1 of 20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 27, 2002 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 1, 2002, there were 39,880,333 shares of Common Stock outstanding. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended (Dollars in thousands, except per share data) Sept. 27, Sept. 28, Sept. 27, Sept. 28, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales.......................................... $ 263,786 $ 238,372 $ 779,051 $ 694,788 Cost of sales...................................... 182,586 166,524 548,663 489,049 ---------- ---------- ---------- ---------- Gross Profit....................................... 81,200 71,848 230,388 205,739 Marketing expense.................................. 22,752 19,995 61,737 55,240 Selling, general and administrative expenses....... 30,299 26,018 88,982 81,207 ---------- ---------- ---------- ---------- Income from Operations............................. 28,149 25,835 79,669 69,292 Equity in earnings of affiliates................... 5,453 886 17,734 3,069 Investment earnings................................ 295 360 1,300 1,211 Other income (expense)............................. (1,394) (110) (2,481) (1,453) Interest expense................................... (5,663) (3,278) (17,848) (5,128) ----------- ----------- ----------- ----------- Income before minority interest and taxes ......... 26,840 23,693 78,374 66,991 Minority interest.................................. -- 29 129 3,783 ---------- ---------- ---------- ---------- Income before taxes................................ 26,840 23,664 78,245 63,208 Income taxes....................................... 9,265 8,418 27,095 22,337 ---------- ---------- ---------- ---------- Net Income......................................... 17,575 15,246 51,150 40,871 Retained earnings at beginning of period........... 340,072 296,907 312,409 276,700 ---------- ---------- ---------- ---------- 357,647 312,153 363,559 317,571 Dividends paid..................................... 2,985 2,924 8,897 8,342 ---------- ---------- ---------- ---------- Retained earnings at end of period................. $ 354,662 $ 309,229 $ 354,662 $ 309,229 ========== ========== ========== ========== Weighted average shares outstanding - Basic........ 39,794 39,011 39,548 38,803 Weighted average shares outstanding - Diluted...... 41,875 41,037 41,749 40,724 Earnings Per Share: Net income per share - Basic....................... $.44 $.39 $1.29 $1.05 Net income per share - Diluted..................... $.42 $.37 $1.23 $1.00 Dividends Per Share................................ $.075 $.075 $.225 $.215 </TABLE> See Notes to Condensed Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> Sept. 27, 2002 Dec. 31, 2001 -------------- ------------- (Dollars in thousands) (Unaudited) Assets Current Assets <S> <C> <C> Cash and cash equivalents........................................................... $ 76,148 $ 52,446 Accounts receivable, less allowances of $2,030 and $3,666........................... 102,600 106,291 Inventories......................................................................... 89,133 101,214 Deferred income taxes............................................................... 25,260 19,849 Note receivable and current portion of long-term note receivable.................... 870 5,803 Prepaid expenses.................................................................... 6,432 7,604 ---------- ---------- Total Current Assets................................................................ 300,443 293,207 ---------- ---------- Property, Plant and Equipment (Net)................................................. 240,975 231,449 Notes Receivable.................................................................... 9,708 11,951 Equity Investment in Affiliates..................................................... 129,408 115,121 Long-term Supply Contracts.......................................................... 6,827 7,695 Tradenames.......................................................................... 85,272 136,934 Goodwill ........................................................................... 184,352 127,320 Other Assets........................................................................ 29,223 25,408 ---------- ---------- Total Assets........................................................................ $ 986,208 $ 949,085 ========== ========== Liabilities and Stockholders' Equity Current Liabilities Short-term borrowings............................................................... $ 4,737 $ 3,220 Accounts payable and accrued expenses............................................... 158,825 176,176 Current portion of long-term debt................................................... 16,035 8,360 Income taxes payable................................................................ 6,038 8,260 ---------- ---------- Total Current Liabilities........................................................... 185,635 196,016 ---------- ---------- Long-term Debt...................................................................... 379,969 406,564 Deferred Income Taxes............................................................... 47,564 27,032 Deferred and Other Long-term Liabilities............................................ 24,346 19,164 Nonpension Postretirement and Postemployment Benefits............................... 15,857 15,880 Minority Interest................................................................... 173 2,126 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.......................................................... 36,488 28,414 Retained earnings................................................................... 354,662 312,409 Accumulated other comprehensive (loss).............................................. (15,624) (9,728) ----------- ---------- 422,187 377,756 Common stock in treasury, at cost: 6,839,805 shares in 2002 and 7,518,105 shares in 2001.......................... (89,523) (95,453) ----------- ---------- Total Stockholders' Equity.......................................................... 332,664 282,303 ========== ========== Total Liabilities and Stockholders' Equity.......................................... $ 986,208 $ 949,085 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW <TABLE> <CAPTION> Nine Months Ended (Dollars in thousands) Sept. 27, 2002 Sept. 28, 2001 -------------- --------------- Cash Flow From Operating Activities <S> <C> <C> Net Income.......................................................................... $ 51,150 $ 40,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization....................................... 21,319 19,649 Equity in earnings of affiliates............................................... (17,734) (3,069) Deferred income taxes.......................................................... 18,110 1,696 Other.......................................................................... 2,439 (782) Change in assets and liabilities: Decrease/(increase) in accounts receivable..................................... 3,304 (29,686) Decrease/(increase) in inventories............................................. 10,436 (11,540) Decrease/(increase) in prepaid expenses........................................ 634 (79) (Decrease) in accounts payable................................................. (19,846) (11,722) Increase in income taxes payable............................................... 1,945 9,242 Increase in other liabilities.................................................. 1,220 2,009 --------- --------- Net Cash Provided By Operating Activities........................................... 72,977 16,589 Cash Flow From Investing Activities Decrease in short-term investments.................................................. -- 1,993 Additions to property, plant and equipment.......................................... (30,879) (22,323) Acquisition of Biovance stock (net of cash acquired of $365)........................ (7,747) -- Investment in note receivable....................................................... -- (16,380) Proceeds from note receivable....................................................... 5,803 -- Distributions from affiliates....................................................... 3,447 4,901 Other long-term assets.............................................................. (717) -- Proceeds from sale of fixed assets.................................................. 211 2,349 Purchase of USAD stock.............................................................. -- (101,642) Investment in affiliates............................................................ (2,631) (108,450) Investment in supply contract....................................................... -- (808) Purchase of and adjustment to purchase price of product lines....................... (919) (128,939) Purchase of intangibles............................................................. -- (1,625) --------- --------- Net Cash Used In Investing Activities............................................... (33,432) (370,924) Cash Flow From Financing Activities Long-term debt borrowing............................................................ -- 560,000 Long-term debt (repayment).......................................................... (20,480) (170,179) Short-term debt borrowing/(repayment)............................................... 3,576 (11,896) Proceeds from stock options exercised............................................... 9,958 8,561 Deferred financing costs............................................................ -- (8,632) Payment of cash dividends........................................................... (8,897) (8,342) ---------- ---------- Net Cash (Used In) Provided By Financing Activities................................. (15,843) 369,512 ---------- --------- Net Change In Cash and Cash Equivalents............................................. 23,702 15,177 Cash And Cash Equivalents At Beginning Of Year...................................... 52,446 21,573 --------- --------- Cash And Cash Equivalents At End Of Period.......................................... $ 76,148 $ 36,750 ========= ========= Acquisition in which liabilities were assumed are as follows: Fair value of assets................................................................ $ 14,880 $ 169,907 Cash paid for stock................................................................. (8,112) (110,877)* --------- ---------- Liabilities assumed................................................................. $ (6,768) $ (59,030) ========= ========= </TABLE> *Includes $9.2 million paid in 2000 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 September 27, 2002, the consolidated statements of income and retained earnings for the three months and nine months ended September 27, 2002 and September 28, 2001 and the consolidated statements of cash flow for the nine months then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments, except as noted in Management's Discussion and Analysis) necessary to present fairly the financial position, results of operations and cash flow at September 27, 2002 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, 2001 annual report to shareholders. The results of operations for the period ended September 27, 2002 are not necessarily indicative of the operating results for the full year. 2. Inventories consist of the following: <TABLE> <CAPTION> (In thousands) Sept. 27, 2002 Dec. 31, 2001 -------------- ------------- <S> <C> <C> Raw materials and supplies.......................................................... $ 29,648 $ 28,869 Work in process..................................................................... 254 651 Finished goods ..................................................................... 59,231 71,694 ---------- ----------- $ 89,133 $ 101,214 ========== ========== </TABLE> 3. Property, Plant and Equipment consist of the following: <TABLE> <CAPTION> (In thousands) Sept. 27, 2002 Dec. 31, 2001 -------------- ------------- <S> <C> <C> Land................................................................................ $ 6,285 $ 6,503 Buildings and improvements.......................................................... 101,148 92,577 Machinery and equipment............................................................. 249,376 253,749 Office equipment and other assets................................................... 25,298 25,037 Software ........................................................................... 5,547 5,652 Mineral rights ..................................................................... 153 257 Construction in progress............................................................ 34,074 17,593 ---------- ---------- 421,881 401,368 Less accumulated depreciation, depletion and amortization........................... 180,906 169,919 ---------- ---------- Net Property, Plant and Equipment................................................... $ 240,975 $ 231,449 ========== ========== </TABLE> 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.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Segment Information Segment sales and operating profit for the third quarter and year to date of 2002 and 2001 are as follows: <TABLE> <CAPTION> Unconsolidated (In thousands) Consumer Specialty Affiliates Total -------- --------- ---------- ----- Net Sales <S> <C> <C> <C> <C> <C> Third quarter 2002........................ $326,752 $56,523 $(119,489) $263,786 Third quarter 2001........................ 195,569 54,105 (11,302) 238,372 Year to date 2002......................... 963,871 166,572 (351,392) 779,051 Year to date 2001......................... 564,794 166,413 (36,419) 694,788 Operating Profit Third quarter 2002........................ 42,202 7,628 (21,681) 28,149 Third quarter 2001........................ 19,028 8,358 (1,551) 25,835 Year to date 2002......................... 119,644 22,670 (62,645) 79,669 Year to date 2001......................... 50,339 24,599 (5,646) 69,292 </TABLE> Both Consumer and Specialty net sales and operating profit include 100 percent of the results of unconsolidated affiliates. Product line net sales data for the third quarter and year to date periods are as follows: <TABLE> <CAPTION> Deodorizing Uncon- and Personal International Specialty solidated Cleaning Laundry Care Consumer Products Affiliates Total -------- ------- ---- -------- -------- ---------- ----- <S> <C> <C> <C> <C> <C> <C> <C> 3rd Qtr 2002.... $ 62,349 $ 101,142 $ 101,806 $ 61,455 $ 56,523 $ (119,489) $ 263,786 3rd Qtr 2001.... 59,640 98,308 26,243 11,378 54,105 (11,302) 238,372 YTD 2002........ $ 188,123 $ 299,046 $ 293,879 $ 182,823 $ 166,572 $ (351,392) $ 779,051 YTD 2001........ 165,277 288,743 80,545 30,229 166,413 (36,419) 694,788 </TABLE> As a result of the Arrid Antiperspirant acquisition and the formation of Armkel, the Company has reclassified the consumer product division into four product lines, which breaks out international from the underlying products and combines the specialty products division into one product line. Prior year sales have been reclassified. 6. Armkel, LLC The following table summarizes financial information for Armkel, LLC. The Company accounts for its 50% interest under the equity method. <TABLE> <CAPTION> Quarter Ended Nine Months Ended (In thousands) Sept. 27, 2002 Sept. 27, 2002 -------------- -------------- Income statement data: <S> <C> <C> Net sales....................................................................... $ 110,290 $ 322,601 Gross profit.................................................................... 61,756 170,472 Net income ..................................................................... 9,316 25,209 Equity earnings in affiliate ................................................... 4,658 15,104 </TABLE> <TABLE> <CAPTION> Sept. 27, December 31, (In thousands) 2002 2001 ---- ---- Balance sheet data: <S> <C> <C> Current assets.................................................................. $ 252,152 $ 269,343 Noncurrent assets............................................................... 568,759 544,450 Short-term debt................................................................. 12,441 5,671 Current liabilities (excluding short-term debt)................................. 115,647 136,257 Long-term debt.................................................................. 433,656 439,750 Other long-term liabilities..................................................... 28,478 28,711 Partners' equity................................................................ 230,689 203,404 </TABLE> 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 28, 2001, the date of the acquisition. The Company is entitled to 100% of the profits until an amount equal to the accumulated excess losses is recorded. During 2002, the Company invoiced Armkel $15.7 million for administrative and management oversight services, and purchased $5.4 million of deodorant antiperspirant inventory produced by Armkel at its cost. Armkel invoiced the Company $1.6 million of transition administrative services. The Company has a receivable from Armkel at September 27, 2002 of approximately $5.0 million that primarily related to administration fees and invoices paid by the Company on behalf of Armkel. 7. Acquisitions a. As previously announced, in January the Company acquired Biovance Technologies, Inc., a small Oskaloosa, Iowa-based producer of specialty feed ingredients which complement our existing range of animal nutrition products. The purchase price paid in the first quarter was $7.7 million (net of cash acquired) and included an additional $6.8 million for the assumption of liabilities. The Company has accrued $3.0 million of additional payments based upon contractual obligations, which will be paid in 2003. Additional payments will be required based on operating performance. Pro forma results of operations are not included as they would not have a material effect on the Company's results of operations. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: <TABLE> <CAPTION> (In thousands) <S> <C> Current assets.......................................................................... $ 1,374 Property, plant and equipment........................................................... 4,640 Patents and non-compete agreement....................................................... 3,183 Tradenames.............................................................................. 490 Goodwill................................................................................ 5,193 ----------- Total assets acquired (includes cash of $365)........................................... 14,880 Current liabilities..................................................................... (4,529) Long-term liabilities................................................................... (2,239) ----------- Net assets acquired..................................................................... $ 8,112 =========== </TABLE> The results of operations are included in the accompanying financial statements from January 1, 2002, and were not significant. An appraisal has been completed and the purchase price allocation was modified based on its results. Goodwill is not being amortized, based on the provisions of SFAS 142 "Goodwill and Other Intangible Assets." The Goodwill is not expected to be deductible for tax purposes and will be included in the specialty products segment. All other intangibles are being amortized based on their estimated useful lives. b. During July, the Company increased its ownership position of its Brazilian Subsidiary, QGN to approximately 98.5% from 85% at a cost of approximately $4.4 million. Approximately one half was paid in July and the balance is due in 2003. 8. Recent Accounting Pronouncements a. Effective January 1, 2002, the Company adopted EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer" and EITF 01-9 "Accounting for Consideration given to a Customer or a Reseller of the Vendor's Products." EITF 00-14 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 did previously. EITF 00-25 outlines required accounting treatment of certain sales incentives, including slotting or placement fees, cooperative advertising arrangements, buydowns and other allowances. The Company previously recorded such costs as marketing expenses. The issue requires the Company to report the paid consideration expense as a reduction of sales, rather than marketing expense. EITF 01-9 codifies and reconciles certain issues from EITF 00-14 and EITF 00-25. The third quarter and year to date 2001 net sales have been reclassified to conform with these pronouncements. The impact was a reduction of net sales for the third quarter and year to date periods of approximately $35.9 and $100.6 million in 2002 and $32.2 and $89.5 million in 2001, respectively, and did not have an effect on net income. b. In January 2002, the Company adopted 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 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 has evaluated this statement and has determined there is no material impact on the Company's consolidated financial statements. c. During the second quarter, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company will adopt the provisions of this Statement upon its effective date and does not anticipate it to have a material effect on its financial statements. d. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial statements. 9. Goodwill and Other Intangibles 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. The following tables discloses the carrying value of all intangible assets: <TABLE> <CAPTION> (In thousands) September 27, 2002 December 31, 2001 ------------------ ----------------- Gross Carrying Accum. Gross Carrying Accum. Amount Amortization Net Amount Amortization Net Amortized intangible assets: - --------------------------- <S> <C> <C> <C> <C> <C> <C> Tradenames............ $ 31,890 $ (4,485) $ 27,405 $ 31,400 $ (3,271) $ 28,129 Technology............ 6,281 (725) 5,556 4,241 (302) 3,939 Non Compete Agreement. 1,143 (88) 1,055 -- -- -- --------- -------- --------- -------- ------- ------- Total................. $ 39,314 $ (5,298) $ 34,016 $ 35,641 $ (3,573) $ 32,068 ========= ========= ========= ========== ======== ========= </TABLE> <TABLE> <CAPTION> Unamortized intangible assets - Carrying value <S> <C> <C> Tradenames............ $ 57,867 $ 108,805 --------- ---------- Total................. $ 57,867 $ 108,805 ========= ========== </TABLE> Intangible amortization expense amounted to $1.7 million in 2002 and $4.3 in 2001. The estimated intangible amortization for each of the next five years is approximately $2.3 million. The changes in the carrying amount of goodwill for the nine months ended September 27, 2002 is as follows: <TABLE> <CAPTION> (In thousands) Consumer Specialty Total <S> <C> <C> <C> Balance December 31, 2001......................................... $ 116,372 $ 10,948 $ 127,320 Purchase accounting adjustments................................... 49,885 -- 49,885 Goodwill acquired during 2002..................................... -- 7,859 7,859 FAS 109 adjustment................................................ -- (137) (137) Foreign exchange/other............................................ 1 (576) (575) ----------- ---------- ----------- Balance September 27, 2002........................................ $ 166,258 $ 18,094 $ 184,352 =========== ========== =========== </TABLE> In accordance with FAS 142, the Company completed the impairment test of the valuation of goodwill and intangibles as of January 1, 2002 and its annual review as of April 1, 2002 and based upon the results, there was no impairment. During the third quarter, the Company took a $1.1 million impairment charge included in selling, general and administrative expenses related to one of its unamortized tradenames due to changes in market conditions since April 1, 2002. Fair value was determined using discounted cash flows. During the second quarter, the Company completed the purchase price allocation of the USAD acquisition and during the third quarter completed the purchase price allocation of the Carter-Wallace acquired brands, which adjusted the valuation of indefinite lived tradenames and goodwill. The Company in 2001 amortized tradenames and goodwill under rules in effect prior to the issuance of FAS 142 using the same useful life, therefore, there was no impact to the 2001 amortization expense recorded by the Company.
Net income results and per share amounts for the quarter and nine months ended September 27, 2002 and September 28, 2001 reflecting goodwill and intangible assets that are no longer being amortized is as follows: <TABLE> <CAPTION> (Dollars in thousands, except per share data) Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 27, Sept. 28, Sept. 27, Sept. 28, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Reported net income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871 Goodwill amortization (net of tax)..................... -- 604 -- 1,443 Discontinued tradename amortization (net of tax)....... -- 301 -- 401 ---------- ---------- ---------- ---------- Adjusted net income.................................... $ 17,575 $ 16,151 $ 51,150 $ 42,715 ========== ========== ========== ========== Basic earnings per share As reported........................................ $.44 $.39 $1.29 $1.05 Goodwill amortization.............................. -- .01 -- .03 Tradename amortization............................. -- .01 -- .01 ---------- ---------- ---------- ---------- Adjusted net income................................ $.44 $.41 $1.29 $1.09 ========== ========== ========== ========== Diluted earnings per share As reported........................................ $.42 $.37 $1.23 $1.00 Goodwill amortization.............................. -- .01 -- .03 Tradename amortization............................. -- .01 -- .01 ---------- ---------- ---------- ---------- Adjusted net income................................ $.42 $.39 $1.23 $1.04 ========== ========== ========== ========== </TABLE> 10. Comprehensive Income The following table presents the Company's Comprehensive Income for the three months ending September 27, 2002 and September 28, 2001: <TABLE> <CAPTION> Three Months Ended Nine Months Ended (In thousands) Sept. 27, Sept. 28, Sept. 27, Sept. 28, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Income......................................... $ 17,545 $ 15,246 $ 51,150 $ 40,871 Other Comprehensive Income, net of tax: Foreign exchange translation adjustments........ (3,184) (1,420) (4,678) (3,512) Interest rate swap agreements................... (946) -- (1,218) -- Available for Sale securities................... -- (1,050) -- 2,152 ---------- ----------- ---------- ---------- Comprehensive Income............................... $ 13,415 $ 12,776 $ 45,254 $ 39,511 ========== ========== ========== ========== </TABLE> 11. Commitments and 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 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. b. The Company has commitments to acquire approximately $15 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. c. 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. 12. 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 27,2002 net sales increased 10.7% from $238.4 million to $263.8 million. Consumer sales increased 11.2% to $217.6 million, primarily due to the addition of the Arrid antiperspirant and Lambert Kay pet care businesses as part of the Carter-Wallace acquisition. Specialty products increased 7.9% to $46.2 million, primarily due an increase in animal nutrition products, which was impacted by the Biovance acquisition. Excluding acquisitions and disposals, and an adjustment of $2.5 million for prior year promotion reserves based upon latest estimates, sales of existing products increased 3%, with higher laundry, deodorizer and specialty products sales, and slightly lower personal care sales. For the nine-month period, net sales increased 12.1% to $779.1 million from $694.8 million. Consumer sales increased 13.7% to $642.4 million for the same reasons as the current quarter which also includes the $1.8 million prior year promotion reserve adjustment from the second quarter 2002. Specialty products increased 5.1% to $136.7 million, again for the same reason as the current quarter. Excluding the items noted earlier, total sales increased 2.9%. Effective January 1, 2002, the Company adopted EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer" and EITF 01-9 "Accounting for Consideration Given to a Customer or a Reseller of the Vendor's Products." EITF 00-14 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 did previously. EITF 00-25 outlines required accounting treatment of certain sales incentives, including slotting or placement fees, cooperative advertising arrangements, buydowns and other allowances. The Company previously recorded such costs as marketing expenses. The issue requires the Company to report the paid consideration expense as a reduction of sales, rather than marketing expense. EITF 01-9 codifies and reconciles certain issues from EITF 00-14 and EITF 00-25. The third quarter and year to date 2001 net sales have been reclassified to conform with these pronouncements. The impact was a reduction of net sales for the third quarter and year to date periods of approximately $35.9 and $100.6 million in 2002 and $32.2 and $89.5 million in 2001, and did not have an effect on net income. Gross profit margin for the quarter was 30.8% and 30.1% as adjusted for the change in promotion reserves versus 30.1% in 2001. During the quarter, the Company sold the remaining high cost antiperspirant inventories produced at the Carter-Wallace Cranbury plant. Gross profit margin for the nine-month period was 29.6%, unchanged from 2001. This is a result of expenses associated with the startup of its Madera, California animal nutrition facility, higher expenses associated with the Cranbury manufactured Arrid Antiperspirant, an increase in consumer coupon expenses related to 2002 sales which reduced net sales and lower sales on its existing personal care products. This was offset by lower manufacturing and distribution costs on laundry products and the prior year promotion reserve adjustments. Marketing expenses increased $2.8 million in the quarter and $6.5 million for the nine-month period. During the current quarter, increased spending on Arm & Hammer deodorant antiperspirant and spending associated with the acquired products were partially offset by lower spending on other personal care products. For the nine-month period, the increase is primarily due to the acquired products partially offset by lower spending on existing personal care products. Selling, general and administrative expenses increased $4.3 million to $30.3 million in the quarter and $7.8 million to $89.0 for the nine-month period. In the quarter, higher personnel related expenses and transition expenses associated with the Carter-Wallace acquired products, a $1.1 million impairment charge related to the tradename valuation of a recently acquired brand and higher deferred compensation expenses in the current quarter were partially offset by the elimination of Goodwill and certain tradename amortization expense associated with the Company's adoption of FAS 142. Excluding deferred compensation expenses, the reason for the nine month increase is consistent with the third quarter. Earnings from affiliates increased due to the inclusion of Armkel, LLC. The Company's existing equity investments, Armand Products and Armakleen were virtually unchanged. Interest expense increased significantly from last year as a result of the Company carrying the debt that was used to finance the two significant acquisitions in 2001. Other expenses include in the quarter and nine-month period foreign exchange losses associated with the Company's Brazilian subsidiary of $1.3 million and $2.5 million, respectively. Earnings were negatively impacted in 2001 by a change in the fair value of derivative instruments not designated as
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued) hedging instruments. Subsequently, these contracts were designated as hedging instruments of debt incurred as part of the Carter-Wallace acquisition and changes in value were recorded through other comprehensive income in the equity portion of the Company's Balance Sheet. The effective tax rate for the nine-month period was 34.6% versus 35.3% last year. This reflects the impact of Armkel's foreign subsidiaries, whose post-tax results are included in equity in earnings of affiliates, partially offset by a higher state tax rate. For the quarter, net income was $17.6 million or $.44 per basic share and $.42 per diluted share, compared to $15.2 million or $.39 per basic share and $.37 per diluted share in the same period last year. This year's results included a reversal of prior year promotion liabilities of approximately $.04 per share, partially offset by the tradename impairment charge of $.02 per share. Last year's results included a $.02 per share charge related to intangibles amortization that was discontinued in 2002 with the adoption of accounting standard FAS 142. For the nine months, net income increased to $51.1 million or $1.29 per basic share and $1.23 per diluted share compared to $40.9 million or $1.05 per basic share and $1.00 per diluted share in the same period last year. This year's results included a $.06 per share first quarter accounting charge relating to the purchase accounting step-up of opening inventory carrying values by Armkel, as well as a $.05 per share second quarter gain related to the allocation of profits of Armkel, a note receivable reserve of approximately $.02 per share, the reversal of prior year promotion reserves of $.07 per share and a $.02 per share charge associated with the tradename impairment referred to earlier. Last year's results included a $.02 plant shutdown charge, as well as a $.04 intangibles amortization charge discontinued in 2002. Liquidity and Capital Resources The Company considers cash and short-term investments as the principal measurement of its liquidity. At September 27, 2002, cash including cash equivalents totaled $76.1 million as compared to $52.4 million at December 31, 2001. The Company has outstanding long-term debt of $380.0 million, and the aforementioned cash equivalents less short-term debt of $20.8 million, for a net debt position of $324.7 million at quarter-end. In addition, the Company had an unused revolving credit facility of $100 million. Based on the definition in its loan agreements, the Company's cash flow (EBITDA) is estimated to be over $102 million for the nine months. Financial covenants include a leverage ratio and an interest coverage ratio, which were both met for the quarter. The Company believes cash on hand, along with the $100 million revolving credit facility is sufficient to meet its liquidity needs, which includes future capital projects. During the first nine months of 2002, the Company generated $73.0 million of cash flow from operating activities and received $10.0 million from stock option exercises. Significant expenditures include the purchase of Biovance stock of $7.7 million, property, plant and equipment additions of $30.9 million, the net repayment of debt of $16.9 million and the payment of cash dividends of $8.9 million. Cautionary Note on Forward-Looking Statements This report contains forward-looking statements relating, among others, to liquidity needs, contingencies and other matters. These statements, represent the intentions, expectations and beliefs of Church & Dwight, and are subject to risks, uncertainties and other factors, many of which are outside the Company's control. These factors, which include the ability of Church & Dwight to successfully complete the integration of the operations of the consumer products business of Carter-Wallace into the Armkel joint venture and Church & Dwight, and assumptions as to market growth and consumer demand (including the effect of recent political and economic events on consumer purchases), and the outcome of contingencies, including litigation, environmental remediation and the divestiture of assets, could cause actual results to differ materially from such forward-looking statements. With regard to new product introductions, there is particular uncertainty related to trade, competitive and consumer reactions. For a description of additional cautionary statements, see Church & Dwight's annual report filed with the SEC.
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 Messrs. Davies' and Eiref'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. PART II - Other Information Item 6. Exhibits and Reports on Form 8-K a. Exhibits (11) Computation of earnings per share (99.1) Statement regarding the 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) Statement regarding the 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 (10) Compensation Plans and Arrangements (a) Employment letter dated July 24, 2002, by and between Church & Dwight Co., Inc. and Andrew B. Steinberg for the position of Vice President, General Counsel and Secretary. (b) Separation and Consulting Agreement dated October 4, 2002, by and between Church & Dwight Co., Inc. and Mark A. Bilawsky. b. No reports on Form 8-K were filed for the three months ended September 27, 2002.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES EXHIBIT 11 - Computation of Earnings Per Share (In thousands except per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 27, Sept. 28, Sept. 27, Sept. 28, 2002 2001 2002 2001 ---- ---- ---- ---- BASIC: <S> <C> <C> <C> <C> Net Income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871 Weighted average shares outstanding................ 39,794 39,011 39,548 38,803 Basic earnings per share........................... $.44 $.39 $1.29 $1.05 DILUTED: Net Income.................................... $ 17,575 $ 15,246 $ 51,150 $ 40,871 Weighted average shares outstanding................ 39,794 39,011 39,548 38,803 Incremental shares under stock option plans........ 2,081 2,026 2,201 1,921 ---------- ---------- ---------- ---------- Adjusted weighted average shares outstanding....... 41,875 41,037 41,749 40,724 ---------- ---------- ---------- ---------- Diluted earnings per share......................... $.42 $.37 $1.23 $1.00 </TABLE>
EXHIBIT 99.1 The Certification of the Chief Executive Officer of Church & Dwight Co., Inc. Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is not being filed with the Quarterly Report but has been submitted to the Securities and Exchange Commission under separate cover.
EXHIBIT 99.2 The Certification of the Chief Financial Officer of Church & Dwight Co., Inc. Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is not being filed with the Quarterly Report but has been submitted to the Securities and Exchange Commission under separate cover
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 8, 2002 /s/ Zvi Eiref --------------------------- ------------------------------------- ZVI EIREF VICE PRESIDENT FINANCE DATE: November 8, 2002 /s/ Gary P. Halker --------------------------- ------------------------------------- GARY P. HALKER VICE PRESIDENT, CONTROLLER AND CHIEF INFORMATION OFFICER
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 other 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 (of 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: November 8, 2002 ---------------- /s/ Robert A. Davies, III --------------------------------- Robert A. Davies, III 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 other 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 (of 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: November 8, 2002 ---------------- /s/ Zvi Eiref --------------------------------- Zvi Eiref Chief Financial Officer