10-Q 1 f10q2-03.txt 2003 2ND QUARTER 1 of 21 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 June 27, 2003 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 (I.R.S. Employer Identification No.) of incorporation or organization) 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 August 1, 2003, there were 40,288,934 shares of Common Stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I ITEM PAGE 1. Financial Statements 3 2. Management's Discussion and Analysis 12 3. Quantitative and Qualitative Disclosure About Market Risk 15 4. Controls and Procedures 15 PART II 6. Exhibits and Reports on Form 8-K 17 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 Six Months Ended ---------------------- ---------------------- (Dollars in thousands, except per share data) June 27, June 28, June 27, June 28, 2003 2002 2003 2002 ---- ---- ---- ---- Net Sales.......................................... $ 256,263 $ 258,463 $ 504,561 $ 515,265 Cost of sales...................................... 176,690 182,525 351,154 366,077 ---------- ---------- ---------- ---------- Gross Profit....................................... 79,573 75,938 153,407 149,188 Marketing expense.................................. 26,288 22,153 43,231 38,985 Selling, general and administrative expenses....... 28,236 29,492 56,346 58,683 ---------- ---------- ---------- ---------- Income from Operations............................. 25,049 24,293 53,830 51,520 Equity in earnings of affiliates................... 12,528 11,364 20,680 12,281 Investment earnings................................ 350 440 654 1,005 Other income (expense), net........................ 612 (894) 617 (1,087) Interest expense................................... (4,715) (6,097) (9,895) (12,185) ----------- ---------- ----------- ---------- Income before taxes and minority interest ......... 33,824 29,106 65,886 51,534 Income taxes....................................... 9,192 10,414 20,299 17,830 Minority interest.................................. 6 40 15 129 ---------- ---------- ---------- ---------- Net Income......................................... 24,626 18,652 45,572 33,575 Retained earnings at beginning of period........... 385,162 324,390 367,211 312,409 ---------- ---------- ---------- ---------- 409,788 343,042 412,783 345,984 Dividends paid..................................... 3,040 2,970 6,035 5,912 ---------- ---------- ---------- ---------- Retained earnings at end of period................. $ 406,748 $ 340,072 $ 406,748 $ 340,072 ========== ========== ========== ========== Weighted average shares outstanding - Basic........ 40,132 39,584 40,039 39,425 ========== ========== ========== ========== Weighted average shares outstanding - Diluted...... 42,072 41,855 41,967 41,677 ========== ========== ========== ========== Earnings Per Share: Net income per share - Basic....................... $0.61 $0.47 $1.14 $0.85 ========== ========== =========== ========== Net income per share - Diluted..................... $0.59 $0.45 $1.09 $0.81 ========== ========== ============ ========== Dividends Per Share................................ $0.075 $0.075 $0.15 $0.15 ========== ========== ============ ==========
See Notes to Condensed Consolidated Financial Statements. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) June 27, 2003 Dec. 31, 2002 ------------- ------------- Assets (Unaudited) Current Assets Cash and cash equivalents........................................................... $ 54,011 $ 76,302 Accounts receivable, less allowances of $1,750 and $1,546........................... 102,383 100,252 Inventories......................................................................... 86,535 82,674 Deferred income taxes............................................................... 17,883 18,154 Note receivable - current........................................................... 942 870 Prepaid expenses.................................................................... 4,799 7,184 ---------- ---------- Total Current Assets................................................................ 266,553 285,436 ---------- ---------- Property, Plant and Equipment (Net)................................................. 244,839 240,007 Note Receivable..................................................................... 8,766 9,708 Equity Investment in Affiliates..................................................... 148,479 131,959 Long-term Supply Contracts.......................................................... 6,062 6,538 Tradenames and Other Intangibles.................................................... 88,647 90,036 Goodwill ........................................................................... 205,726 202,388 Other Assets........................................................................ 23,595 22,169 ---------- ---------- Total Assets........................................................................ $ 992,667 $ 988,241 ========== ============ Liabilities and Stockholders' Equity Current Liabilities Short-term borrowings............................................................... $ 63,268 $ 4,490 Accounts payable and accrued expenses............................................... 152,728 162,907 Current portion of long-term debt................................................... 3,213 11,455 Income taxes payable................................................................ 17,697 12,315 ---------- ---------- Total current liabilities........................................................... 236,906 191,167 Long-term Debt...................................................................... 253,243 352,488 Deferred Income Taxes............................................................... 62,694 57,103 Deferred and Other Long-term Liabilities............................................ 26,541 24,014 Postretirement and Postemployment Benefits.......................................... 15,663 15,609 Minority Interest................................................................... 271 214 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 46,660,988 shares........................ 46,661 46,661 Additional paid-in capital.......................................................... 43,527 39,550 Retained earnings................................................................... 406,748 367,211 Accumulated other comprehensive (loss).............................................. (13,851) (16,919) ----------- ---------- 483,085 436,503 Common stock in treasury, at cost: 6,406,254 shares in 2003 and 6,763,554 shares in 2002.......................... (85,736) (88,857) ----------- ---------- Total Stockholders' Equity.......................................................... 397,349 347,646 ---------- ---------- Total Liabilities and Stockholders' Equity.......................................... $ 992,667 $ 988,241 ========== ============
See Notes to Condensed Consolidated Financial Statements. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended (Dollars in thousands) June 27, 2003 June 28, 2002 ------------- -------------- Cash Flow From Operating Activities Net Income.......................................................................... $ 45,572 $ 33,575 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization....................................... 14,888 13,985 Equity in earnings of affiliates............................................... (20,680) (12,281) Deferred income taxes.......................................................... 5,845 10,482 Other.......................................................................... 1,073 1,609 Change in assets and liabilities: (Increase) in accounts receivable.............................................. (724) (332) (Increase)/decrease in inventories............................................. (2,490) 2,861 Decrease in prepaid expenses................................................... 2,537 2,957 (Decrease) in accounts payable................................................. (11,846) (8,582) Increase in income taxes payable............................................... 7,152 544 Increase in other liabilities.................................................. 2,201 1,688 --------- --------- Net Cash Provided By Operating Activities........................................... 43,528 46,506 --------- --------- Cash Flow From Investing Activities Additions to property, plant and equipment.......................................... (14,092) (20,268) Biovance acquisition (net of cash acquired)......................................... (3,424) (7,714) Proceeds from note receivable....................................................... 870 803 Distributions from affiliates....................................................... 2,255 1,627 Other long-term assets.............................................................. (370) (740) Adjustment to purchase price of product lines....................................... -- (137) Proceeds from sale of fixed assets.................................................. -- 81 --------- --------- Net Cash Used In Investing Activities............................................... (14,761) (26,348) --------- --------- Cash Flow From Financing Activities Long-term debt (repayment).......................................................... (109,557) (1,879) Short-term debt borrowing........................................................... 59,553 1,482 Proceeds from stock options exercised............................................... 5,232 9,465 Payment of cash dividends........................................................... (6,035) (5,912) Other............................................................................... (251) (475) --------- --------- Net Cash (Used In) Provided By Financing Activities................................. (51,058) 2,681 --------- --------- Net Change In Cash and Cash Equivalents............................................. (22,291) 22,839 Cash And Cash Equivalents At Beginning Of Year...................................... 76,302 52,446 --------- --------- Cash And Cash Equivalents At End Of Period.......................................... $ 54,011 $ 75,285 ========= =========
See Notes to Condensed Consolidated Financial Statements. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated balance sheet as of June 27, 2003, the consolidated statements of income and retained earnings for the three and six months ended June 27, 2003 and June 28, 2002 and the consolidated statements of cash flow for the six 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 June 27, 2003 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 December 31, 2002 annual report to shareholders. The results of operations for the period ended June 27, 2003 are not necessarily indicative of the operating results for the full year. 2. Inventories consist of the following:
(In thousands) June 27, 2003 Dec. 31, 2002 ------------- ------------- Raw materials and supplies.......................................................... $ 32,422 $ 30,987 Work in process..................................................................... 247 142 Finished goods ..................................................................... 53,866 51,545 ---------- ---------- $ 86,535 $ 82,674 ========== ==========
3. Property, Plant and Equipment consist of the following:
(In thousands) June 27, 2003 Dec. 31, 2002 ------------- ------------- Land................................................................................ $ 6,150 $ 6,079 Buildings and improvements.......................................................... 106,554 105,469 Machinery and equipment............................................................. 271,621 267,568 Office equipment and other assets................................................... 22,128 30,556 Software ........................................................................... 6,000 5,945 Mineral rights ..................................................................... 574 467 Construction in progress............................................................ 23,907 9,920 ---------- ---------- 436,934 426,004 Less accumulated depreciation, depletion and amortization........................... 192,095 185,997 ---------- ---------- Net Property, Plant and Equipment................................................... $ 244,839 $ 240,007 ========== ==========
During the second quarter of 2003, the Company disposed of approximately $8.3 million of fully depreciated assets. 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 Six Months Ended (In thousands) June 27, 2003 June 28, 2002 June 27, 2003 June 28, 2002 ------------- ------------- ------------- ------------- Basic............................................ 40,132 39,584 40,039 39,425 Dilutive effect of stock options................. 1,940 2,271 1,928 2,252 ---------- ---------- ---------- ---------- Diluted.......................................... 42,072 41,855 41,967 41,677 ========== ========== ========== ==========
The Company had 1.1 million and .6 million shares of anti-dilutive stock options outstanding for the three and six month periods ending June 27, 2003 and June 28, 2002, respectively. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Stock Based Compensation The Company accounts for costs of stock-based compensation in accordance with Accounting Principles Board Opinion No. 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". During the second quarter of 2003, there were 556,940 stock options granted at an average fair value of $11.95 per share. The Company's pro forma net income and pro forma net income per share for the second quarter and six months of 2003 and 2002 are as follows:
Three Months Ended Six Months Ended (In thousands, except for per share data) June 27, 2003 June 28, 2002 June 27, 2003 June 28, 2002 ------------- ------------- ------------- ------------- Net Income As reported........................................... $ 24,626 $ 18,652 $ 45,572 $ 33,575 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects -- -- -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects. (878) (1,072) (1,819) (1,937) --------- --------- -------- --------- Pro forma............................................. $ 23,748 $ 17,580 $ 43,753 $ 31,638 ========= ========= ======== ========= Net Income per Share: basic As reported........................................... $0.61 $0.47 $1.14 $0.85 Pro forma............................................. 0.59 0.44 1.08 0.79 Net Income per Share: diluted As reported...................................... $0.59 $0.45 $1.09 $0.81 Pro forma............................................ 0.56 0.42 1.03 0.75
6. Segment Information Sales and operating results in affiliate companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are reported for segment purposes in a manner similar to consolidated subsidiaries. The effect of this convention is eliminated to adjust management reporting results to the amounts in the financial statements. The sales and operating results are presented in this manner to enable the chief decision maker (the CEO) to make decisions about allocating resources and assessing performance of the segments. Segment sales and income from operations for the second quarter and year to date of 2003 and 2002 are as follows:
Unconsolidated Affiliates and (In thousands) Consumer Specialty Eliminations Total -------- --------- -------------- ----- Net Sales Second quarter 2003......................... $ 322,447 $ 58,270 $ (124,454) $ 256,263 Second quarter 2002......................... 316,408 56,804 (114,749) 258,463 Year to date 2003........................... 625,618 113,073 (234,130) 504,561 Year to date 2002........................... 616,611 110,049 (211,395) 515,265 Income from Operations Second quarter 2003......................... $ 51,890 $ 7,728 $ (34,569) $ 25,049 Second quarter 2002......................... 43,592 7,952 (27,251) 24,293 Year to date 2003........................... 101,800 12,784 (60,754) 53,830 Year to date 2002........................... 75,212 15,047 (38,739) 51,520
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Product line net sales data for the second quarter periods are as follows:
Three Months Ended June 27, 2003 Three Months Ended June 28, 2002 ---------------------------------------------- ---------------------------------------------- As Unconsol. Including As Unconsol. Including Reported Affiliates Elim.** Affiliates Reported Affiliates Elim.** Affiliates ---------------------------------------------- ---------------------------------------------- Deodorizing and Cleaning Products..... $ 61,162 $ -- $ -- $ 61,162 $ 63,431 $ -- $ -- $ 63,431 Laundry Products......... 98,193 -- -- 98,193 97,698 -- -- 97,698 Personal Care Products... 40,892 57,553 -- 98,445 43,295 58,284 -- 101,579 International............ 9,245 55,924 (522) 64,647 7,553 46,147 -- 53,700 --------- -------- -------- --------- --------- --------- --------- --------- Total Consumer........... 209,492 113,477 (522) 322,447 211,977 104,431 -- 316,408 Specialty Products Division 46,771 13,848 (2,349) 58,270 46,486 11,688 (1,370) 56,804 --------- -------- -------- --------- --------- --------- --------- --------- Total Net Sales.......... $ 256,263 $127,325 $(2,871) $ 380,717 $ 258,463 $ 116,119 $ (1,370) $ 373,212 ========= ======== ======== ========= ========= ========= ========= =========
**Includes elimination of intercompany sales Product line net sales data for the six month periods are as follows:
Three Months Ended June 27, 2003 Three Months Ended June 28, 2002 ---------------------------------------------- ---------------------------------------------- As Unconsol. Including As Unconsol. Including Reported Affiliates Elim.** Affiliates Reported Affiliates Elim.** Affiliates ---------------------------------------------- ---------------------------------------------- Deodorizing and Cleaning Products..... $ 114,326 $ -- $ -- $ 114,326 $ 126,063 $ -- $ -- $ 126,063 Laundry Products......... 198,808 -- -- 198,808 197,908 -- -- 197,908 Personal Care Products... 83,485 109,681 -- 193,166 84,878 106,944 -- 191,822 International............ 17,149 103,449 (1,280) 119,318 15,959 84,859 -- 100,818 --------- -------- -------- --------- --------- --------- -------- --------- Total Consumer........... 413,768 213,130 (1,280) 625,618 424,808 191,803 -- 616,611 Specialty Products Division 90,793 25,781 (3,501) 113,073 90,457 21,707 (2,115) 110,049 --------- --------- --------- --------- --------- --------- -------- --------- Total Net Sales.......... $ 504,561 $238,911 $ (4,781) $ 738,691 $ 515,265 $ 213,510 $ (2,115) $ 726,660 ========= ======== ========= ========= ========= ========= ======== =========
**Includes elimination of intercompany sales 7. Armkel LLC The following table summarizes financial information for Armkel LLC. The Company accounts for its 50% interest under the equity method.
Three Months Ended Six Months Ended ------------------------------- ------------------------------ (In thousands) June 27,2003 June 28, 2002 June 27, 2003 June 28, 2002 ------------ ------------- ------------- ------------- Income statement data: Net sales................................... $ 113,477 $ 104,431 $ 213,130 $ 191,803 Gross profit................................ 64,526 58,880 123,011 101,018 Net income ................................. 22,520 15,585 37,740 15,893 Equity in affiliate ........................ 11,260 10,138 18,870 10,446
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 27, December 31, (In thousands) 2003 2002 ---- ---- Balance sheet data: Current assets...................................................................... $ 249,985 $ 246,307 Noncurrent assets................................................................... 560,644 562,207 Short-term debt..................................................................... 7,217 28,556 Current liabilities (excluding short-term debt)..................................... 104,263 110,224 Long-term debt...................................................................... 398,888 411,634 Other long-term liabilities......................................................... 30,265 28,420 Partners' equity.................................................................... 269,996 229,680
Under the partnership agreement with Kelso, the Company is allocated 50% of all book and tax profits. If there are losses, the Company is allocated 50% of all book and tax losses up to $10 million and 100% of such losses above that level for the period starting September 29, 2001, the date of the acquisition. The Company is entitled to 100% of the profits up to an amount equal to the accumulated excess losses it recorded. As a result, the Company recorded 50% of the first half of 2003's net income of $37.7 million as compared to 100% of the first $5 million and 50% of the balance of 2002's net income. Armkel's results for the second quarter of 2003 include a $13.1 million net gain from the settlement of litigation partially offset by a $3.1 million impairment charge related to the former Carter-Wallace facility being held for sale. During the first quarter, Armkel closed on its previously announced sale of its Italian subsidiary for a sales price of approximately $22.6 million and Armkel recognized a pretax gain on the sale of approximately $1.9 million. The Company invoiced Armkel $14.0 million and $10.1 million for primarily administrative and management oversight services (which is included as a reduction of selling, general and administrative expenses), and purchased $1.4 million and $5.4 million of deodorant anti-perspirant inventory produced by Armkel in the first half of 2003 and 2002, respectively. The Company sold Armkel $1.3 million and $.1 million of Arm & Hammer products to be sold in international markets in the first half of 2003 and 2002, respectively. The Company had a net open receivable from Armkel at June 27, 2003 and December 31, 2002 of approximately $4.9 million and $4.8 million, respectively, that primarily related to administrative services, partially offset by amounts owed for inventory. 8. Goodwill, Tradenames and Other Intangible Assets The following tables discloses the carrying value of all intangible assets:
(In thousands) June 27, 2003 December 31, 2002 ------------------------------------ -------------------------------- Gross Gross Carrying Accum. Carrying Accum. Amount Amort. Net Amount Amort. Net ------------------------------------ -------------------------------- Amortized intangible assets: Tradenames...................... $ 36,970 $ (6,231) $ 30,739 $ 36,970 $ (5,182) $ 31,788 Formulas........................ 6,281 (1,148) 5,133 6,281 (866) 5,415 Non Compete Agreement........... 1,143 (175) 968 1,143 (117) 1,026 --------- ---------- --------- -------- -------- -------- Total........................... $ 44,394 $ (7,554) $ 36,840 $ 44,394 $ (6,165) $ 38,229 ========= ========= ========= ======== ======== ======== Unamortized intangible assets - Carrying value Tradenames...................... $ 51,807 $ 51,807 --------- -------- Total........................... $ 51,807 $ 51,807 ========= ========
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Intangible amortization expense amounted to $1.4 million in the six months of 2003 and $1.0 million for the same period of 2002. The estimated intangible amortization for each of the next five years is approximately $2.9 million. The changes in the carrying amount of goodwill for the six months ended June 27, 2003 is as follows:
(In thousands) Consumer Specialty Total -------- --------- ----- Balance December 31, 2002......................................... $ 182,498 $ 19,890 $ 202,388 Additional purchase price......................................... -- 3,424 3,424 Foreign exchange/other............................................ 26 (112) (86) ----------- ---------- ----------- Balance June 27, 2003............................................. $ 182,524 $ 23,202 $ 205,726 =========== ========== ===========
Based upon the terms of the Biovance purchase agreement, an additional payment of $3.4 million was made during the first quarter of 2003 based upon 2002 operating performance and was recorded as goodwill in the accompanying balance sheet. An additional payment will be required based on the provisions of the purchase agreement, which cannot exceed $8.6 million and will be accounted for as additional purchase price. 9. Comprehensive Income The following table presents the Company's Comprehensive Income for the six months ended June 27, 2003 and June 28, 2002:
Three Months Ended Six Months Ended ----------------------- ------------------------- (In thousands) June 27, June 28, June 27, June 28, 2003 2002 2003 2002 ---- ---- ---- ---- Net Income......................................... $ 24,626 $ 18,652 $ 45,572 $ 33,575 Other Comprehensive Income, net of tax: Foreign exchange translation adjustments........ 3,502 (1,263) 4,374 (1,494) Interest rate swap agreements................... 458 (1,318) 561 (272) Minimum pension liability....................... (219) -- (1,867) -- ---------- ---------- ---------- ---------- Comprehensive Income............................... $ 28,367 $ 16,071 $ 48,640 $ 31,809 ========== ========== ========== ==========
10. Accounts Receivable Securitization During the first quarter of 2003, the Company entered into a receivables purchase agreement with an issuer of receivables-backed commercial paper in order to refinance a portion, $60,000,000, of its primary credit facility. This transaction resulted in a reclassification of long-term debt to short-term debt in the Company's Consolidated Balance Sheet. Under this arrangement, the Company sold, and will sell from time to time, throughout the 3 year term of the agreement, its trade accounts receivable to a wholly-owned, consolidated, special purpose finance subsidiary, Harrison Street Funding LLC, a Delaware limited liability company ("Harrison"). Harrison in turn sold, and will sell on an ongoing basis, to the commercial paper issuer an undivided interest in the pool of accounts receivable. The receivables assets and the short-term borrowings of Harrison are included in the consolidated financial statements of the Company. The transactions were entered into to reduce certain expenses associated with the credit facility in addition to lowering the Company's financing costs by accessing the commercial paper market. The balance outstanding under the agreement is $58 million at June 27, 2003. CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. The Company will adopt the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which aims to eliminate diversity in practice by requiring that the "freestanding" financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company adopted the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. 12. Contingencies a. Certain former shareholders of Carter-Wallace have brought legal action against the Company that purchased the pharmaceutical business of Carter-Wallace regarding the fairness of the consideration these shareholders received. Pursuant to various indemnification agreements, Armkel could be liable for damages up to $12 million, and the Company could be liable directly to Armkel for an amount up to $2.1 million. The Company believes that the consideration offered was fair to the former Carter-Wallace shareholders, and it cannot predict with certainty the outcome of this litigation. On March 27, 2003, GAMCO Investors, Inc. filed another complaint in the New York Supreme Court seeking damages from MedPointe Healthcare Inc. (the new name of the company formerly known as Carter-Wallace), 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 Armkel (some of the products acquired by Armkel were subsequently sold by Armkel to the Company) and the merger of MCC Acquisition Sub Corporation with and into Carter-Wallace. The complaint seeks monetary damages and equitable relief, including among other things, invalidation of the transactions. The defendants have moved to dismiss the complaint. The Company has not been named as a defendant in this action and believes it has no liability. b. On February 28, 2003 a class action suit was filed against the Company and Armkel, and two unrelated condom manufacturers, in the Superior Court of New Jersey alleging injuries sustained due to the use of condoms with N-9. In June 2003, the plaintiffs voluntarily dismissed the suit after defendants filed a motion to dismiss on the ground that their compliance with comprehensive federal medical device regulations precluded recovery. c. The Company has commitments to acquire approximately $12 million of raw material and packaging supplies from our 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. d. 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. 13. Reclassification Certain prior year amounts have been reclassified in order to conform with the current year presentation. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations --------------------- For the quarter ended June 27,2003, the Company reported net income of $ 24.6 million or diluted net income per share of $0.59.This includes a $0.09 per share gain resulting from settlement of litigation and a $0.02 per share charge associated with an impairment of a former Carter-Wallace facility being held for sale, both of which relate to the Company's Armkel LLC joint venture, and a $0.06 per share gain associated with a settlement of a State tax dispute. Net income in the year ago quarter was $18.7 million or $0.45 per diluted share, which included income of $0.05 per share related to the disproportionate allocation of profits to the Company under the terms of the Armkel joint venture agreement. The settlement of litigation referred to above relates to a $13.1 million net gain, after expenses and costs, from the settlement of patent infringement litigation, the net proceeds of which Armkel expects to receive in August. For the six months, net income increased to $45.6 million or $1.09 per diluted share compared to $33.6 million or $0.81 per diluted share. Besides the items noted in the first paragraph, net income in 2002 also includes a $0.06 per share first quarter acquisition related charge associated with the step-up of opening inventory values by Armkel. Net sales for the quarter were $256.3 million, or $2.2 million or 0.9% lower than last year. The decline reflects the discontinuation of certain former USA Detergents cleaners and former Carter-Wallace pet care products as well as a $2.3 million reversal in last year's second quarter of prior year promotion reserves due to a change in estimate. At the product line level, higher sales of liquid laundry detergent and certain deodorizers and cleaners, as well as higher exports, were offset by lower sales of laundry detergent powder, fabric softeners and certain oral care products. Specialty products sales were essentially unchanged from the year ago quarter at $46.8 million. Net sales for the six month period were $504.6 million or $10.7 million or 2.1% lower than last year. The reasons for the decline result from the matters described in the current quarter. In addition, international sales were adversely affected in the first quarter of 2003 because certain export operations were transferred to Armkel. Specialty products sales were essentially unchanged from the year ago period at $90.8 million. Gross Profit for the quarter was $79.6 million or 31.1% of net sales, a $3.6 million increase or 1.7 percentage point increase over last year. This increase is primarily due to integration benefits from the USA Detergents and Carter-Wallace acquisitions, and other cost reduction programs, partially offset by energy-related and other commodity-based cost increases. For the six month period, gross profit was $153.4 million or 30.4% of net sales compared to to $149.2 million or 29.0% of net sales last year. The reasons for the six month change result from the matters described in the current quarter. Marketing expenses increased $4.1 million and $4.2 million over the comparable three and six month periods of 2002. The increase is primarily associated with Personal Care products, namely higher Arm & Hammer Dentifrice and Arrid brands' advertising expenses, partially offset by a reduction in advertising expenses for Arm & Hammer Advanced Breathcare. Selling, general and administrative expenses decreased $1.3 million to $28.2 million in the quarter and $2.3 million to $56.3 million for the six month period. The decrease is primarily a result of the elimination of transition related expenses incurred in 2002 that were associated with the acquired Carter-Wallace products and a reduction in deferred compensation expenses, partially offset by higher personnel related expenses. Equity in earnings of affiliates increased $1.2 million in the quarter and $8.4 million for the six month period as a result of higher earnings by Armkel. Armkel's earnings in the quarter were higher as a result of the litigation settlement, partially offset by an impairment of an asset held for sale. Earnings in the year ago quarter reflect the disproportionate recapture in accordance with the terms of the Armkel joint venture agreement of $5 million of allocated losses sustained in the fourth quarter of 2001. (See note 7 to the consolidated financial statements for additional information.) The six month period increase is also impacted by the inventory step-up charge in the first quarter of 2002 relating to Armkel's opening inventory values. Investment earnings were lower as a result of lower interest rates. Interest expense was lower due to lower interest rates and a lower amount of debt outstanding. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Other income and expense in 2003 reflect foreign exchange gains by the Company's Brazilian subsidiary; in 2002, the Brazilian subsidiary recognized foreign exchange losses. The tax rate for the six months was 30.8%, compared to 34.6% a year ago. This decrease is a result of a settlement of a State tax dispute partially offset by a higher state tax rate and taxes associated with Armkel's sale of its Italian subsidiary in 2003. Segment Results Sales and operating results in affiliate companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are reported for segment purposes in a manner similar to consolidated subsidiaries. The effect of this convention is eliminated to adjust management reporting results to the amounts in the financial statements. The sales and operating results are presented in this manner to enable the chief decision maker (the CEO) to make decisions about allocating resources and assessing performance of the segments.
Unconsolidated Affiliates and (In thousands) Consumer Specialty Eliminations Total -------- --------- -------------- ----- Net Sales Second quarter 2003......................... $ 322,447 $ 58,270 $ (124,454) $ 256,263 Second quarter 2002......................... 316,408 56,804 (114,749) 258,463 Year to date 2003........................... 625,618 113,073 (234,130) 504,561 Year to date 2002........................... 616,611 110,049 (211,395) 515,265 Income from Operations Second quarter 2003......................... $ 51,890 $ 7,728 $ (34,569) $ 25,049 Second quarter 2002......................... 43,592 7,952 (27,251) 24,293 Year to date 2003........................... 101,800 12,784 (60,754) 53,830 Year to date 2002........................... 75,212 15,047 (38,739) 51,520
Consumer Products Combined Consumer Product net sales of the Company and its affiliate grew 2% to $322.4 million in the quarter. International sales increased due to foreign exchange gains and a strong performance by the European businesses, particularly in the areas of skin care, oral care and depilatories. Domestic sales were lower due to discontinuation of some former USA Detergents cleaners and former Carter-Wallace pet care products, as well as the reversal in last year's second quarter of $2.3 million of prior year promotion reserves due to a change in estimates. At the product line level, higher sales of liquid laundry detergent, certain deodorizers and cleaners, and Trojan Condoms were offset by lower sales of laundry detergent powder, fabric softeners, certain oral care products as well as Nair depilatories, a highly seasonal product line which was affected by the unseasonably cool and wet weather conditions. Income from operations in the quarter increased $8.3 million or 19% to $51.9 million due to integration benefits from the USA Detergents and Carter-Wallace acquisitions, and other cost reduction programs, partially offset by energy-related and other commodity-based cost increases. Marketing expenses were higher due to an increase in advertising costs in support of personal care products, both domestically and internationally. Operating profit also reflects the net effect of the litigation settlement and the impairment of the former Carter-Wallace facility held for sale. For the six month period, operating profit increased to $101.8 million or an increase of 35.3% from $75.2 million last year. The reasons for the increase , besides the items noted for the quarter , relate to the prior year $8.1 million charge for the remaining step-up of Armkel's opening inventory values established as part of purchase accounting. Specialty Products Combined Specialty Products sales grew $1.5 million or 2.6% in the current quarter and $3.0 million or 2.7% for the six month period due to higher specialty chemicals sales, partially offset by lower sales of animal nutrition products. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Operating profit was relatively unchanged in the quarter but was lower by $2.3 million for the six month period primarily as a result of higher manufacturing costs in certain animal nutrition and specialty chemical products. Liquidity and Capital Resources ------------------------------- The Company had outstanding total debt of $319.7 million, and cash of $54.0 million, for a net debt position of $265.7 million at June 27, 2003. This compares to $292.1 million at December 31, 2002. In the fourth quarter of 2001, the Company financed its investment in Armkel, the acquisition of USA Detergents and the Anti-perspirant and Pet Care businesses from Carter-Wallace with a $510 million credit facility consisting of a $125 million five year term loan (Term Loan A), a $285 million six year term loan (Term Loan B) and a $100 million revolving credit facility. The entire amount of the term loans was drawn at closing and the revolving credit facility remains fully un-drawn. Term Loan A paid interest at 200 basis points over LIBOR and Term Loan B pays interest at 250 basis points over LIBOR, with interest rates determined based on the ratio of total debt to EBITDA during the second quarter of 2003. Term Loan A was paid off in full during the second quarter 2003. EBITDA is a required component of the financial covenants contained in the Company's primary credit facility and management believes that the presentation of EBITDA is useful to investors as a financial indicator of the Company's ability to service its indebtedness. Financial covenants include a total debt to 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. EBITDA, as defined by the Company's loan agreement, was approximately $70.6 million for the six months of 2003. The leverage ratio at June 27, 2003 per the loan agreement was approximately 2.13 versus the agreement's maximum 3.25, and the interest coverage ratio was approximately 6.74 versus the agreement's minimum of 4.25. This credit facility is secured by a blanket lien on all of the Company's assets. The reconciliation of Net Cash Provided by Operating Activities (the most directly comparable GAAP financial measure) to the Company's key liquidity measure, "EBITDA", per the term loan agreement, is as follows (in millions): Net Cash Provided by Operating Activities..................... $ 43.5 Plus: Interest Expense...................................... 9.9 Current Income Tax Provision.......................... 14.5 Distributions from Affiliates......................... 2.3 Increase in Working Capital........................... 5.4 Less: Interest Income....................................... (.7) Other................................................. (4.3) ---------- EBITDA (per loan agreement)................................... $ 70.6 ========== During the first half of 2003, cash flow from operating activities was $43.5 million. Major factors contributing to the cash flow from operating activities included operating earnings before non-cash charges for depreciation and amortization, offset by an increase in working capital, and by the net non-cash impact from the equity in earnings of affiliates. Operating cash flow was used for additions to property, plant and equipment and to make an additional payment related to the Biovance acquisition. Operating cash together with proceeds from stock options exercised, were used to make both voluntary and mandatory debt repayments and to pay cash dividends. During the first quarter of 2003, the Company entered into a receivables purchase agreement with an issuer of receivables-backed commercial paper in order to refinance a portion, $60,000,000, of its primary credit facility. The transaction resulted in a reclassification of long-term debt to short-term debt in the Company's Consolidated Balance Sheet. Under this arrangement, the Company sold, and will sell from time to time, throughout the 3 year term of the agreement, its trade accounts receivable to a wholly-owned, consolidated, special purpose finance subsidiary, Harrison Street Funding LLC, a Delaware limited liability company ("Harrison"). Harrison in turn sold, and will sell on an ongoing basis, to the commercial paper issuer an undivided interest in the pool of accounts receivable. The receivables assets and the short-term borrowings of Harrison are included in the consolidated financial statements of the Company. The transactions were entered into to reduce certain expenses associated with the credit facility in addition to lowering the Company's financing costs by accessing the commercial paper market. The balance outstanding under the agreement is $58 million at June 27, 2003. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Recent Accounting Pronouncements -------------------------------- In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. The Company will adopt the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which aims to eliminate diversity in practice by requiring that the "freestanding" financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company adopted the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At current prices, the Company expects to incur over $10 million in energy and other commodity-based cost increases for the year, for materials such as resin, surfactants and palm oil. While these cost increases will slow down gross margin growth, the Company still expects to achieve a gross margin improvement for the year, through reductions in other raw and packaging materials costs, and improved manufacturing and distribution efficiencies. For additional information, refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, we have concluded that the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting within the time periods specified in the SEC's rules and forms material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Since the Chief Executive Officer's and Chief Financial Officer's most recent review of the Company's internal controls systems, there have been no significant changes in internal controls or in other factors that could significantly affect these controls. Cautionary Note on Forward-Looking Statements This report contains forward-looking statements relating, among others, to short- and long-term financial objectives, sales growth, cash flow and cost improvement programs. 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), raw material and energy prices, the financial condition of major customers, and the Company's determination and ability to exercise its option to acquire the remaining 50% interest in Armkel. With regard to the new product introductions referred to in this report, there is particular uncertainty relating to trade, competitive and consumer reactions. Other factors, which could materially affect the results, include the outcome of contingencies, including litigation, pending regulatory proceedings, environmental remediation and the acquisition or divestiture of assets. 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 as permitted by the Private Securities Litigation Reform Act of 1995. PART II - Other Information ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits (3.1) Restated Certificate of Incorporation of the Corporation filed on June 6, 2003, as filed with the Secretary of State of the State of Delaware. (3.2) Certificate of Correction of the Amended and Restated Certificate of Incorporation of the Corporation filed on July 12, 1990, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.3) Certificate of Correction of the Amended and Restated Certificate of Incorporation of the Corporation filed on October 22, 1992, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.4) Certificate of Correction of the Certificate of Incorporation of the Corporation filed on June 6, 2003, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.5) Restated Certificate of Incorporation of the Corporation, as amended through July 24, 2003. * (10) Employment Agreement, dated June 16, 2003 by and between Church & Dwight Co., Inc. and Susan E. Goldy for the position of Vice President, General Counsel and Secretary. (99.1) Certification of the CEO of Church & Dwight Co., Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification of the CFO of Church & Dwight Co., Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K On May 7, 2003, a report on Form 8-K was filed to announce that the Company issued a press release relating to earnings for the quarter ended March 28, 2003. * Indicates a management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form. 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: August 5, 2003 /s/ Zvi Eiref ---------------------------- ------------------------------------- ZVI EIREF VICE PRESIDENT FINANCE DATE: August 5, 2003 /s/ Gary P. Halker --------------------------- -------------------------------------- GARY P. HALKER VICE PRESIDENT FINANCE AND TREASURER CERTIFICATION I, Robert A. Davies, III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Church & Dwight Co., Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of any material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls: and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 5, 2003 -------------------- /s/ Robert A. Davies, III ------------------------------------ Robert A. Davies, III Chairman and Chief Executive Officer CERTIFICATION I, Zvi Eiref, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Church & Dwight Co., Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of any material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls: and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 5, 2003 -------------------- /s/ Zvi Eiref ----------------------------------- Zvi Eiref Chief Financial Officer EXHIBITS (3.1) Restated Certificate of Incorporation of the Corporation filed on June 6, 2003, as filed with the Secretary of State of the State of Delaware. (3.2) Certificate of Correction of the Amended and Restated Certificate of Incorporation of the Corporation filed on July 12, 1990, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.3) Certificate of Correction of the Amended and Restated Certificate of Incorporation of the Corporation filed on October 22, 1992, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.4) Certificate of Correction of the Certificate of Incorporation of the Corporation filed on June 6, 2003, as filed with the Secretary of the State of Delaware on July 24, 2003. (3.5) Restated Certificate of Incorporation of the Corporation, as amended through July 24, 2003. (10) Employment Agreement, dated June 16, 2003 by and between Church & Dwight Co., Inc. and Susan E. Goldy for the position of Vice President, General Counsel and Secretary. (99.1) Certification of the CEO of Church & Dwight Co., Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification of the CFO of Church & Dwight Co., Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.