10-Q 1 f3rdq_01.txt THIRD QUATER 2001 10Q 1 of 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file Number 1-10585 CHURCH & DWIGHT CO., INC. (Exact name of registrant as specified in its charter) Delaware 13-4996950 (State of incorporation) (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 ---------- ---------- As of November 2, 2001, there were 39,098,518 shares of Common Stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited)
Three Months Ended Nine Months Ended ------------------------------ ----------------------------- Sept. 28 Sept. 29, Sept. 28, Sept. 29, (In thousands, except per share data) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Net Sales $270,627 $202,451 $784,249 $598,805 Cost of sales 166,524 112,307 489,049 334,342 ----------------------------- ------------------------------ Gross profit 104,103 90,144 295,200 264,463 Advertising, consumer and trade promotion expenses 52,250 47,857 144,701 139,143 Selling, general and administrative expenses 26,018 22,070 81,207 67,098 Impairment and other items - 21,911 - 21,911 ----------------------------- ------------------------------ Income/(Loss) from Operations 25,835 (1,694) 69,292 36,311 Equity in earnings of affiliates 886 855 3,069 2,033 Investment income 360 399 1,211 1,584 Other income/(expense) (110) (274) (1,453) (161) Interest expense (3,278) (1,229) (5,128) (4,083) ----------------------------- ------------------------------ Income before minority interest and taxes 23,693 (1,943) 66,991 35,684 Minority Interest 29 162 3,783 324 ----------------------------- ------------------------------ Income/(loss) before taxes 23,664 (2,105) 63,208 35,360 Income tax expense/(benefit) 8,418 (869) 22,337 12,489 ----------------------------- ------------------------------ Net Income/(Loss) 15,246 (1,236) 40,871 22,871 Retained earnings at beginning of period 296,907 272,600 276,700 253,885 ----------------------------- ------------------------------ 312,153 271,364 317,571 276,756 Dividends paid 2,924 2,679 8,342 8,071 ----------------------------- ------------------------------ Retained earnings at end of period $309,229 $268,685 $309,229 $268,685 ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding - Basic 39,011 38,235 38,803 38,355 Weighted average shares outstanding - Diluted 41,037 39,636 40,724 39,931 ------------------------------------------------------------------------------------------------------------------------- Earnings Per Share: Net income per share - Basic $0.39 ($0.03) $1.05 $0.60 Net income per share - Diluted $0.37 ($0.03) $1.00 $0.57 ------------------------------------------------------------------------------------------------------------------------- Dividends Per Share: $0.075 $0.07 $0.215 $0.21 -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) Sept. 28, 2001 Dec. 31, 2000 --------------------------------------------------------------------------------- ---------------- --------------- Assets (Unaudited) --------------------------------------------------------------------------------- ---------------- --------------- Current Assets Cash and cash equivalents $36,750 $21,573 Short-term investments 997 2,990 Accounts receivable, less allowances of $3,941 and $2,052 106,934 64,958 Inventories (Note 2) 106,743 55,165 Deferred income taxes 12,844 11,679 Prepaid expenses 10,485 6,162 Notes receivable and current portion of note receivable 8,890 - ---------------- --------------- Total Current Assets 283,643 162,527 --------------------------------------------------------------------------------- ---------------- --------------- Property, Plant and Equipment (Note 3) 239,375 168,570 Equity Investment in Affiliates 128,832 19,416 Long-Term Supply Contracts 5,005 8,152 Goodwill and Other Intangibles 243,763 83,974 Other Assets 30,786 12,993 --------------------------------------------------------------------------------- ---------------- --------------- Total Assets $931,404 $455,632 --------------------------------------------------------------------------------- ---------------- --------------- Liabilities and Stockholders' Equity --------------------------------------------------------------------------------- ---------------- --------------- Current Liabilities Short-term borrowings $1,850 $13,178 Accounts payable and accrued expenses 174,628 129,268 Current portion of long-term debt 685 685 Income taxes payable 11,872 6,007 ---------------- --------------- Total Current Liabilities 189,035 149,138 --------------------------------------------------------------------------------- ---------------- --------------- Long-Term Debt 415,133 20,136 Deferred Income Taxes 14,516 17,852 Deferred and Other Long-Term Liabilities 17,676 15,009 Nonpension Postretirement and Postemployment Benefits 15,999 15,392 Minority Interest 1,742 3,455 Commitments and Contingencies (Note 10) 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 46,660,988 shares 46,661 46,661 Additional paid-in capital 28,217 22,514 Retained earnings 309,229 276,700 Accumulated other comprehensive income (loss) (10,748) (9,389) ---------------- --------------- 373,359 336,486 Less common stock in treasury, at cost - 7,587,070 shares in 2001 and 8,283,086 shares in 2000 (96,056) (101,836) --------------------------------------------------------------------------------- ---------------- --------------- Total Stockholders' Equity 277,303 234,650 --------------------------------------------------------------------------------- ---------------- --------------- Total Liabilities and Stockholders' Equity $931,404 $455,632 --------------------------------------------------------------------------------- ---------------- --------------- See Notes to Consolidated Financial Statements
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Nine Months Ended ------------------------------------- (Dollars in thousands) Sept. 28, 2001 Sept. 29, 2000 ----------------------------------------------------------------------------- ------------------- ------------------ Cash Flow From Operating Activities ----------------------------------------------------------------------------- ------------------- ------------------ Net Income $40,871 $22,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 19,649 16,464 Equity in income from affiliates (3,069) (2,033) Deferred income taxes 1,696 (5,398) Disposal of fixed assets - 14,324 Other (782) (241) Change in assets and liabilities (net of effect of acquisitions): (Increase) in accounts receivable (29,686) (2,245) (Increase)/decrease in inventories (11,540) 9,622 (Increase) in prepaid expenses (79) (788) (Decrease)/increase in accounts payable (11,722) 22,896 Increase/(decrease) in income taxes payable 9,242 (3,328) Increase in other liabilities 2,009 810 ----------------------------------------------------------------------------- ------------------- ------------------ Net Cash Provided By Operating Activities 16,589 72,954 Cash Flow From Investing Activities ----------------------------------------------------------------------------- ------------------- ------------------ Decrease in short-term investments 1,993 14 Additions to property, plant and equipment (22,323) (14,931) Purchase of USA Detergent common stock (101,642) (10,360) Purchase of product lines (128,939) - Investment in affiliates (108,450) (2,860) Investment in notes receivable (16,380) - Distributions from unconsolidated affiliates 4,901 2,788 Proceeds from repayment of notes receivable - 3,000 Investment in supply contract (808) - Purchase of other assets - (2,590) Goodwill and other intangibles adjustment - 1,507 Proceeds from sale of fixed assets 2,349 863 Purchase of intangibles (1,625) (861) ----------------------------------------------------------------------------- ------------------- ------------------ Net Cash (Used In) Investing Activities (370,924) (23,430) Cash Flow From Financing Activities ----------------------------------------------------------------------------- ------------------- ------------------ Long-term debt borrowings 560,000 - Long-term debt (repayments) (170,179) (34,874) Deferred financing costs (8,632) - Short-term debt borrowing (repayments) (11,896) 7,602 Payment of cash dividends (8,342) (8,071) Proceeds from stock options exercised 8,561 4,551 Purchase of treasury stock - (20,094) ----------------------------------------------------------------------------- ------------------- ------------------ Net Cash Provided By (Used In) Financing Activities 369,512 (50,886) Net Change In Cash and Cash Equivalents 15,177 (1,362) Cash And Cash Equivalents At Beginning Of Year 21,573 19,765 ----------------------------------------------------------------------------- ------------------- ------------------ Cash And Cash Equivalents At End Of Period $36,750 $18,403 ----------------------------------------------------------------------------- ------------------- ------------------ See Notes to Consolidated Financial Statements
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated balance sheet as of September 28, 2001, the consolidated statements of income and retained earnings for the three and nine months ended September 28, 2001 and September 29, 2000, and the consolidated statements of cash flow for the nine months ended September 28, 2001 and September 29, 2000 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 September 28, 2001 and for all periods presented have been made. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2000 annual report to shareholders. The results of operations for the period ended September 28, 2001 are not necessarily indicative of the operating results for the full year. 2. Inventories consist of the following:
Sept. 28, Dec. 31, (in thousands) 2001 2000 ---------------------------------------------------------------------------- ---------------- -------------- Raw materials and supplies $33,191 $18,696 Work in process 884 25 Finished goods 72,668 36,444 ---------------- -------------- $106,743 $55,165 ---------------------------------------------------------------------------- ---------------- --------------
3. Property, Plant and Equipment consist of the following:
Sept. 28, Dec. 31, (in thousands) 2001 2000 --------------------------------------------------------------------------- ---------------- -------------- Land $ 6,417 $ 5,546 Buildings and improvements 80,758 78,781 Machinery and equipment 251,327 214,926 Office equipment and other assets 21,316 15,664 Software 5,312 5,355 Mineral rights 222 304 Construction in progress 40,445 6,463 ---------------- -------------- 405,797 327,039 Less accumulated depreciation and amortization 166,422 158,469 ---------------- -------------- Net Property, Plant and Equipment $239,375 $168,570 --------------------------------------------------------------------------- ---------------- --------------
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. 5. Recent Accounting Developments The EITF issued EITF 00-14, "Accounting for Certain Sales Incentives". This issue addresses the income statement classification for offers by a vendor directly to end consumers that are exercisable after a single exchange transaction in the form of coupons, rebate offers, or free products or services disbursed on the same date as the underlying exchange transaction. The issue requires the cost of these items to be accounted for as a reduction of revenues, not included as a marketing expense as the Company does today. This reclassification is approximately $20 million annually. The EITF will be effective January, 2002 and there is no net income impact. The EITF also issued EITF No. 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer". This issue outlines required accounting treatment of certain sales incentives, including slotting or placement fees, cooperative advertising arrangements, buydowns and other allowances. The Company currently records such costs as marketing expenses. EITF 00-25 will require the Company to report the paid consideration expense as a reduction of sales, rather than marketing expense. The Company is required to implement EITF 00-25 for the quarter beginning January 1, 2002. The Company has not yet determined the effect of implementing the guidelines of EITF 00-25, but in any case, implementation will not have an effect on net income. During the first quarter of 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." Under this statement, all derivatives, whether designated as hedging instruments or not, are required to be recorded on the balance sheet at fair value. Furthermore, changes in fair value of derivative instruments not designated as hedging instruments are recognized in earnings in the current period. The Company entered into interest rate swap agreements, which are considered derivatives, to reduce the impact of changes in interest rates on its floating rate short-term debt. The swap agreements are contracts to exchange floating interest payments for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. As of December 31, 2000, the Company had swap agreements for a notional amount of $20 million, and as of September 28, 2001, the Company had swap agreements in the amount of $110 million, swapping debt with either a one or a three-month libor rate for a fixed interest rate. These swaps, of which $20 million expire in May 2002 and $90 million, which decline by $3.3 million per month and expire in December 2003, were recorded as a liability in the amount of $2.2 million. These instruments are designated as cash flow hedges as of September 28, 2001 and any changes in value are recorded in other comprehensive income. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" which establishes new standards for accounting and reporting requirements for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. The Company adopted this statement for transactions that occurred after June 30, 2001. Management does not believe that SFAS No. 141 will have a material impact on the Company's consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets". Under its changes, SFAS No. 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. The Company adopted this statement upon its effective date. If effective for all acquisitions made prior to June 30, 2001, there would have been a reduction of amortization expense of approximately $4.0 million in 2001. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business (as previously defined in that Opinion). This statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company is in the process of evaluating the impact of the SFAS No. 144. The adoption of this Statement is not expected to have a material impact on the Company's consolidated financial statements. 6. USAD Acquisition and Non-Core Business Divestiture On May 25, 2001, the Company and USA Detergents, Inc. ("USAD") closed on its previously announced merger agreement under which the Company acquired USAD, its partner in the previously announced ARMUS LLC joint venture, for $7 per share in an all-cash transaction. This combination increased the Company's laundry products sales to over $400 million a year, making it the third largest company in the $6 billion retail U.S. laundry detergents business with three leading brands: ARM & HAMMER(R) and XTRA(R) Liquid and Powder Laundry Detergents and NICE'N FLUFFY(R) Liquid Fabric Softener. The Company and USAD formed the ARMUS joint venture to combine their laundry products businesses in June 2000. Under its terms, the Company had management control of the venture and an option to buy USAD's interest in five years. The venture became operational on January 1, 2001, and was dissolved when the Company purchased USAD outright. As part of the ARMUS venture, the Company had already acquired 2.1 million shares or 15% of USAD's stock for $15 million or $7 a share. The acquisition agreement extended the same offer price to USAD's remaining stockholders. The Company estimates the total transaction cost, including the assumption of debt, and the initial stock purchase, to be approximately $135 million before disposal of unwanted assets. The Company financed the acquisition with a short term bridge loan, which subsequently was refinanced as part of the Carter-Wallace acquisition. The Company divested USAD's non-laundry business, which accounted for less than 20% of USAD's sales in 2000, and other non-core assets to former USAD executives. A preliminary allocation of the purchase price is as follows: (in thousands) --------------------------------------------------------------------------- Consideration paid (excluding debt assumption) $112,027 Financing Costs (935) Net assets acquired as of May 25, 2001 (2,093) Deferred tax adjustment (7,325) Fixed asset adjustments (2,309) Note receivable for divestiture of unwanted assets (2,000) Other purchase accounting adjustments 727 ---------------- Preliminary excess purchase price $98,092 --------------------------------------------------------------------------- An appraisal of USAD is currently in process. The purchase price allocation will be modified based on its results. The preliminary excess purchase price is included in the Goodwill and Other Intangibles caption in the Consolidated Balance sheet as of September 28, 2001 and is being amortized, using the straight line method over 30 years. As noted, the Company divested USAD's non-laundry business and other non-core assets to former USAD executives concurrent with the merger agreement. The Company will have a 20% ownership interest in the newly formed company and contribute $200,000. The new company, USA Metro, Inc. (USAM), purchased inventory and other assets for a total of $5,087,000, in the form of two notes receivable. The inventory note of $3,087,000 is secured by a lien on the inventory. The note is due on December 31, 2001 and bears interest at 8% for the first ninety days and 10% thereafter. The interest rate increases to 12% for any period the loan remains outstanding beyond December 31, 2001. The note for all the other assets of $2,000,000 has a maturity of five years and bear interest at 8% for the first two years, 9% for the third year, 10% for the fourth year and 11% for the fifth year. There shall be interest only payments for the first two years. Commencing with the start of the third year the principal and accrued interest shall be paid monthly based upon a five-year amortization. The unpaid principal and accrued interest as of the maturity date shall be payable in a lump sum at such time. In the event the unpaid principal and interest is not paid as of the maturity date, the interest rate shall increase by 300 basis points. In the case of default by USAM that is not remedied as provided in the note, the Company may convert the note to additional ownership in USAM. 7. USAD Pro forma Results The following are Pro forma Income Statements to reflect the USAD acquisition as if the merger had occurred on January 1, 2001. A comparable income statement for the year ago period is also presented.
(in thousands except for per share data) For the Nine Months Ended ------------------------------------------------------------------------------------------------------------------------ September 28, 2001 September 29, 2000 ------------------ ------------------ C&D USAD Adj's Total C&D USAD Adj's Total ------------------------------------------------------------------------------------------------------------------------ Net Sales $784,249 $113,542 $(97,638) (1) $800,153 $598,805 $189,465 $ - $788,270 (30) (6) (71) (2) (828) (7) (1,479) (3) Net Income 40,871 (6,384) (1,535) (8) 32,011 $22,871 2,307 (2,745) (4) 20,737 (83) (9) (146) (5) Diluted E.P.S. $1.00 $ .79 $ .57 $ .52 ------------------------------------------------------------------------------------------------------------------------ (1) To eliminate inter-company sales (2) To record nine months of additional depreciation due to fair value adjustment - net of tax (3) To record nine months of excess purchase price amortization - net of tax (4) To record nine months of interest expense - net of tax (5) To record nine months of deferred financing cost amortization - net of tax (6) To record five months of additional depreciation due to fair value adjustment - net of tax (7) To record five months of excess purchase price amortization - net of tax (8) To record five months of interest expense - net of tax (9) To record five months of deferred financing cost amortization - net of tax
8. Other Item - Concentration of Risk The Company has a concentration of risk with USA Metro, Inc. ("USAM") at September 28, 2001 in the form of the following:
(in thousands) -------------------------------------------------------------------------------------------------------------------------------- A 20% equity interest in USAM $ 200 Note receivable for inventory - due December 31, 2001 3,087 Note receivable for other assets - payments start with the beginning of the third year 2,000 Trade accounts receivable 2,761 -------------------------------------------------------------------------------------------------------------------------------- $ 8,048
Should USAM be unable to meet these obligations, the impact may have a material adverse effect to the Company's financial statements. 9. Carter-Wallace Acquisition On September 28, 2001, the Company closed on its previously announced agreement to acquire the consumer products business of Carter-Wallace, Inc. in a partnership with the private equity group, Kelso & Company, for a total negotiated price of $739 million, including the assumption of certain debt plus transaction costs. Under the terms of its agreements with Carter-Wallace and Kelso, the Company acquired Carter-Wallace's U.S. antiperspirant and pet care businesses outright for a negotiated price of approximately $128 million; and ArmKel, LLC, a 50/50 joint venture between the Company and Kelso, acquired the rest of Carter-Wallace's domestic and international consumer products business for a negotiated price of $611 million. The Company will account for its interest in ArmKel on the equity method. Through the formation of ArmKel, LLC, coupled with the outright purchase of Carter-Wallace's antiperspirant product lines and pet care businesses, the Company creates a personal care business that achieves critical mass in manufacturing, sales and distribution. In addition, the Company expects to obtain cost saving synergies, particularly related to the antiperspirant business. The results of operations for the businesses acquired are not included in the Company's consolidated financial statements, because the acquisition occurred on the last day of the third quarter. Carter-Wallace's consumer business is estimated to have sales of more than $500 million. Major brands include ARRID(R) antiperspirants, TROJAN(R) condoms, NAIR(R) depilatories, FIRST RESPONSE(R) pregnancy test kits, PEARL DROPS(R) toothpaste and Lambert Kay pet care products. Approximately 60% of the sales are in the U.S., and the remaining 40% abroad, including Canada and the U.K. where the Company also operates, as well as Mexico, Western Europe and Australia. Under the terms of its joint venture agreement with Kelso, the Company will have a call option to acquire Kelso's interest in ArmKel in three to five years after the closing, at fair market value subject to certain limits. If the Company does not exercise its call option, there are provisions for the sale of the assets after a certain period. In the case of a sale of the assets to a third party after the seventh anniversary of the acquisition, the Company will make up any shortfall to Kelso relative to Kelso's aggregate initial capital contribution, less $5.0 million. The venture's Board will have equal representation from both sides, with the Company appointing the Chairman. The Company financed its investment in ArmKel, the acquisition of USA Detergents and the Antiperspirant and Pet Care businesses from Carter-Wallace with a $510 million credit facility consisting of $410 million in 5- and 6-year term loans, all of which were drawn at closing and a $100 million revolving credit facility which remains fully undrawn. The term loans pay interest at 200 and 250 basis points over LIBOR. The ArmKel venture itself is financed with $229 million in equity contributions from the Company and Kelso and an additional $445 million in debt. ArmKel has obtained financing for $530 million to finance the debt portion of the joint venture balance sheet. Any debt on ArmKel's balance sheet will be without recourse to the Company. Simultaneous with this transaction, Carter-Wallace and its pharmaceutical business merged into a newly formed company set up by pharmaceutical industry executives and backed by two well-known private equity firms. While the Company and ArmKel are not affiliated with the pharmaceutical venture, ArmKel has agreed to provide certain transitional services to help this venture with the start-up of its operations at Carter-Wallace's main Cranbury, New Jersey, facility. A preliminary allocation of the purchase price of the Antiperspirant and Pet Care businesses is as follows:
(in thousands) ---------------------------------------------------------------------------------------------------------- Consideration paid $128,939 Net assets acquired (40,898) Purchase accounting adjustments to net asset acquired (20,930) ---------------- Excess purchase price to be allocated between brand names and goodwill $67,111 ----------------------------------------------------------------------------------------------------------
An appraisal is currently in process and the purchase price allocation will be modified based on its results. The excess purchase price (including indefinite lived brand names) is included in the Goodwill and Other Intangibles caption in the Consolidated Balance Sheet as of September 28, 2001 and is not being amortized, based on the provisions of SFAS 142 "Goodwill and Other Intangible Assets." 10. Impairment and Other Items During 2000, the Company recorded a pre-tax charge of $21.9 million relating to three major elements: a $14.3 million book write-down of the Company's Syracuse N.Y. manufacturing facility, a $2.1 million charge for potential carrying and site clearance costs, and a $5.5 million severance charge related to both the Syracuse shutdown and the sales force reorganization. The Company also incurred plant and warehouse shutdown charges of $1.8 million in 2000 and $1.4 million in 2001. This brings the total one-time cost to approximately $25 million. The cash portion of this one-time cost, however, was less than $5 million after tax.
Reserves at Payments & Reserves at (In thousands) Dec. 31, 2000 Adjustments Sept. 28, 2001 ------------------------------------------------------------------------------------------------------------------------- Severance and other charges $ 5,239 $(1,577) $3,662 Site clearance costs 2,129 (513) 1,616 ------------------------------------------------------------------------------------------------------------------------- $ 7,368 $(2,090) $5,278
11. Segment Information Segment sales and operating profit/(loss) for the third quarter and year to date 2001 and 2000 are as follows:
Unconsolidated (In thousands) Consumer Specialty Affiliates Corporate Total ----------------------------------------------------------------------------------------------------------------------------- Net Sales Third quarter 2001 $227,825 $48,454 $(5,652) - $270,627 Third quarter 2000 161,021 47,693 (6,263) - 202,451 Year to date 2001 654,256 148,203 (18,210) - 784,249 Year to date 2000 477,763 140,148 (19,106) - 598,805 Operating Profit/(Loss) Third quarter 2001 19,035 7,675 (875) - 25,835 Third quarter 2000 14,004 7,056 (843) (21,911) (1,694) Year to date 2001 50,348 21,978 (3,034) - 69,292 Year to date 2000 40,135 20,059 (1,972) (21,911) 36,311 Identified Assets September 28, 2001 760,322 140,194 - 30,888 931,404 December 31, 2000 282,678 143,112 - 29,842 455,632 -----------------------------------------------------------------------------------------------------------------------------
Product line net sales data for the third quarter and year to date periods are as follows: ============================================================================================================================= Oral and Deodorizing Uncon- Laundry Personal & Household Specialty Animal Specialty solidated Products Care Cleaners Chemicals Nutrition Cleaners Affiliates Total ----------------------------------------------------------------------------------------------------------------------------- 3rd Qtr 2001 $116,717 $38,153 $72,955 $26,589 $19,922 $1,943 $(5,652) $270,627 3rd Qtr 2000 56,645 38,534 65,842 27,757 18,006 1,930 (6,263) 202,451 YTD 2001 344,009 113,233 197,014 84,811 57,015 6,377 (18,210) 784,249 YTD 2000 173,145 119,639 184,979 82,933 50,972 6,243 (19,106) 598,805 -----------------------------------------------------------------------------------------------------------------------------
12. Comprehensive Income The following table presents the Company's Comprehensive Income for the three and nine months ending September 28, 2001 and September 29, 2000.
Three Months Ended Nine Months Ended ------------------------- --------------------------- Sept. 28 Sept. 29 Sept. 28 Sept. 29, (in thousands) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------- Net Income $15,246 $(1,236) $40,871 $22,871 Other Comprehensive Income, net of tax: Foreign exchange translation adjustments (1,420) (534) (3,512) (1,145) Interest rate swaps/Available for Sale securities (1,050) 252 2,152 (2,099) -------------------------- ---------------------------------- Comprehensive Income/(Loss) $12,776 $(1,518) $39,511 $19,627 --------------------------------------------------------------------------------------------------------------------
13. Contingencies 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 consolidated financial statements. 14. Reclassification Certain prior year amounts have been reclassified in order to conform with the current year presentation. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations --------------------- For the quarter ended September 28, 2001, net income was $15.3 million, equivalent to basic earnings of $.39 per share, from a loss of $(1.2) million or $(.03) per share, in last year's third quarter. Diluted earnings were $.37 per share compared to a loss of $(.03) per share last year. Included in last year's third quarter was a pretax charge of $21.9 million for the Syracuse, New York plant shutdown. Excluding this charge, net income would have been $12.7 million or $.32 per diluted share. For the first nine months of 2001, net income was $40.9 million or basic earnings of $1.05 per share compared to $22.9 million or $.60 per share last year. Diluted earnings were $1.00 per share compared to $.57 per share last year. This years results included $1.4 million in previously announced plant and warehouse shutdown costs related to the start-up of the Armus joint venture. Last years results included a deferred compensation gain of $1.2 million and the previously mentioned plant shutdown charge. Adjusting for these unusual items, diluted earnings for the nine month period were $1.02 per share compared to $.90 per share last year. Net sales for the quarter increased by 34% to $270.6 million from $202.5 million in the same period last year. Consumer products sales rose 41.5% primarily due to the addition of the Xtra(R) Laundry Detergent and Nice'N Fluffy(R) Fabric Softener brands as part of the acquisition of USAD earlier in the year. The Company's existing laundry, deodorizing and cleaning products also reported solid growth; however, personal care products were slightly lower. Specialty products increased by 3.3% due to growth in the animal nutrition line. Net sales for the first nine months of 2001 increased 31.0% to $784.2 million, with consumer products up 36.9% and specialty products up 7.4%. The reasons for the increase are consistent with the third quarter. The Company's gross margin of 38.5% and 37.6% for the quarter and nine month period, respectively, was lower than the same periods of a year ago. This reflects the impact of the consolidation of the lower margin USAD brands, which accounts for the majority of the decline. In addition the plant and warehouse shutdown costs and lower personal care sales also contributed to the decline. Advertising, consumer and trade promotion expenses were $4.4 million higher in the quarter and $5.6 million for the nine month period. Increases in laundry products as a result of the USAD brands were partially offset by reductions in deodorizers and cleaners. Selling, general and administrative expenses increased $3.9 million in the quarter and $14.1 million for the nine month period. Personnel related costs, which includes higher deferred compensation costs, costs associated with the Armus joint venture and USAD acquisition were the major reasons for the increases. An increase in the bad debt reserve and higher outside service costs also contributed. Earnings from affiliates was virtually unchanged in the quarter but higher for the nine month period due to higher ArmaKleen earnings as a result of improved performance in the current year and the prior year bad debt provision associated with Safety-Kleen filing chapter 11. Interest expense increased $2.0 million in the quarter and $1.0 million for the nine month period as a result of higher average debt. The Company borrowed $150 million at the end of May to purchase USA Detergents and to pay off existing bank debt. This debt was refinanced as part of the Carter-Wallace acquisition. Investment earnings was unchanged in the quarter and $.3 million lower for the nine month period as a result of the receipt of interest from the Fluid Packaging note in 2000. Other expenses decreased in the quarter but increased year to date. The increase is primarily a result of foreign exchanges losses associated with the Brazilian subsidiary and other foreign exchange transactions. Minority interest expense is primarily the 35% of the earnings generated by the Armus joint venture through the month of May that accrued to USAD. The effective tax rate for the nine-month period was 35.3%, which is consistent with last year's rate. Liquidity and Capital Resources ------------------------------- The Company financed its investment in ArmKel, the acquisition of USA Detergents and the Antiperspirant and Pet Care businesses from Carter-Wallace with a $510 million credit facility consisting of $410 million in 5- and 6-year term loans, all of which were drawn at closing and a $100 million revolving credit facility which remains fully undrawn. The term loans pay interest at 200 and 250 basis points over LIBOR. In addition to the unused revolving credit facility, the Company had approximately $38 million in cash and short-term investments at quarter-end. Financial covenants include EBITDA to total debt and interest coverage. The Company believes that the $100 million revolving credit facility is sufficient to meet its liquidity needs. During the first nine months of 2001, the Company generated $16.6 million from operating activities (after an increase in working capital to fund its growth), increased its net debt position by $377.9 million, and received $8.6 million from the exercise of stock options. Significant expenditures include the purchase of USAD of $101.6 million, the purchase of the Antiperspirant and Pet Care businesses from Carter-Wallace of $128.9 million and the investment in ArmKel of $108.3 million. Other expenditures included additions to property, plant and equipment of $22.3 million, payment of cash dividends of $8.3 million and investment in notes receivable of $16.4 million. Other Item - Concentration of Risk ---------------------------------- The Company has a concentration of risk with USA Metro, Inc. ("USAM") at September 28, 2001 in the form of the following:
(in thousands) -------------------------------------------------------------------------------------------------------------------------------- A 20% equity interest in USAM $ 200 Note receivable for inventory - due December 31, 2001 3,087 Note receivable for other assets - payments start with the beginning of the third year 2,000 Trade accounts receivable 2,761 -------------------------------------------------------------------------------------------------------------------------------- $ 8,048
Should USAM be unable to meet these obligations, the impact may have a material adverse effect to the Company's financial statements. PART II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Computation of earnings per share (b) The Company filed an 8-K on October 12, 2001 to announce the Company's investment in ArmKel, LLC and the acquisition of the Antiperspirant and Pet Care businesses acquired by ArmKel from Carter-Wallace. The Company filed an 8-K/A on November 9, 2001 to provide pro-forma financial statements that were not provided with the 8-K filed on October 12, 2001. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES EXHIBIT 11 - Computation of Earnings Per Share (In thousands except per share amounts)
Three Months Ended Nine Months Ended ------------------------- ------------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2001 2000 2001 2000 ------------------------- ------------------------- BASIC: Net Income/(Loss) $15,246 $(1,236) $40,871 $22,871 Weighted average shares outstanding 39,011 38,235 38,803 38,355 Basic earnings/(loss) per share $0.39 $(0.03) $1.05 $0.60 DILUTED: Net Income/(Loss) $15,246 $(1,236) $40,871 $22,871 Weighted average shares outstanding 39,011 38,235 38,803 38,355 Incremental shares under stock option plans 2,026 1,401 1,921 1,576 ------------ ------------ ------------ ------------ Adjusted weighted average shares outstanding 41,037 39,636 40,724 39,931 ------------ ------------ ------------ ------------ Diluted earnings/(loss) per share $0.37 $(0.03) $1.00 $0.57
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, 2001 /s/Zvi Eiref --------------------- ----------------------------------------- ZVI EIREF VICE PRESIDENT FINANCE AND CHIEF FINANCIAL OFFICER DATE: November 9, 2001 /s/Gary P. Halker --------------------- ----------------------------------------- GARY P. HALKER VICE PRESIDENT, CONTROLLER AND CHIEF INFORMATION OFFICER