22,839 )
    


 


Cash Flow From Financing Activities

                

Long-term debt borrowing

     540,000       100,000  

Long-term debt (repayment)

     (436,896 )     (208,438 )

Short-term debt borrowing

     43,700       60,000  

Short-term debt (repayment)

     (1,689 )     (2,469 )

Proceeds from stock options exercised

     10,885       7,118  

Payment of cash dividends

     (10,261 )     (9,258 )

Deferred financing costs

     (3,662 )     (3,442 )
    


 


Net Cash Provided by (Used In) Financing Activities

     142,077       (56,489 )

Effect of exchange rate changes on cash and cash equivalents

     814       864  
    


 


Net Change In Cash and Cash Equivalents

     69,806       394  

Cash And Cash Equivalents At Beginning Of Year

     75,634       76,302  
    


 


Cash And Cash Equivalents At End Of Period

   $ 145,440     $ 76,696  
    


 


Acquisitions in which liabilities were assumed are as follows:

                

Fair value of assets

   $ 902,146     $ —    

Cash paid and investment in and receivable from Armkel

     416,514       —    
    


 


Liabilities assumed

   $ 485,632     $ —    
    


 


 

See Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. The consolidated balance sheet as of October 1, 2004, the consolidated statements of income and retained earnings for the three and nine months ended October 1, 2004 and September 26, 2003 and the consolidated statements of cash flow for the nine months then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flow at October 1, 2004 and for all periods presented have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The results of operations for the period ended October 1, 2004 are not necessarily indicative of the operating results for the full year.

 

On May 28, 2004, the Company completed the previously announced purchase of the remaining 50% ownership interest of Armkel, LLC (“Armkel”) from affiliates of Kelso & Company (“Kelso interest”) for a purchase price of $253.7 million plus fees and Armkel was merged into the Company. Results of operations for the business are included in the Company’s consolidated financial statements from May 29, 2004.

 

Quarterly periods are based on a 4-4-5 methodology. As a result, the first quarter can include a partial or expanded week in the first four week period of the quarter. Similarly, the last five week period in the fourth quarter could be a partial or expanded week.

 

2. Inventories consist of the following:

 

(In thousands)

 

   Oct. 1, 2004

   Dec. 31, 2003

Raw materials and supplies

   $ 44,997    $ 26,205

Work in process

     7,405      204

Finished goods

     100,264      57,767
    

  

     $ 152,666    $ 84,176
    

  

 

3. Property, Plant and Equipment consist of the following:

 

(In thousands)

 

   Oct. 1, 2004

   Dec. 31, 2003

Land

   $ 13,649    $ 6,165

Buildings and improvements

     132,680      109,860

Machinery and equipment

     339,098      295,255

Office equipment and other assets

     33,783      27,753

Software

     17,830      12,459

Mineral rights

     583      571

Construction in progress

     18,490      9,574
    

  

       556,113      461,637

Less accumulated depreciation, depletion and amortization

     225,286      203,627
    

  

Net Property, Plant and Equipment

   $ 330,827    $ 258,010
    

  

 

In the second quarter of 2004 the Company recorded a plant impairment charge of $1.5 million, which was recorded as cost of sales in the Consumer Domestic segment, as the value could not be supported by projected cash flows.

 

6


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

4. Earnings Per Share

 

Basic EPS is calculated based on income available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock issuable pursuant to the exercise of stock options outstanding. The weighted average number of common shares outstanding used to calculate Basic EPS is reconciled to those shares used in calculating Diluted EPS as follows:

 

     Three Months Ended

   Nine Months Ended

(In thousands)

 

   Oct. 1, 2004

   Sept 26, 2003

   Oct. 1, 2004

   Sept. 26, 2003

Basic

   62,005    60,477    61,641    60,198

Dilutive effect of stock options

   2,930    2,895    3,113    2,889
    
  
  
  

Diluted

   64,935    63,372    64,754    63,087
    
  
  
  

Anti-dilutive stock options outstanding

   86    842    888    1,616
    
  
  
  

 

On August 6, 2004 the Company announced a 3 for 2 stock split. The shares resulting from the stock split were distributed on September 1, 2004 to stockholders of record at the close of business on August 16, 2004. All share and per share information in this report reflects the impact of the stock split.

 

In August 2003, the Company issued $100 million of 5.25% convertible senior debentures that may be converted into shares of the Company’s common stock prior to maturity at a conversion price of approximately $31.00 per share, subject to adjustment in certain circumstances. Because of the inclusion of a contingent convertibility feature of the debentures, the Company’s diluted net income per common share does not give effect to the dilution from the conversion of the debentures until the Company’s share price exceeds 120% of the initial conversion price or the occurrence of other specified events.

 

The Emerging Issues Task Force (EITF) concluded in EITF Issue 04-8: The Effect of Contingently Convertible Debt on Diluted Earnings per Share that contingently convertible debt (“Co-Cos”) be treated for diluted EPS purposes as if converted from debt to equity, beginning with the date the contingently convertible debt instrument is initially issued, even if the triggering events (such as stock price) have not yet occurred. The effective date would be reporting periods ending on or after December 15, 2004 and prior period EPS amounts presented for comparative purposes, would have to be restated.

 

The change in accounting rules for reporting Co-Cos will have an estimated $0.02 dilutive effect on earnings per share in 2004.

 

5. Stock-Based Compensation

 

The Company accounts for costs of stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, rather than the fair-value based method in Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation”. In connection with purchasing Kelso’s interest in Armkel, the Company paid cash and issued options to purchase 97,500 shares of Company common stock at an exercise price of $22.88 per share to certain executives under the Equity Appreciation Rights Plan (“EAR Plan”). The unvested portion of the EAR Plan options is being amortized over a two year vesting period and is recognized as expense as vesting occurs. In 2004, the amount recognized as expense for the stock options granted under the EAR Plan was $0.17 million for the third quarter and was $0.23 million for the nine months ended October 1, 2004.

 

During 2004, options to purchase approximately 900 thousand shares of Company common stock were granted at an average fair value of $10.58 per share.

 

The Company’s pro forma net income and pro forma net income per share for the third quarter of 2004 and 2003, determined as if the Company had adopted the fair value method of SFAS 123, are as follows:

 

     Three Months Ended

    Nine Months Ended

 

(In thousands, except for per share data)

 

   Oct. 1, 2004

    Sept. 26, 2003

    Oct. 1, 2004

    Sept. 26, 2003

 

Net Income

                                

As reported

   $ 27,401     $ 19,522     $ 76,880     $ 65,094  

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     172       —         229       —    

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (1,272 )     (1,043 )     (3,381 )     (2,862 )
    


 


 


 


Pro forma

   $ 26,301     $ 18,479     $ 73,728     $ 62,232  
    


 


 


 


Net Income per Share: basic

                                

As reported

   $ 0.44     $ 0.32     $ 1.25     $ 1.08  

Pro forma

   $ 0.42     $ 0.30     $ 1.19     $ 1.03  

Net Income per Share: diluted

                                

As reported

   $ 0.42     $ 0.31     $ 1.19     $ 1.03  

Pro forma

   $ 0.40     $ 0.29     $ 1.13     $ 0.98  

 

7


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

6. Segment Information

 

As a result of purchasing the Kelso interest, the Company has redefined its operating segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International, and Specialty Products Division (“SPD”).

 

Segment revenues are derived from the sale of the following products:

 

Segment


    

Products


Consumer Domestic

     Deodorizing and cleaning, laundry, and personal care products

Consumer International

     Primarily personal care products

SPD

     Specialty chemical products

 

The domestic results of the acquired Armkel business since May 29, 2004 are included in the Consumer Domestic segment and Armkel’s former international subsidiaries (in addition to the Company’s existing international consumer subsidiary) comprise the Consumer International segment. There has been no change to the SPD segment. The Company’s earnings, prior to its acquisition of Kelso’s interest in Armkel, attributable to the Company’s equity investment in Armkel’s domestic and international operations are included in Income Before Taxes and Minority Interest of the Consumer Domestic and Consumer International segments, respectively. The Company’s earnings attributable to its equity investment in Armand Products and The Armakleen Company are included in Income Before Taxes and Minority Interest of the Corporate segment. Prior to purchasing Kelso’s interest in Armkel, the Company’s segments were: Church & Dwight Consumer, Armkel, Church & Dwight SPD, and Other Equity Affiliates. All prior periods have been conformed to the new segment presentation.

 

Segment sales and income before taxes and minority interest for the third quarter and nine month periods of 2004 and 2003 and total segment assets as of October 1, 2004 and December 31, 2003 are as follows:

 

(in thousands)

 

   Consumer
Domestic


   Consumer
Internat’l


   SPD

   Corporate

   Total

Net Sales

                                  

Third Quarter 2004

   $ 299,285    $ 69,890    $ 51,135      —      $ 420,310

Third Quarter 2003

     208,604      9,812      47,150      —        265,566

2004 Year to Date

     794,205      107,773      155,108      —        1,057,086

2003 Year to Date

     605,223      26,961      137,943      —        770,127

Income Before Taxes and Minority Interest (1)

                                  

Third Quarter 2004

     28,237      4,922      3,866      1,144      38,169

Third Quarter 2003

     22,305      2,760      3,642      683      29,390

2004 Year to Date

     82,365      13,865      13,063      2,983      112,276

2003 Year to Date

     72,413      9,037      11,332      2,494      95,276

Total Assets

                                  

October 1, 2004

   $ 1,368,932    $ 263,941    $ 166,621    $ 65,886    $ 1,865,380

December 31, 2003

   $ 841,036    $ 50,868    $ 166,953    $ 60,760    $ 1,119,617

(1) In determining Income Before Taxes and Minority Interest, Interest Expense, Interest Income, Loss on Early Extinguishment of Debt and Other Income (expense) were allocated to the segments based upon each segments’ relative Operating Profit.

 

The Company’s net sales and total assets changed significantly since December 31, 2003 as a result of the consolidation of the operations and the assets associated with the former Armkel business.

 

The following table shows product line revenues from external customers for the three and nine months ended October 1, 2004 and September 26, 2003:

 

     Three Months Ended

   Nine Months Ended

(In thousands)

 

   Oct. 1, 2004

   Sept 26, 2003

   Oct. 1, 2004

   Sept. 26, 2003

Deodorizing Products

   $ 68,824    $ 61,337    $ 194,489    $ 175,663

Laundry Products

     105,846      105,536      315,109      304,344

Personal Care Products

     124,615      41,731      284,607      125,216
    

  

  

  

Total Consumer Domestic

     299,285      208,604      794,205      605,223

Total Consumer International

     69,890      9,812      107,773      26,961

Total SPD

     51,135      47,150      155,108      137,943
    

  

  

  

Total Consolidated Net Sales

   $ 420,310    $ 265,566    $ 1,057,086    $ 770,127
    

  

  

  

 

8


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

7. Supplemental Financial Information of Guarantor and Non-Guarantor Operations

 

The 9 1/2 % senior subordinated notes due 2009 assumed by the Company as a result of Armkel’s merger into the Company are fully and unconditionally guaranteed by Church & Dwight Co., Inc. and certain domestic subsidiaries of the Company on a joint and several basis.

 

Supplemental information for condensed consolidated balance sheets at October 1, 2004 and December 31, 2003, condensed consolidated income statements for the three and nine months ended October 1, 2004 and September 26, 2003, and condensed consolidated statements of cash flows for the nine-month periods ended October 1, 2004 and September 26, 2003 is summarized as follows (amounts in thousands):

 

Statements of Income

 

    

For The Three Months Ended

October 1, 2004


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

   

Total

Consolidated


 

Net sales

   $ 346,653     $ 80,842     $ (7,185 )   $ 420,310  

Cost of sales

     220,293       46,613       (7,185 )     259,721  
    


 


 


 


Gross profit

     126,360       34,229       —         160,589  

Operating expenses

     81,600       25,588       —         107,188  
    


 


 


 


Income from operations

     44,760       8,641       —         53,401  

Equity in earnings of affiliates

     1,143       —         —         1,143  

Investment earnings

     537       323       —         860  

Intercompany income (expense)

     121       (121 )     —         —    

Other income (expense)

     (362 )     913       —         551  

Interest expense

     (16,753 )     (1,033 )     —         (17,786 )
    


 


 


 


Income before taxes

     29,446       8,723       —         38,169  

Income taxes

     8,195       2,569       —         10,764  

Minority interest

     4       —         —         4  
    


 


 


 


Net Income

   $ 21,247     $ 6,154     $ —       $ 27,401  
    


 


 


 


 

Statements of Income

 

    

For The Three Months Ended

September 26, 2003


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

    Total
Consolidated


 

Net sales

   $ 250,197     $ 19,836     $ (4,467 )   $ 265,566  

Cost of sales

     174,455       15,036       (4,467 )     185,024  
    


 


 


 


Gross profit

     75,742       4,800       —         80,542  

Operating expenses

     49,903       1,765       —         51,668  
    


 


 


 


Income from operations

     25,839       3,035       —         28,874  

Equity in earnings of affiliates

     5,164       —         —         5,164  

Investment earnings

     208       48       —         256  

Intercompany income (expense)

     (889 )     889       —         —    

Other income (expense)

     (19 )     (64 )     —         (83 )

Interest expense

     (4,240 )     (581 )     —         (4,821 )
    


 


 


 


Income before taxes

     26,063       3,327       —         29,390  

Income taxes

     8,945       916       —         9,861  

Minority interest

     7       —         —         7  
    


 


 


 


Net Income

   $ 17,111     $ 2,411     $ —       $ 19,522  
    


 


 


 


 

9


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Statements of Income

 

    

For The Nine Months Ended

October 1, 2004


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

    Total
Consolidated


 

Net sales

   $ 930,367     $ 144,535     $ (17,816 )   $ 1,057,086  

Cost of sales

     608,775       89,300       (17,816 )     680,259  
    


 


 


 


Gross profit

     321,592       55,235       —         376,827  

Operating expenses

     204,535       39,003       —         243,538  
    


 


 


 


Income from operations

     117,057       16,232       —         133,289  

Equity in earnings of affiliates

     13,759       —         —         13,759  

Investment earnings

     1,211       488       —         1,699  

Intercompany income (expense)

     (673 )     673       —         —    

Other income (expense)

     (8,007 )     872       —         (7,135 )

Interest expense

     (27,270 )     (2,066 )     —         (29,336 )
    


 


 


 


Income before taxes

     96,077       16,199       —         112,276  

Income taxes

     30,572       4,807       —         35,379  

Minority interest

     17       —         —         17  
    


 


 


 


Net Income

   $ 65,488     $ 11,392     $ —       $ 76,880  
    


 


 


 


 

Statements of Income

    

For The Nine Months Ended

September 26, 2003


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

    Total
Consolidated


 

Net sales

   $ 725,363     $ 58,410     $ (13,646 )   $ 770,127  

Cost of sales

     504,176       45,648       (13,646 )     536,178  
    


 


 


 


Gross profit

     221,187       12,762       —         233,949  

Operating expenses

     144,453       6,792       —         151,245  
    


 


 


 


Income from operations

     76,734       5,970       —         82,704  

Equity in earnings of affiliates

     25,844       —         —         25,844  

Investment earnings

     845       65       —         910  

Intercompany income (expense)

     (2,537 )     2,537       —         —    

Other income (expense)

     172       362       —         534  

Interest expense

     (13,011 )     (1,705 )     —         (14,716 )
    


 


 


 


Income before taxes

     88,047       7,229       —         95,276  

Income taxes

     28,128       2,032       —         30,160  

Minority interest

     22       —         —         22  
    


 


 


 


Net Income

   $ 59,897     $ 5,197     $ —       $ 65,094  
    


 


 


 


 

10


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Consolidated Balance Sheet

 

     October 1, 2004

 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

    Total
Consolidated


 

Current Assets

                                

Cash and cash equivalents

   $ 93,992     $ 51,448     $ —       $ 145,440  

Accounts receivable (net of allowances)

     3,335       194,806       —         198,141  

Inventories

     109,037       43,629       —         152,666  

Deferred income taxes

     8,410       1,875       —         10,285  

Note receivable – current

     1,015       —         —         1,015  

Net assets held for sale

     11,000       —         —         11,000  

Prepaid expenses

     4,962       3,269       —         8,231  
    


 


 


 


Total Current Assets

     231,751       295,027       —         526,778  
    


 


 


 


Property, Plant and Equipment (Net)

     277,507       53,320       —         330,827  

Notes Receivable

     75,019       —         (67,268 )     7,751  

Equity Investment in Affiliates

     113,640       —         (100,417 )     13,223  

Long-term Supply Contracts

     5,078       —         —         5,078  

Tradenames and Other Intangibles

     337,559       34,885       —         372,444  

Goodwill

     557,705       7,868       —         565,573  

Other Assets

     38,464       5,241       —         43,705  
    


 


 


 


Total Assets

   $ 1,636,723     $ 396,341     $ (167,685 )   $ 1,865,379  
    


 


 


 


Liabilities and Stockholders’ Equity

                                

Current Liabilities

                                

Short-term borrowings

   $ —       $ 105,210     $ —       $ 105,210  

Accounts payable and accrued expenses

     175,290       73,818       (21 )     249,087  

Intercompany accounts

     (9,698 )     9,698       —         —    

Current portion of long-term debt

     6,948       —         —         6,948  

Income taxes payable

     14,986       2,207       —         17,193  
    


 


 


 


Total Current Liabilities

     187,526       190,933       (21 )     378,438  
    


 


 


 


Long-term Debt

     788,737       939       —         789,676  

Notes Payable

     —         79,291       (79,291 )     —    

Deferred Income Taxes

     73,571       6,889       —         80,460  

Deferred and Other Long-term Liabilities

     54,947       11,295       —         66,242  

Postretirement and Postemployment Benefits

     16,295       2,276       —         18,571  

Minority Interest

     —         284       —         284  

Commitments and Contingencies

     —         —         —         —    

Stockholders’ Equity

                                

Common Stock

     46,661       66,761       (66,761 )     46,661  

Additional paid-in capital

     62,928       17,761       (17,761 )     62,928  

Retained earnings

     481,666       22,122       (1,492 )     502,296  

Accumulated other comprehensive (loss)

     (3,372 )     (2,210 )     (2,359 )     (7,941 )
    


 


 


 


       587,883       104,434       (88,373 )     603,944  

Common stock in treasury, at cost

     (72,236 )     —         —         (72,236 )
    


 


 


 


Total Stockholders’ Equity

     515,647       104,434       (88,373 )     531,708  
    


 


 


 


Total Liabilities and Stockholders’ Equity

   $ 1,636,723     $ 396,341     $ (167,685 )   $ 1,865,379  
    


 


 


 


 

11


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Consolidated Balance Sheet

 

     December 31, 2003

 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


    Eliminations

    Total
Consolidated


 

Current Assets

                                

Cash and cash equivalents

   $ 68,975     $ 6,659     $ —       $ 75,634  

Accounts receivable (net of allowances)

     30,501       77,052       —         107,553  

Inventories

     75,111       9,065       —         84,176  

Deferred income taxes

     14,054       55       —         14,109  

Note receivable – current

     942       —         —         942  

Prepaid expenses

     6,115       693       —         6,808  
    


 


 


 


Total Current Assets

     195,698       93,524       —         289,222  
    


 


 


 


Property, Plant and Equipment (Net)

     236,520       21,490       —         258,010  

Notes Receivable

     8,766       —         —         8,766  

Equity Investment in Affiliates

     189,435       —         (36,860 )     152,575  

Long-term Supply Contracts

     5,668       —         —         5,668  

Tradenames and Other Intangibles

     117,550       1,824       —         119,374  

Goodwill

     247,702       11,742       —         259,444  

Other Assets

     24,870       1,688       —         26,558  
    


 


 


 


Total Assets

   $ 1,026,209     $ 130,268     $ (36,860 )   $ 1,119,617  
    


 


 


 


Liabilities and Stockholders’ Equity

                                

Current Liabilities

                                

Short-term borrowings

   $ —       $ 62,337     $ —       $ 62,337  

Accounts payable and accrued expenses

     137,751       11,207       —         148,958  

Intercompany accounts

     (14,214 )     14,214       —         —    

Current portion of long-term debt

     3,560       —         —         3,560  

Income taxes payable

     15,470       1,729       —         17,199  
    


 


 


 


Total Current Liabilities

     142,567       89,487       —         232,054  
    


 


 


 


Long-term Debt

     329,830       1,319       —         331,149  

Deferred Income Taxes

     60,447       553       —         61,000  

Deferred and Other Long-term Liabilities

     40,056       667       —         40,723  

Postretirement and Postemployment Benefits

     15,900       —         —         15,900  

Minority Interest

     —         297       —         297  

Commitments and Contingencies

     —         —         —         —    

Stockholders’ Equity

                                

Common Stock

     46,661       14,701       (14,701 )     46,661  

Additional paid-in capital

     51,212       17,761       (17,761 )     51,212  

Retained earnings

     426,439       10,730       (1,492 )     435,677  

Accumulated other comprehensive (loss)

     (5,809 )     (5,247 )     (2,906 )     (13,962 )
    


 


 


 


       518,503       37,945       (36,860 )     519,588  

Common stock in treasury, at cost

     (81,094 )     —         —         (81,094 )
    


 


 


 


Total Stockholders’ Equity

     437,409       37,945       (36,860 )     438,494  
    


 


 


 


Total Liabilities and Stockholders’ Equity

   $ 1,026,209     $ 130,268     $ (36,860 )   $ 1,119,617  
    


 


 


 


 

12


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Statements of Cash Flows

 

    

For The Nine Months Ended

October 1, 2004


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


   

Total

Consolidated


 

Cash Flow From Operating Activities:

                        

Net Income

   $ 65,488     $ 11,392     $ 76,880  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation, depletion and amortization

     26,884       2,007       28,891  

Equity in earnings of affiliates

     (13,759 )     —         (13,759 )

Deferred income taxes

     11,459       1,750       13,209  

Plant Impairment charge and other net asset write-offs

     2,208       —         2,208  

Net loss on early extinguishment of debt

     7,995       —         7,995  

Other

     1,760       (1,898 )     (138 )

Change in assets and liabilities:

                        

Decrease (increase) in accounts receivable

     53,184       (46,459 )     6,725  

Decrease (increase) in inventories

     407       (1,934 )     (1,527 )

Decrease in prepaid expenses

     2,041       142       2,183  

Increase in accounts payable

     742       16,210       16,953  

Increase (decrease) in income taxes payable

     7,843       (3,666 )     4,177  

(Decrease) increase in intercompany and other liabilities

     (4,092 )     4,258       166  
    


 


 


Net Cash Provided by (Used in) Operating Activities

     162,159       (18,196 )     143,963  
    


 


 


Cash Flow From Investing Activities:

                        

Additions to property, plant & equipment

     (18,549 )     (3,815 )     (22,364 )

Armkel acquisition (net of cash acquired)

     (194,375 )     —         (194,375 )

Proceeds from note receivable

     942       —         942  

Distributions from affiliates

     4,301       —         4,301  

Contingent acquisition payments

     (5,068 )     —         (5,068 )

Other long-term assets

     (1,615 )     —         (1,615 )

Proceeds from sale of fixed assets

     —         1,131       1,131  
    


 


 


Net Cash Used in Investing Activities

     (214,364 )     (2,684 )     (217,048 )
    


 


 


Cash Flow from Financing Activities:

                        

Long-term debt borrowing

     540,000       —         540,000  

Long-term debt (repayment)

     (436,136 )     (760 )     (436,896 )

Short-term debt borrowing

     43,700       —         43,700  

Short-term debt (repayment)

     (36 )     (1,653 )     (1,689 )

Intercompany debt transactions

     (67,268 )     67,268       —    

Proceeds from stock options exercised

     10,885       —         10,885  

Payment of cash dividends

     (10,261 )     —         (10,261 )

Deferred financing costs

     (3,662 )     —         (3,662 )
    


 


 


Net Cash Provided by Financing Activities

     77,222       64,855       142,077  

Effect of exchange rate changes on cash and cash equivalents

     —         814       814  
    


 


 


Net Change In Cash & Cash Equivalents

     25,017       44,789       69,806  

Cash And Cash Equivalents At Beginning of Year

     68,975       6,659       75,634  
    


 


 


Cash And Cash Equivalents At End of Period

   $ 93,992     $ 51,448     $ 145,440  
    


 


 


 

13


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Statements of Cash Flows

 

    

For The Nine Months Ended

September 26, 2003


 
    

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


   

Total

Consolidated


 

Cash Flow From Operating Activities:

                        

Net Income

   $ 59,898     $ 5,196     $ 65,094  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation, depletion and amortization

     21,198       1,102       22,300  

Equity in earnings of affiliates

     (25,844 )     —         (25,844 )

Deferred income taxes

     10,120       —         10,120  

Other

     26       —         26  

Change in assets and liabilities:

                        

Decrease (increase) in accounts receivable

     108,217       (108,207 )     10  

Decrease in inventories

     4,105       1,406       5,511  

Decrease (increase) in prepaid expenses

     1,967       (352 )     1,615  

Decrease in accounts payable

     (9,624 )     (2,323 )     (11,947 )

Increase in income taxes payable

     11,221       —         11,221  

(Decrease) increase in intercompany and other liabilities

     (51,548 )     52,300       752  
    


 


 


Net Cash Provided by (Used in) Operating Activities

     129,736       (50,878 )     78,858  
    


 


 


Cash Flow From Investing Activities:

                        

Additions to property, plant & equipment

     (20,286 )     (2,188 )     (22,474 )

Proceeds from note receivable

     870       —         870  

Distributions from affiliates

     3,629       —         3,629  

Contingent acquisition payments

     (3,424 )     —         (3,424 )

Other long-term assets

     (1,440 )     —         (1,440 )
    


 


 


Net Cash Used in Investing Activities

     (20,651 )     (2,188 )     (22,839 )
    


 


 


Cash Flow from Financing Activities:

                        

Long-term debt borrowing

     100,000       —         100,000  

Long-term debt (repayment)

     (265,721 )     57,283       (208,438 )

Short-term debt borrowing

     60,000       —         60,000  

Short-term debt (repayment)

     (2,469 )     —         (2,469 )

Proceeds from stock options exercised

     7,118       —         7,118  

Payment of cash dividends

     (9,258 )     —         (9,258 )

Deferred financing costs

     (3,442 )     —         (3,442 )
    


 


 


Net Cash Provided by (Used in) Financing Activities

     (113,772 )     57,283       (56,489 )
    


 


 


Effect of exchange rate changes on cash and cash equivalents

     —         864       864  
    


 


 


Net Change In Cash & Cash Equivalents

     (4,687 )     5,081       394  

Cash And Cash Equivalents At Beginning of Year

     71,745       4,557       76,302  
    


 


 


Cash And Cash Equivalents At End of Period

   $ 67,058     $ 9,638     $ 76,696  
    


 


 


 

14


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

8. Armkel, LLC

 

On May 28, 2004, the Company completed the previously announced purchase of the remaining 50% of Armkel that it did not previously own from affiliates of Kelso for a purchase price of $253.7 million plus fees.

 

The Armkel acquisition was funded using available cash and by obtaining new Term A and B Loans through an amendment to the Company’s existing credit agreement. In connection with the amendment, the Company, among other things, was provided with a new Term A Loan in the amount of $100 million, and a new Term B Loan in the amount of $440 million, which were used to replace the Company’s existing credit facility of approximately $194 million, to replace Armkel’s principal credit facility of approximately $136 million and to provide $210 million to fund a portion of the purchase price for the transaction. The new Term B Loan has essentially the same terms as the replaced loans, but with more favorable interest rate provisions. Results of operations for the business are included in the Company’s consolidated financial statements from May 29, 2004.

 

Pro forma comparative net sales, net income and basic and diluted earnings per share for the nine months ended October 1, 2004 and September 26, 2003 are as follows:

 

    

Nine Months Ended

October 1, 2004


  

Nine Months Ended

September 16, 2003


(Dollars in thousands, except per share data)

 

   Reported

   Pro forma

   Reported

   Pro forma

Net Sales

   $ 1,057,086    $ 1,249,111    $ 770,127    $ 1,178,300

Net Income

     76,880      101,400      65,094      83,400

Earnings Per Share Basic

     1.25      1.65      1.08      1.39

Earnings Per Share Diluted

     1.19      1.57      1.03      1.32

 

The pro forma information gives effect to the Company’s purchase of Kelso’s interest in Armkel as if it occurred at January 1, 2003. Pro forma adjustments include the inventory step-up charge, equity appreciation rights, additional interest expense and the related income tax impact, as well as elimination of intercompany sales. In the current quarter, the reported and pro forma results are not applicable because the acquired business is included in the Company’s results.

 

Pro forma results of operations for the three months ended April 2, 2004, the year ended December 31, 2003 and the balance sheet as of April 2, 2004 were filed by the Company on Form 8-K on June 28, 2004.

 

The following table summarizes the preliminary purchase price allocation relating to purchasing Kelso’s 50% interest in Armkel. An independent appraisal is currently in process:

 

(In thousands)

 

    

Current Assets

   $ 244,682

Property, plant and equipment

     76,917

Tradenames and patents

     250,364

Goodwill

     311,661

Other long-term assets

     18,522
    

Total Assets acquired

     902,146

Current liabilities

     91,123

Long-term debt

     359,522

Other long-term liabilities

     37,553
    

Net assets acquired

   $ 413,948
    

 

The following table summarizes financial information for Armkel for the periods ending prior to May 28, 2004 during which the Company accounted for its 50% interest under the equity method.

 

(In thousands)

 

  

Three Months Ended

September 26, 2003


   Five Months Ended
May 28, 2004


   Nine Months Ended
September 26, 2003


Income statement data:

                    

Net sales

   $ 103,351    $ 192,767    $ 316,481

Gross profit

     57,602      109,915      180,613

Net income

     8,958      21,554      46,698

Equity in affiliate’s income recorded by the Company

     4,479      10,777      23,349

 

15


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The Company invoiced Armkel $10.2 million and $19.0 million for primarily administrative and management oversight services (which is included as a reduction of selling, general and administrative expenses), and purchased $0.8 million and $1.4 million of deodorant anti-perspirant inventory produced by Armkel in the first five months of 2004 and the first nine months of 2003, respectively. The Company sold Armkel $0.7 million and $1.9 million of Arm & Hammer products to be sold in international markets in the first five months of 2004 and the first nine months of 2003, respectively. The Company had a net open receivable from Armkel at December 31, 2003 of approximately $6.7 million that primarily related to administrative services, partially offset by amounts owed for inventory.

 

9. Short-term borrowings and Long-Term Debt

 

Short-term borrowings and long-term debt consist of the following:

 

(In thousands)

 

        Oct. 1, 2004

    Dec. 31, 2003

Syndicated Financing Loan

                  $ 230,000

Term A Loan

          $ 29,438        

Amount due 2004

   $ 373               

Amount due 2005

     2,236               

Amount due 2006

     5,217               

Amount due 2007

     7,452               

Amount due 2008 & subsequent

     14,160               

Term B Loan

            438,900        

Amount due 2004

   $ 1,100               

Amount due 2005

     4,400               

Amount due 2006

     4,400               

Amount due 2007

     4,400               

Amount due 2008 & subsequent

     424,600               

Convertible Debentures due on August 15, 2033

            100,000       100,000

Securitization of Accounts Receivable due on January 15, 2005

            100,000       56,300

Senior Subordinated Note (9 1/2%) due August 15, 2009

            225,000        

Discount on Senior Subordinated Note

            (1,043 )      

Various Debt from Brazilian Banks
$4,830 in 2004, $557 in 2005, $557 in 2006 and
$205 due in 2007

            6,149       7,356

Industrial Revenue Refunding Bond
Due in installments of $685 from 2004-2007 and $650 in 2008

            3,390       3,390
           


 

Total debt

            901,834       397,046
           


 

Less: current maturities

            112,158       65,897
           


 

Net long-term debt

          $ 789,676     $ 331,149
           


 

 

The principal payments required to be made are as follows:

 

(In thousands)

 

    

2004

   $ 6,988

2005

     107,878

2006

     10,859

2007

     12,742

2008

     13,993

2009 and subsequent

     749,374
    

     $ 901,834
    

 

16


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

On May 28, 2004, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) with several banks and other financial institutions, The Bank of Nova Scotia, Fleet National Bank and National City Bank, each as a documentation agent, Citicorp North America, Inc., as syndication agent, and J.P. Morgan Chase Bank, as administrative agent. The Credit Agreement provides for (i) a five year term loan in a principal amount of $100 million (the “Term A Loan”), (ii) a seven year term loan in a principal amount of $440 million, which term loan may be increased by up to an additional $250 million upon the satisfaction of certain conditions (the “Term B Loan,” and together with the Term A Loan, the “Term Loans”), and (iii) a five year multi-currency revolving credit and letter of credit facility in an aggregate principal amount of up to $100 million (the “Revolving Loans”). The Term Loans were used to finance the acquisition of the remaining 50% interest in Armkel not previously owned by the Company, pay amounts outstanding under Armkel’s principal credit facility of approximately $136 million and refinance the Company’s principal credit facility of approximately $194 million. The Revolving Loans, which are currently undrawn, are available for general corporate purposes. The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its domestic subsidiaries. Those domestic subsidiaries have also guaranteed the loan obligations under the Credit Agreement. The Term Loans and the Revolving Loans bear interest under one of two rate options, selected by the Company, equal to either (i) a eurocurrency rate (adjusted for any reserve requirements) (“Eurocurrency Rate”) or (ii) the greater of the prime rate, the secondary market rate for three-month certificates of deposit (adjusted for any reserve requirements) plus 1%, or the federal funds effective rate plus 0.5% (“Alternate Base Rate”), plus (b) an applicable margin. The applicable margin is determined by the Company’s then current leverage ratio. At the closing date of the Credit Agreement, the applicable margin was (a) 1.75% for the Eurocurrency Rate and (b) 0.75% for the Alternate Base Rate.

 

As a result of the purchase of the Kelso interest in Armkel, LLC, the Company assumed $225 million of 9.5% subordinated notes (“Notes”) that were issued on August 28, 2001 at a discount and are due in 2009, with interest paid semi-annually on February 15 and August 15. The effective yield on the Notes is approximately 9.62%. The terms of the Notes provide for an optional prepayment of principal at a premium. The issue discount is being amortized using the effective interest method. The Notes are guaranteed by the Company and certain of the Company’s domestic subsidiaries. The Notes contain various financial and non-financial covenants. In connection with the acquisition, a fair value appraisal of the notes is currently in process.

 

During July 2004, as a result of purchasing Kelso’s interest in Armkel, the Company amended its Accounts Receivable Securitization Agreement to increase the capacity that can be borrowed from $60 million to $100 million. The increase in borrowing was used to fund a voluntary bank debt payment on Term A Loan on August 4, 2004.

 

10. Goodwill, Tradenames and Other Intangible Assets

 

The following table discloses the carrying value of all intangible assets:

 

     October 1, 2004

   December 31, 2003

(In thousands)

 

   Gross
Carrying
Amount


   Accum.
Amort.


    Net

   Gross
Carrying
Amount


   Accum.
Amort.


    Net

Amortized intangible assets:

                                           

Tradenames

   $ 77,258    $ (12,011 )   $ 65,247    $ 69,645    $ (7,839 )   $ 61,806

Formulas

     22,320      (2,450 )     19,870      6,281      (1,430 )     4,851

Non Compete Agreement

     1,143      (321 )     822      1,143      (233 )     910
    

  


 

  

  


 

Total

   $ 100,721    $ (14,782 )   $ 85,939    $ 77,069    $ (9,502 )   $ 67,567
    

  


 

  

  


 

Unamortized intangible assets - Carrying value

                                           

Tradenames

   $ 286,505                   $ 51,807               
    

                 

              

Total

   $ 286,505                   $ 51,807               
    

                 

              

 

The increase in tradenames as compared to the values at December 31, 2003 is primarily due to the inclusion of tradenames acquired in connection with the purchase of Armkel and the final valuation adjustments associated with the Unilever brands acquired in 2003.

 

The Armkel tradenames are currently valued at their book value as of May 28, 2004. An appraisal is currently in process.

 

17


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The changes in the carrying amount of goodwill for the nine months ended October 1, 2004 are as follows:

 

(In thousands)

 

   Consumer

    Specialty

    Total

 

Balance December 31, 2003

   $ 236,851     $ 22,593     $ 259,444  

Tradename and fixed asset valuation adjustments

     (5,527 )     —         (5,527 )

Book value of Armkel’s goodwill on day of acquisition

     205,156       —         205,156  

Additional goodwill associated with Armkel purchase

     106,505       —         106,505  

Other

     —         (5 )     (5 )
    


 


 


Balance October 1, 2004

   $ 542,985     $ 22,588     $ 565,573  
    


 


 


 

Intangible amortization expense amounted to $4.8 million for the nine months of 2004 and $2.1 million for the same period of 2003. The estimated intangible amortization will be approximately $7.2 million in each of the next five years.

 

11. Comprehensive Income

 

The following table presents the Company’s Comprehensive Income for the three and nine months ended October 1, 2004 and September 26, 2003:

 

     Three Months Ended

    Nine Months Ended

 

(In thousands)

 

   Oct. 1, 2004

   Sept. 26, 2003

    Oct. 1, 2004

   Sept. 26, 2003

 

Net Income

   $ 27,401    $ 19,522     $ 76,880    $ 65,094  

Other Comprehensive Income, net of tax:

                              

Foreign exchange translation adjustments

     1,387      (874 )     3,584      3,500  

Interest rate swap agreements

     —        822       143      1,383  

Company’s portion of Armkel’s Accumulated

                              

Other Comprehensive Income (Loss)

     —        (303 )     2,294      (2,169 )
    

  


 

  


Comprehensive Income

   $ 28,788    $ 19,167     $ 82,901    $ 67,808  
    

  


 

  


 

12. Investment in Del Labs Inc.

 

On July 2, 2004, the Company announced that it has agreed to invest $30 million in a company formed by Kelso, to acquire Del Laboratories, Inc. The Company’s investment will be substantially in the form of convertible preferred stock, and will represent about 20% of the equity financing. Kelso will provide the remaining equity, with the participation of Del’s existing management team.

 

As part of this transaction, the Company will have certain rights with respect to the Orajel brand, including an option to acquire the business after three years. In the event that the Company does not exercise this option, the Company will have the right, subject to certain conditions, to convert its preferred stock into a 20% interest in the common stock of the new Del company.

 

The Company expects the transaction to close in this year’s fourth quarter subject to regulatory, financing and other customary conditions and will use cash on hand to fund the transaction.

 

13. Pension Disclosure

 

The following table presents the net periodic benefit cost for the Company’s Pension Plan and Post-retirement Plan for the three and nine months ending October 1, 2004 and September 26, 2003.

 

    

Pension Costs

Three Months Ended


   

Pension Costs

Nine Months Ended


 

(In thousands)

 

   Oct. 1, 2004

    Sept. 26, 2003

    Oct. 1, 2004

    Sept. 26, 2003

 

Components of Net Periodic Benefit Cost:

                                

Service cost

   $ 595     $ 37     $ 861     $ 111  

Interest cost

     1,525       363       2,621       1,089  

Expected return on plan assets

     (1,413 )     (315 )     (2,410 )     (945 )

Amortization of prior service cost

     1       1       3       3  

Recognized actuarial (gain) or loss

     126       75       376       225  
    


 


 


 


Net periodic benefit cost

   $ 834     $ 161     $ 1,451     $ 483  
    


 


 


 


 

18


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

    

Post-retirement Costs

Three Months Ended


   

Post-retirement Costs

Nine Months Ended


 

(In thousands)

 

   Oct. 1, 2004

    Sept. 26, 2003

    Oct. 1, 2004

    Sept. 26, 2003

 

Components of Net Periodic Benefit Cost:

                                

Service cost

   $ 140     $ 84     $ 389     $ 252  

Interest cost

     246       204       708       612  

Expected return on plan assets

     —         —         —         —    

Amortization of prior service cost

     (20 )     (20 )     (60 )     (60 )

Recognized actuarial (gain) or loss

     3       (22 )     6       (66 )
    


 


 


 


Net periodic benefit cost

   $ 369     $ 246     $ 1,043     $ 738  
    


 


 


 


 

The Company estimates it will be required to make a cash contribution to its pension plans of approximately $1.5 million during 2004. The contribution is $0.8 million higher than previously estimated due to the inclusion of Armkel’s pension plan.

 

In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1 “Accounting and Disclosure Requirements to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The adoption of the provisions of FSP 106-1 in this quarter did not have a significant impact to the Company’s postretirement accumulated projected benefit obligation or net periodic benefit cost.

 

14. Commitments, contingencies and guarantees

 

  a. In December 1981, the Company formed a partnership with a supplier of raw materials which mines and processes sodium mineral deposits owned by each of the two partners in Wyoming. The Company purchases the majority of its sodium raw material requirements from the partnership. This agreement terminates upon two years’ written notice by either company. The Company has an annual commitment to purchase 240,000 tons, based upon market price. There are no other material transactions with the partnership or the Company’s partner.

 

  b. On January 17, 2002, a petition for appraisal, Cede & Co., Inc. and GAMCO Investors, Inc. v. Medpointe Healthcare Inc., Civil Action No. 19354, was filed in the Court of Chancery of the State of Delaware demanding a determination of the fair value of shares of Medpointe. The action was brought by purported former shareholders of Carter-Wallace in connection with the merger on September 28, 2001 of MCC Acquisition Sub Corporation with and into Carter-Wallace. The merged entity subsequently changed its name to Medpointe. The petitioners sought an appraisal of the fair value of their shares in accordance with Section 262 of the Delaware General Corporation Law. The matter was heard by the court on March 10 and 11, 2003, at which time the petitioners purportedly held approximately 2.3 million shares of Medpointe. An additional post-trial hearing was held on January 20, 2004 to address the valuation of the Company. On July 30, 2004 the Court issued a letter informing the parties that it had determined that the fair value of a share of Carter-Wallace on the Merger Date to be $24.45, and that interest at the annual rate of 7.5% compounded quarterly should be added to the award.

 

Medpointe and certain former Carter-Wallace shareholders were party to an indemnification agreement pursuant to which such shareholders would be required to indemnify Medpointe from a portion of the damages suffered by Medpointe in relation to the exercise of appraisal rights by the former Carter-Wallace shareholders in the merger. Pursuant to the agreement, the shareholders agreed to indemnify Medpointe for 40% of any Appraisal Damages (defined as the recovery greater than the per share merger price times the number of shares in the appraisal class) suffered by Medpointe in relation to the merger; provided that if the total amount of Appraisal Damages exceeds $33.3 million, then the indemnifying stockholders will indemnify Medpointe for 100% of any damages suffered in excess of that amount. The Company, in turn, was party to an agreement with Medpointe pursuant to which it agreed to indemnify Medpointe and certain related parties against 60% of any Appraisal Damages for which Medpointe remains liable. The maximum liability to the Company pursuant to the indemnification agreement was $12 million.

 

On March 27, 2003, GAMCO Investors, Inc. filed another complaint in the New York Supreme Court seeking damages from MedPointe, the former directors of Carter-Wallace, and one of the former shareholders of Carter-Wallace. The complaint alleges breaches of fiduciary duty in connection with certain employment agreements with former Carter-Wallace executives, the sale of Carter Wallace’s consumer products business to the Company and the merger of MCC Acquisition Sub Corporation with and into Carter-Wallace. The complaint sought monetary damages and equitable relief, including among other things, invalidation of the transactions. On May 21, 2004, the court dismissed certain of the plaintiffs’ claims. The Company was not named as a defendant in this action and believed it had no liability.

 

On October 12, 2004, Medpointe and the plaintiffs settled both of the legal actions described above. In connection with the settlement of the legal actions, the Company entered into a settlement agreement and release with Medpointe pursuant to which, in settlement of the Company’s indemnification obligations or other claims that Medpointe may have against the Company and certain persons related to the Company, the Company agreed to pay Medpointe $8.1 million, of which $4.9 million is included in interest expense in the third quarter of 2004 and $3.2 million was applied towards goodwill as of October 1, 2004. Payment was made by the Company on October 13, 2004.

 

19


Table of Contents

CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

  c. The Company’s distribution of condoms under the Trojan and other trademarks is regulated by the U.S. Food and Drug Administration (FDA). Certain of the Company’s condoms and similar condoms sold by its competitors, contain the spermicide nonoxynol-9 (N-9). The World Health Organization and other interested groups have issued reports suggesting that N-9 should not be used rectally or for multiple daily acts of vaginal intercourse, given the ingredient’s potential to cause irritation to human membranes. The Company expects the FDA to issue non-binding draft guidance concerning the labeling of condoms with N-9, although the timing of such draft guidance remains uncertain. The Company believes that condoms with N-9 provide an acceptable added means of contraceptive protection and is cooperating with the FDA concerning the appropriate labeling revisions, if any. However, the Company cannot predict the outcome of the FDA review. While awaiting further FDA guidance, the Company has implemented interim labeling revisions that caution against rectal use and more-than-once-a-day vaginal use of N-9-containing condoms, and has launched a public information campaign to communicate these messages to the affected communities. If the FDA or state governments promulgate rules which prohibit or restrict the use of N-9 in condoms (such as new labeling requirements), the financial condition and operating results of the Company could suffer.

 

  d. Fleming Companies, Inc., a customer of the Company, has filed a voluntary petition for bankruptcy. Subsequently, Fleming brought legal action against the Company seeking the recovery of certain alleged preference payments and overpayments made to the Company in the amount of approximately $4.2 million. In addition, Fleming claims that it is owed approximately $1.9 million relating to a vendor agreement with the Company. The Company will vigorously defend the lawsuit but cannot predict with certainty the outcome. However, in the opinion of management, the ultimate amount of liability, if any, will not have a material adverse effect on the Company’s financial position.

 

  e. The Company has commitments to acquire approximately $21 million of raw material and packaging supplies from its vendors. The packaging supplies are in either a converted or non-converted status. This enables the Company to respond quickly to changes in customer orders/requirements.

 

  f. The Company has outstanding letters of credit of approximately $7.1 million with several banks which guarantee payment for such things as insurance claims in the event of the Company’s insolvency, a year’s worth of lease payments on a warehouse, and 200 days of interest on an Industrial Revenue Bond borrowing.

 

  g. In connection with the acquisition of the oral care brands from Unilever, the Company will make additional performance-based payments of a minimum of $5 million and a maximum of $12 million over the eight year period following the date of acquisition. All payments will be accounted for as additional purchase price. The Company paid approximately $1.9 million in 2004 based upon 2004 half year and 2003 operating performance since acquisition.

 

  h. The Company, in the ordinary course of its business, is the subject of, or a party to, various pending or threatened legal actions. The Company believes that any ultimate liability arising from these actions will not have a material adverse effect on its financial position.

 

15. Reclassification

 

Certain prior year amounts have been reclassified in order to conform with the current year presentation.

 

20


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Results of Operations

 

The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment for the third quarter and nine month periods of 2004 compared to the third quarter and nine month periods of 2003. With the acquisition of the remaining 50% interest in Armkel that the Company did not previously own from affiliates of Kelso on May 28, 2004, and Armkel’s subsequent merger with the Company, the results of operations of the former Armkel business are consolidated in the accompanying financial statements from the date of acquisition.

 

Consolidated Results

 

Net Sales

 

Net sales for the quarter increased by $154.7 million or 58.2% to $420.3 million, as compared to $265.6 million in the previous year’s third quarter. Of the increase, $114.8 million reflects sales of products formerly owned by Armkel and now included in Company sales as a result of the acquisition of Kelso’s interest in Armkel late in the second quarter and $27.6 million reflects sales resulting from the acquisition of the former Unilever oral care business in the fourth quarter of 2003. Other increases included the reversal of prior year promotion accruals of approximately $1.3 million as a result of a change in estimate and favorable foreign exchange rates of $0.8 million (excluding the impact of the former Armkel subsidiaries). For the nine month period, net sales increased $287.0 million or 37.3% to $1,057.1 million. The primary reasons for the sales increase are the sales of products formerly owned by Armkel of $158.3 million and sales of $85.8 million resulting from the acquisition of the Unilever oral care business. Sales also increased due to favorable foreign exchange rates of $3.6 million, the reversal of the previously mentioned prior year promotion reserves of $4.3 million and the effect of six extra days in the first quarter of this year’s fiscal calendar.

 

Operating Costs

 

The Company’s gross margin in the current quarter increased to 38.2% from 30.3% in the prior year. The increase is in large part a result of the products formerly owned by Armkel and the oral care business acquired from Unilever as these products carry a higher gross profit margin than existing Company products. The margin was also impacted by the effect on the third quarter of 2004 of the Armkel acquisition related inventory step up charge of $6.2 million, and the reversal of the previously mentioned prior year promotion reserves. In addition, efficient promotion spending, and supply chain efficiencies offset commodity price increases for the quarter and new product launch costs were higher in last year’s third quarter. Gross margin for the nine month period was 35.6% as compared to 30.4% for the nine month period of 2003. The reasons for the improvement are consistent with those affecting the current quarter and includes a second quarter 2004 plant impairment charge of $1.5 million.

 

Marketing expenses in the current quarter increased by $28.1 million to $51.0 million as compared to the same period of 2003 primarily as a result of both the Armkel and Unilever oral care business acquisitions. Marketing expenses for the Company’s pre-existing product lines were essentially unchanged. For the nine month period, marketing expenses of $111.3 million were $45.2 million higher than in 2003 for the same reasons as referenced above, as well as an increase in advertising expenses in support of certain household deodorizing and oral care products.

 

Selling, general and administrative (“SG&A”) expenses in the current quarter increased $27.4 million as compared to the same period last year. This is primarily a result of costs associated with the Armkel business of approximately $18.0 million, higher broker commission costs of $1.6 million as a result of higher sales, higher compensation related costs of $3.9 million and costs to comply with certain provisions of the Sarbanes-Oxley Act of 2002 and related regulations of $1.1 million. SG&A expenses for the nine month period increased $47.1 million as compared to the same period last year. This is primarily a result of costs associated with the Armkel business of approximately $25.0 million, higher broker commission costs of $4.3 million as a result of higher sales, tradename amortization expenses associated with the acquired Unilever oral care business of $1.9 million, higher compensation related costs of $6.9 million, higher information system costs of $1.8 million and costs to comply with certain provisions of the Sarbanes-Oxley Act of 2002 and related regulations of $2.3 million.

 

Other Income and Expenses

 

The decrease in equity in earnings of affiliates of $4.0 million in the current quarter as compared to the year ago period was entirely due to the Company’s acquisition of Kelso’s interest in Armkel on May 28, 2004. The combined results of other equity investments, Armand Products Company (“Armand”) and The Armakleen Company (“Armakleen”), slightly increased. For the nine month period the decrease in equity in earnings of affiliates of $12.1 million is primarily due to the reasons noted for the third quarter. Armkel’s net income for the five months ended May 28, 2004 was reduced as a result of an international tradename impairment charge of approximately $3.2 million (net of tax). The impact to the Company was a reduction of earnings in equity of affiliates of approximately $1.6 million. Armkel’s nine month 2003 results were positively impacted by a litigation settlement, partially offset by an impairment of an asset held for sale.

 

21


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

 

Other income and expense in 2004 results from a gain on the sale of a warehouse by our Canadian subsidiary and in 2003 reflect foreign exchange gains by the Company’s Brazilian subsidiary.

 

Interest expense increased in the quarter and the nine month period as a result of interest associated with the third quarter settlement of the former Carter-Wallace shareholder appraisal suit of $4.9 million, interest associated with the assumption of the $225 million principal amount of Armkel’s 9.5% Senior Subordinated Notes, the increase in debt required to purchase Kelso’s interest in Armkel and to purchase the Unilever oral care business in late 2003, partially offset by the settlement of the Company’s remaining fixed rate interest rate swap contracts in the first quarter of 2004.

 

The loss on early extinguishment of debt pertained to existing deferred financing costs that were written off when the Company refinanced its bank debt.

 

Taxation

 

The effective tax rate for the nine month period was 31.5% as compared to 31.7% for the same period of last year. Last year’s tax rate reflected the settlement of a state tax dispute, offset by a higher state tax rate and taxes associated with Armkel’s sale of its Italian subsidiary, which helped to depress the tax rate. The current year rate was impacted favorably by the estimated amount of additional research and development tax credits included in recently filed and amended income tax returns.

 

Segment results

 

As a result of purchasing the Kelso interest, the Company has redefined its operating segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International, and Specialty Products Division (“SPD”).

 

Segment revenues are derived from the sale of the following products:

 

Segment


 

Products


Consumer Domestic

  Deodorizing and cleaning, laundry, and personal care products

Consumer International

  Primarily personal care products

SPD

  Specialty chemical products

 

The domestic results of the acquired Armkel business since May 29, 2004 are included in the Consumer Domestic segment and its international subsidiaries (in addition to the Company’s existing international consumer subsidiary) comprise the Consumer International segment. There has been no change to the SPD segment. There are no material intersegment sales. The Company’s earnings, prior to its acquisition of Kelso’s interest in Armkel, attributable to the Company’s equity investment in Armkel’s domestic and international operations are included in Income Before Taxes and Minority Interest of the Consumer Domestic and Consumer International segments, respectively. The Company’s earnings attributable to its equity investment in Armand Products and the Armakleen Company are included in Income Before Taxes and Minority Interest of the Corporate segment. Prior to purchasing Kelso’s interest in Armkel, the Company’s segments were: Church & Dwight Consumer, Armkel, Church & Dwight SPD and Other Equity Affiliates.

 

22


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

 

Segment sales and income before taxes and minority interest for the third quarter and nine month period of 2004 and 2003 are as follows:

 

(in thousands)

 

   Consumer
Domestic


   Consumer
Internat’l


   SPD

   Corporate

   Total

Net Sales

                                  

Third Quarter 2004

   $ 299,285    $ 69,890    $ 51,135      —      $ 420,310

Third Quarter 2003

     208,604      9,812      47,150      —        265,566

2004 Year to Date

     794,205      107,773      155,108      —        1,057,086

2003 Year to Date

     605,223      26,961      137,943      —        770,127

Income Before Taxes and Minority Interest (1)

                                  

Third Quarter 2004

     28,237      4,922      3,866      1,144      38,169

Third Quarter 2003

     22,305      2,760      3,642      683      29,390

2004 Year to Date

     82,365      13,865      13,063      2,983      112,276

2003 Year to Date

     72,413      9,037      11,332      2,494      95,276

Total Assets

                                  

October 1, 2004

   $ 1,368,932    $ 263,941    $ 166,621    $ 65,886    $ 1,865,380

December 31, 2003

   $ 841,036    $ 50,868    $ 166,953    $ 60,760    $ 1,119,617

(1) In determining Income Before Taxes and Minority Interest, Interest Expense, Interest Income, Loss on Early Extinguishment of Debt and Other Income (Expense) were allocated to the segments based upon each segments’ relative Operating Profit.

 

Consumer Domestic

 

For the third quarter of 2004, Consumer Domestic Net Sales increased $90.7 million or 43.5% to $299.3 million. The increase includes sales of $56.0 million associated with the domestic results of the former Armkel business, $27.2 million of sales associated with the fourth quarter 2003 acquisition of the oral care brands from Unilever and the reversal of $0.9 million of prior year promotion reserves due to a change in estimate. At the product line level, sales of deodorizers were moderately higher than last year and existing personal care products were flat. Laundry consumption was also higher than last year, although shipments were flat due to the timing of promotional activities. At the brand level, sales of Arm & Hammer and Xtra liquid laundry detergent, Arm & Hammer Baking Soda and Arm & Hammer Super Scoop were all significantly higher than last year, while sales of Arm & Hammer powder laundry detergent, fabric softener and antiperspirants were lower.

 

For the nine month period of 2004, Consumer Domestic Net Sales increased $189.0 million or 31.2% to $794.2 million. The increase includes sales of $79.6 million associated with the domestic results of the former Armkel business, $84.1 million of sales associated with the fourth quarter 2003 acquisition of the oral care brands from Unilever and the reversal of $3.8 million of prior year promotion reserves due to a change in estimate. At the product line level, deodorizing products and laundry products net sales were higher than last year and existing personal care products decreased. At the brand level, sales of Arm & Hammer and Xtra liquid laundry detergent, Arm & Hammer Baking Soda, Arm & Hammer toothpaste and Arm & Hammer Super Scoop were higher than last year while sales of Arm & Hammer powder laundry detergent and antiperspirants were lower. The nine month period was also affected by six extra days in the first fiscal quarter of this year as compared to the first fiscal quarter of 2003.

 

Consumer Domestic Income before Taxes and Minority Interest for the current quarter increased $5.9 million to $28.2 million mainly due to operating results associated with the former Armkel business (despite the impact of the inventory step up charge of $4.6 million) and the contribution from the acquired Unilever brands. This increase was partially offset by higher allocated interest expense (which includes the segment’s allocation of the interest expense element of the Medpointe Settlement Agreement) and as a result of purchasing Kelso’s interest in Armkel, the elimination of earnings in equity of affiliates.

 

For the nine month period, Income before Taxes and Minority Interest increased $10.0 million to $82.4 million due to operating results associated with the former Armkel business (despite the impact of the inventory step up charge of $8.0 million) and the contribution from the acquired Unilever brands. This increase was partially offset by a plant impairment charge of $1.5 million, higher allocated interest expense (which includes the segment’s allocation of the interest expense element of the Medpointe Settlement Agreement), the segment’s allocation of the deferred financing cost write-off and as a result of purchasing Kelso’s interest in Armkel, a reduction of earnings in equity of affiliates.

 

The Company expects to significantly increase its marketing spending in the fourth quarter compared to the same period last year. In part, this increase is to support several personal care products introduced earlier in the year, including Arm & Hammer Enamel Care toothpaste, a patented product which combines the cleaning and whitening properties of baking soda with fluoride and liquid calcium to fill tooth surfaces and restore enamel luster; and Trojan® condoms with Warming Sensations, a unique lubricant system which warms the skin on contact for enhanced pleasure. In addition, the increase reflects new initiatives in support of the acquired oral care products, particularly Mentadent® toothpaste and toothbrushes and Close-Up® toothpaste. On the household products side of the business, there will also be marketing spending to support the new cat litter product, Arm & Hammer Multi-Cat, designed for households with two or more cats.

 

23


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

 

Consumer International

 

Consumer International net sales for the current quarter as compared to the same period of last year increased $60.1 million to $69.9 million and for the nine month period increased $80.8 million to $107.8 million as a result of the inclusion of the former Armkel business results following the acquisition and the effect of favorable foreign exchange rates.

 

Income before Taxes and Minority Interest increased $2.2 million in the current quarter to $4.9 million and increased $4.8 million to $13.9 million for the nine month period as a result of the inclusion of the former Armkel business results since the acquisition (despite the impact of the inventory step up charge of $1.6 million in the current quarter and $2.3 for the nine month period.). This increase was partially offset by the higher interest expense and the segment’s allocation of the deferred financing cost write-off and the Medpointe settlement agreement.

 

Specialty Products

 

Specialty Products Net Sales grew $4.0 million or 8.5% to $51.1 million in the current quarter, as a result of higher sales of Animal Nutrition and Specialty Chemical products and favorable foreign exchange rates. For the nine month period, net sales increased $17.2 million or 12.4% to $155.1 million for the same reasons as are applicable to the current quarter.

 

Specialty Products Income before Taxes and Minority Interest increased by $0.2 million to $3.9 million primarily due to higher income associated with higher net sales, partially offset by an allocation of higher interest expense and the deferred financing write-off. For the nine month period, Income before Taxes and Minority Interest increased $1.7 million to $13.1 million. The reasons for the nine month increase are consistent with the third quarter and were also impacted by the extra shipping days in the first quarter of 2004 as compared to the first quarter of 2003.

 

Liquidity and Capital Resources

 

The Company had outstanding total debt of $901.8 million and cash of $145.4 million (of which approximately $48.0 million resides in foreign subsidiaries). This compares to total debt of $397.0 million at December 31, 2003. The reason for the increase of total debt since December 31, 2003 is due to the Company’s assumption of $225 million principal amount of Armkel’s 9.5% Senior Subordinated Notes due 2009, the Company’s assumption of Armkel’s bank debt of approximately $136 million and additional amounts borrowed in connection with the acquisition of Kelso’s interest in Armkel of approximately $254 million. The $613 million increase of debt was partially offset by debt repayments of approximately $108 million.

 

The Company entered into an amended and restated credit agreement (the “Credit Agreement”) with several banks and other financial institutions, The Bank of Nova Scotia, Fleet National Bank and National City Bank, each as a documentation agent, Citicorp North America, Inc., as syndication agent, and J.P. Morgan Chase Bank, as administrative agent. The Credit Agreement provides for (i) a five year term loan in a principal amount of $100 million (the “Term A Loan”), (ii) a seven year term loan in the principal amount of $440 million, which term loan may be increased by up to an additional $250 million upon the satisfaction of certain conditions (the “Term B Loan,” and together with the Term A Loan, the “Term Loans”), and (iii) a five year multi-currency revolving credit and letter of credit facility in an aggregate principal amount of up to $100 million (the “Revolving Loans”). The Term Loans were used to finance the acquisition of the remaining 50% interest in Armkel not previously owned by the Company, pay amounts outstanding under Armkel’s principal credit facility of approximately $136 million and refinance the Company’s principal credit facility of approximately $194 million. The Revolving Loans, which are currently undrawn, are available for general corporate purposes. The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its domestic subsidiaries. Those domestic subsidiaries have also guaranteed the loan obligations under the Credit Agreement. The Term Loans and the Revolving Loans bear interest under one of two rate options, selected by the Company, equal to either (i) a eurocurrency rate (adjusted for any reserve requirements) (“Eurocurrency Rate”) or (ii) the greater of the prime rate, the secondary market rate for three-month certificates of deposit (adjusted for any reserve requirements) plus 1%, or the federal funds effective rate plus 0.5% (“Alternate Base Rate”), plus (b) an applicable margin. The applicable margin is determined by the Company’s current leverage ratio. At the closing date of the Credit Agreement, the applicable margin was (a) 1.75% for the Eurocurrency Rate and (b) 0.75% for the Alternate Base Rate.

 

The principal debt payments required to be made are as follows:

 

(In thousands)

 

    

2004

   $ 6,988

2005

     107,878

2006

     10,859

2007

     12,742

2008

     13,993

2009 and subsequent

     749,374
    

     $ 901,834
    

 

24


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

 

During July 2004, as a result of purchasing Kelso’s interest in Armkel, the Company amended its Accounts Receivable Securitization Agreement to increase the capacity that can be borrowed from $60 million to $100 million. The proceeds of the increased borrowing were used to make a voluntary Term A Loan payment on August 4, 2004.

 

Adjusted EBITDA is a required component of the financial covenants contained in the Company’s primary credit facility and management believes that the presentation of Adjusted EBITDA is useful to investors as a financial indicator of the Company’s ability to service its indebtedness. Adjusted EBITDA may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to cash flows from operating activities, which is determined in accordance with accounting principles generally accepted in the United States. Financial covenants include a total debt to Adjusted EBITDA leverage ratio and an interest coverage ratio, which if not met, could result in an event of default and trigger the early termination of the credit facility, if not remedied within a certain period of time. Adjusted EBITDA was approximately $180.6 million for the first 9 months of 2004. The leverage ratio (total debt to Adjusted EBITDA) for the 12 months ended October 1, 2004 which, under the loan agreement, permits the inclusion of Armkel’s EBITDA prior to its acquisition by the Company for pro forma purposes was approximately 3.14 versus the agreement’s maximum 4.25, and the interest coverage ratio (Adjusted EBITDA to total interest expense) was approximately 6.04 versus the agreement’s minimum of 3.0. This credit facility is secured by the assets of the Company and certain domestic subsidiaries. The reconciliation of Net Cash Provided by Operating Activities (the most directly comparable GAAP financial measure) to Adjusted EBITDA is as follows (in thousands):

 

Net Cash Provided by Operating Activities

   $ 143,963  

Interest Expense

     29,336  

Current Income Tax Provision

     22,170  

Distributions from Affiliates

     4,301  

Change in Working Capital and Other Liabilities

     (28,677 )

Investment Income

     (1,699 )

Deferred Financing Write-off

     7,995  

Other

     3,241  
    


Adjusted EBITDA (per loan agreement)

   $ 180,630  
    


Net Cash Used in Investing Activities

   $ (217,048 )
    


Net Cash Provided by Financing Activities

   $ 142,077  
    


 

During the nine months of 2004, cash flow from operating activities was $144.0 million. Major factors affecting cash flow from operating activities included operating earnings before non-cash charges for depreciation and amortization, the write-off of deferred financing costs and a decrease in working capital. Operating cash flow, together with an increase in bank debt, distributions from affiliates, proceeds from stock option exercises and existing cash, were used to fund the purchase of Kelso’s interest in Armkel, additions to property, plant and equipment, payment of dividends and debt repayments.

 

On July 2, 2004, the Company announced that it has agreed to invest $30 million in a company formed by Kelso & Company, a private equity group, to acquire Del Laboratories, Inc. The Company’s investment will be substantially in the form of convertible preferred stock, and will represent about 20% of the equity financing. Kelso & Company, New York, will provide the remaining equity, with the participation of Del’s existing management team.

 

As part of this transaction, the Company will have certain rights with respect to the Orajel brand, including an option to acquire the business after three years. In the event that the Company does not exercise this option, the Company will have the right, subject to certain conditions, to convert its preferred stock into a 20% interest in the common stock of the new Del Company.

 

The Company expects the transaction to close in this year’s fourth quarter subject to regulatory, financing and other customary conditions and will use cash on hand to fund the transaction.

 

The Company’s cash and cash equivalents will be used to invest in Del Labs, make voluntary debt repayments, pay cash dividends, make investments in property, plant and equipment and support operating needs.

 

Recent Accounting Pronouncements

 

In August 2003, the Company issued $100 million of 5.25% convertible senior debentures that may be converted into shares of the Company’s common stock prior to maturity at an initial conversion price of approximately $31.00 per share, subject to adjustment in certain circumstances. Because of the inclusion of the contingent convertibility feature of the debentures, the Company’s diluted net income per common share does not give effect to the dilution from the conversion of the debentures until the Company’s share price exceeds 120% of the initial conversion price or until the occurrence of certain specified events.

 

The Emerging Issues Task Force (EITF) concluded in EITF Issue 04-8: The Effect of Contingently Convertible Debt on Diluted Earnings per Share that contingently convertible debt (“Co-Cos”) be treated for diluted EPS purposes as if converted from debt to equity, beginning with the date the contingently convertible debt instrument is initially issued, even if the triggering events (such as stock price) have not yet occurred. The effective date would be reporting periods ending on or after December 15, 2004 and prior period EPS amounts presented for comparative purposes, would have to be restated.

 

25


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

 

The change in accounting rules for reporting Co-Cos will have an estimated $0.02 dilutive effect on earnings per share in 2004.

 

In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1 “Accounting and Disclosure Requirements to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The adoption of the provisions of FSP 106-1 in this quarter did not have a significant impact to the Company’s postretirement accumulated projected benefit obligation or net periodic benefit cost.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Company is facing higher costs for several categories of raw and packaging materials, particularly those based on energy prices. The Company has successful strategies in place to improve its margin structure, and will intensify these strategies to counter the effect of these cost increases. These strategies include traditional cost reduction programs designed to improve supply chain and organizational efficiency; more efficient promotion spending using recently developed analytical tools; and selective price increases.

 

ITEM 4. CONTROLS AND PROCEDURES

 

  a. Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

  b. Change in Internal Control over Financial Reporting

 

No change in the Company’s internal control over financial reporting occurred during the Company’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Cautionary Note on Forward-Looking Statements

 

This report contains forward-looking statements relating, among others, to short- and long-term financial objectives, sales and earnings growth, gross profit margin, earnings per share, non-cash accounting charges, increased marketing and R&D spending, new product launches, adoption of new accounting guidance, effect of the Company’s fiscal calendar, and financial forecasts. These statements represent the intentions, plans, expectations and beliefs of Church & Dwight, and are subject to risks, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. The uncertainties include assumptions as to market growth and consumer demand (including the effect of political and economic events on consumer demand), increases in raw material, packaging and energy prices, the Company’s ability to raise prices or reduce promotion spending, the Company’s ability to implement cost reduction programs in response to commodity price increases, the financial condition of major customers, trade, competitive and consumer reactions to the Company’s products and other factors described in Church & Dwight’s quarterly and annual reports filed with the SEC.

 

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the U.S. Securities and Exchange Commission. This discussion is provided in reliance upon the Private Securities Litigation Reform Act of 1995.

 

26


Table of Contents

PART II - Other Information

 

ITEM 6. EXHIBITS

 

Exhibits

 

(31.1) Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.

 

(31.2) Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.

 

(32.1) Certification of the Chief Executive Officer of Church & Dwight Co., Inc. pursuant to Rule 13a-14(b) under the

Exchange Act and 18 U.S.C. Section 1350.

 

(32.2) Certification of the Chief Financial Officer of Church & Dwight Co., Inc. pursuant to Rule 13a-14(b) under the

Exchange Act and 18 U.S.C. Section 1350.

 

27


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CHURCH & DWIGHT CO., INC.
    (REGISTRANT)
DATE: November 9, 2004  

/s/ Zvi Eiref


    ZVI EIREF
    VICE PRESIDENT FINANCE
DATE: November 9, 2004  

/s/ Gary P. Halker


    GARY P. HALKER
    VICE PRESIDENT FINANCE AND TREASURER

 

28


Table of Contents

EXHIBITS

 

(31.1)   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
(31.2)   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
(32.1)   Certification of the Chief Executive Officer of Church & Dwight Co., Inc. pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
(32.2)   Certification of the Chief Financial Officer of Church & Dwight Co., Inc. pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.

 

29