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 July 1, 2005
Commission file number 1-10585
CHURCH & DWIGHT CO., INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
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 5, 2005, there were 64,041,599 shares of Common Stock outstanding.
TABLE OF CONTENTS
ITEM
1.
Financial Statements
2.
Management’s Discussion and Analysis
3.
Quantitative and Qualitative Disclosure About Market Risk
4.
Controls and Procedures
6.
Exhibits
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Net Sales
Cost of sales
Gross Profit
Marketing expense
Selling, general and administrative expenses
Income from Operations
Equity in earnings of affiliates
Investment earnings
Loss on early extinguishment of debt
Other income (expense), net
Interest expense
Income before minority interest and taxes
Minority interest
Income before taxes
Income taxes
Net Income
Retained earnings at beginning of period
Dividends paid
Retained earnings at end of period
Weighted average shares outstanding - Basic
Weighted average shares outstanding - Diluted
Net income per share - Basic
Net income per share - Diluted
Dividends Per Share
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowances of $1,748 and $1,171
Inventories
Deferred income taxes
Note receivable – current
Net assets held for sale
Prepaid expenses
Total Current Assets
Property, Plant and Equipment (Net)
Note Receivable
Equity Investment in Affiliates
Long-term Supply Contracts
Tradenames and Other Intangibles
Goodwill
Other Assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Short-term borrowings
Accounts payable and accrued expenses
Current portion of long-term debt
Income taxes payable
Total current liabilities
Long-term Debt
Deferred Income Taxes
Deferred and Other Long Term Liabilities
Pension, Postretirement and Postemployment Benefits
Minority Interest
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock-$1.00 par value
Authorized 2,500,000 shares, none issued
Authorized 150,000,000 shares, issued 69,991,482 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Common stock in treasury, at cost:
5,973,152 shares in 2005 and 6,803,296 shares in 2004
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
Cash Flow From Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization
Distributions from unconsolidated affiliates
Net loss (gain) on disposal of assets
Asset impairment charges
Net loss on early extinguishment of debt
Other
Change in assets and liabilities:
(Increase) in accounts receivable
(Increase) decrease in inventories
(Increase) decrease in prepaid expenses
(Decrease) increase in accounts payable
Increase in income taxes payable
Increase in other liabilities
Net Cash Provided By Operating Activities
Cash Flow From Investing Activities
Additions to property, plant and equipment
Armkel acquisition (net of cash acquired)
Proceeds from note receivable
Contingent acquisition payments
Change in other long-term assets
Proceeds from sale of fixed assets
Net Cash Used In Investing Activities
Cash Flow From Financing Activities
Long-term debt borrowing
Long-term debt (repayment)
Short-term debt borrowings - net
Bank overdraft
Proceeds from stock options exercised
Payment of cash dividends
Deferred financing costs
Net Cash (Used In) Provided by Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Net Change In Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning Of Year
Cash and Cash Equivalents at End Of Period
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of July 1, 2005 and the consolidated statements of income and consolidated statements of cash flow for the three and six months ending July 1, 2005 and July 2, 2004 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 July 1, 2005 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The results of operations for the period ended July 1, 2005 are not necessarily indicative of the operating results for the full year.
On May 28, 2004, the Company purchased the remaining 50% ownership interest of Armkel, LLC (“Armkel”) that it did not own from affiliates of Kelso & Company (“the Armkel acquisition”) for a purchase price of approximately $262.0 million and Armkel was merged into the Company. Results of operations for Armkel’s business are included in the Company’s consolidated financial statements from May 29, 2004. Prior to May 28, 2004, the Company accounted for its investment in Armkel under the equity method. All material intercompany transactions and profits have been eliminated in consolidation.
The Company’s fiscal year begins on January 1st of the year stated and ends on December 31st. Quarterly periods are based on a 4 weeks - 4 weeks - 5 weeks methodology. As a result, the first quarter can include a partial or expanded week in the first four week period of the quarter. Similarly, the last five week period in the fourth quarter could be a partial or expanded week.
2. Inventories consist of the following:
(In thousands)
Raw materials and supplies
Work in process
Finished goods
3. Property, Plant and Equipment consist of the following:
Land
Buildings and improvements
Machinery and equipment
Office equipment and other assets
Software
Mineral rights
Construction in progress
Less accumulated depreciation, depletion and amortization
Net Property, Plant and Equipment
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 and the dilutive effect of contingently convertible debt instruments. 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:
Basic
Dilutive effect of stock options
Dilutive effect of convertible bonds
Diluted
Anti-dilutive stock options outstanding
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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 (“APB 25”), “Accounting for Stock Issued to Employees”, rather than the fair-value based method in Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation”. In connection with the Armkel acquisition, the Company paid cash and issued options to purchase 97,500 shares of Company common stock at an exercise price of $22.88 per share to certain executives in accordance with the provisions of Armkel’s Equity Appreciation Rights Plan (“EAR Plan”). The unvested portion of the EAR Plan options is being amortized over a two year vesting period and is recognized as expense as vesting occurs. In 2005, the amount recognized as expense for the stock options granted under the EAR Plan was $0.2 million.
During the second quarter of 2005, the Company issued restricted stock to elected and appointed officers of the Company. Those officers that elect to use a portion of their annual incentive compensation bonus to purchase the Company’s common stock will receive a premium of 20% of the amount purchased (to a maximum of 50% of their bonus). This premium will be provided in the form of restricted shares, which have a cliff vesting term of 3 years. During the vesting period, these shares will have voting rights and receive dividends either in cash or reinvested in additional shares. Approximately 4,000 shares were issued during the second quarter at a total value of $146 thousand. This amount will be expensed over the vesting period of which $12 thousand was reflected in the second quarter results.
During the first half of 2005, the Company issued approximately 0.7 million stock options at an average fair value of $13.54 per share, based upon the Black Scholes option pricing model. Key assumptions used were: expected life 6.6 years, expected volatility 33.0%, risk-free interest rate 4.0%, dividend yield 0.7%.
The Company’s pro forma net income and pro forma net income per share for the second quarter and six months of 2005 and 2004, determined as if the Company had adopted the fair value method of SFAS 123, are as follows:
(In thousands, except for per share data)
As reported
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
Pro forma
Net Income per Share: basic
Net Income per Share: diluted
6. Segment Information
The Company maintains three reportable segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”).
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Segment revenues are derived from the sale of the following products:
Segment
Products
The Company has 50 percent ownership interests in Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”). Since the Company does not control these entities, they are accounted for under the equity method in the consolidated financial statements of the Company. With respect to periods prior to the Armkel acquisition, the equity earnings derived from Armkel’s domestic results are included in the Consumer Domestic segment, and the equity earnings derived from its international results are included in the Consumer International segment. The equity earnings of Armand and ArmaKleen are included in Corporate.
Some of the subsidiaries that are included in Consumer International manufacture and sell personal care products to Consumer Domestic. These sales are eliminated from the Consumer International results.
Segment sales and income before taxes and minority interest for the second quarter and six month periods of 2005 and 2004 are as follows:
(in thousands)
Second Quarter 2005
Second Quarter 2004
Year to Date 2005
Year to Date 2004
Income Before Taxes and Minority Interest (1)
The following table discloses product line revenues from external customers for the three and six month periods ended July 1, 2005 and July 2, 2004.
Household Products
Personal Care Products
Total Consumer Domestic
Total Consumer International
Total SPD
Total Consolidated Net Sales
The Company has combined the sales of Deodorizing and Cleaning products along with Laundry products into a product line entitled Household products. These products have similar production processes, method of sales and distribution efforts and class of customers. The Company has combined them as a result that individually each group of products has less significance to the consolidated results since the acquisition of Armkel in May 2004.
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7. Armkel, LLC
On May 28, 2004, the Company purchased the remaining 50% of Armkel that it did not previously own from affiliates of Kelso for a purchase price of approximately $262.0 million.
Pro forma comparative net sales, net income and basic and diluted earnings per share for the three and six months ended July 2, 2004 are as follows:
Six Months Ended
July 2, 2004
Earning Per Share Basic
Earning Per Share Diluted
The pro forma information gives effect to the Company’s purchase of Kelso’s interest in Armkel as if it occurred at January 1, 2003. Pro forma adjustments reflect an inventory step-up charge, equity appreciation rights, additional interest expense and the related income tax impact, as well as elimination of intercompany sales.
The allocation of purchase price to certain intangibles has been completed and is reflected in the Company’s financial statements.
The following table summarizes financial information for Armkel for the two and five months ended May 28, 2004, during which the Company accounted for its 50% interest under the equity method.
Two Months Ended
May 28, 2004
Five Months Ended
Income Statement Data:
Equity in affiliate’s income recorded by the Company
The Company invoiced Armkel $10.2 million primarily for administrative and management oversight services (which are reflected as a reduction of selling, general and administrative expenses), and purchased $0.8 million of deodorant anti-perspirant inventory produced by Armkel in the first half of 2004. The Company sold Armkel $0.7 million of Arm & Hammer products to be sold in international markets in the first five months of 2004.
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8. Short-term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt consist of the following:
Securitization of accounts receivable due in April 2006
Various debt due to Brazilian banks
Bank overdraft debt
Other international debt
Total short-term debt
Long-term debt
Term B loan
Amount due 2005
Amount due 2006
Amount due 2007
Amount due 2008
Amount due 2009
Amount due 2010 and subsequent
Convertible debentures due on August 15, 2033
Senior subordinated notes (6%) due December 22, 2012
Senior subordinated notes (9 1/2%) due August 15, 2009
Premium on 9 1/2% senior subordinated notes
Various debt due to Brazilian banks--$355 in 2005, $700 in 2006 and $255 in 2007
Industrial Revenue Refunding Bond--Due in installments of $685 from 2005-2007 and $650 in 2008
Total long-term debt
Less: current maturities
Net long-term debt
The long-term debt principal payments required to be made are as follows:
2005
2006
2007
2008
2009
2010 and subsequent
During the second quarter and six month period of 2005, the Company paid approximately $25.8 million and $102.8 million of its Term B Loan, of which $25.0 million and $100.0 million were voluntary payments, respectively.
In April 2005, the accounts receivable securitization facility was renewed with similar terms and a new maturity date of April 2006.
During the month of July 2005, the Company issued a Notice of Intention to Redeem all the remaining outstanding 9 ½% Senior Subordinated Notes due 2009 on August 15, 2005 at a redemption price of 104.75% of the principal amount of the notes plus accrued interest to the redemption date. Cash required to redeem the notes will be approximately $7 million, which will be funded from available cash.
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9. Goodwill and Other Intangible Assets
The following tables disclose the carrying value of all intangible assets:
Amortized intangible assets:
Tradenames
Customer Related
Formulas
Non Compete Agreement
Total
Unamortized intangible assets - Carrying value
Intangible amortization expense amounted to $3.9 million for the six months of 2005 and $3.2 million for the same period of 2004. The Company’s estimated intangible amortization will be approximately $8.4 million in each of the next five years.
During the second quarter of 2005, the Company recorded in SG&A expenses, $3.8 million of impairment charges associated with certain indefinite lived intangible assets of which $1.6 million was incurred by the Consumer Domestic Segment and $2.2 million by the Consumer International Segment.
The changes in the carrying amount of goodwill for the six months ended July 1, 2005 are as follows:
Consumer
International
Balance December 31, 2004
Tradename reclassification (related to Armkel)
Goodwill associated with the Armkel acquisition1
Balance July 1, 2005
10. Comprehensive Income
The following table discloses the Company’s comprehensive income for the three and six months ended July 1, 2005 and July 2, 2004:
Other Comprehensive Income, net of tax:
Foreign exchange translation adjustments
Interest rate swap agreements
Company’s portion of Armkel’s Accumulated Other Comprehensive Income (Loss)
Comprehensive Income
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11. Pension and Postretirement Plans
The following table discloses the net periodic benefit cost for the Company’s pension and postretirement plans for the three and six months ended July 1, 2005 and July 2, 2004. The results include former Armkel employees as of May 28, 2004.
Pension Costs
Components of Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial (gain) or loss
Net periodic benefit cost
Postretirement Costs
The Company made cash contributions of approximately $2.8 million to certain of its pension plans during the first half of 2005 and expects to make additional contributions of $1.7 million during the remainder of the year.
12. Commitments, contingencies and guarantees
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13. Assets Held For Sale
As part of the Armkel acquisition, the Company has title to property and facilities in Cranbury, New Jersey, which includes research facilities that are in use as well as assets that are held for sale. In the third quarter of 2004, the Company entered into a contract to sell sections of the land available for development (and demolish the remaining buildings at the buyer’s expense), subject to obtaining environmental and other regulatory approvals. The Company expects to close on the sale before the end of 2005. In the first quarter of 2005, the Company entered into a contract to sell the remaining assets held for sale. The value expected to be received for all land at the Cranbury, NJ location (other than that related to the research facilities), net of costs to sell, is approximately $11.0 million. These assets are included in the Consumer Domestic segment.
In January 2005, the Company signed an agreement to sell its manufacturing plant in Mexico. At the end of April, the Company closed on the sale of this facility and received, net of costs to sell, approximately $2.4 million, which is included in the Consumer International segment. The new owner of the plant is manufacturing products for the Company.
14. Reclassification
Certain immaterial prior year amounts have been reclassified in order to conform with the current year presentation.
15. Supplemental Financial Information of Guarantor and Non-Guarantor Operations
The 6% senior subordinated notes are fully and unconditionally guaranteed by Church & Dwight Company, a Wyoming corporation, and the 9½% senior subordinated notes are fully and unconditionally guaranteed by several domestic subsidiaries of the Company on a joint and several basis. The Company and guarantor financial information includes the Parent Company and an immaterial subsidiary whose total assets are approximately 1% of total Company and guarantor assets. The following information is being presented in response to Item 3-10 of Regulation S-X, promulgated by the Securities and Exchange Commission.
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Supplemental information for condensed consolidated balance sheets at July 1, 2005 and December 31, 2004, condensed consolidated income statements and for the three and six months ended July 1, 2005 and July 2, 2004 and condensed consolidated statements of cash flows for the six month period ended July 1, 2005 and July 2, 2004 are summarized as follows (amounts in thousands):
Statements of Income
Non-
GuarantorSubsidiaries
Net sales
Gross profit
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Consolidated Balance Sheet
Total Current Liabilities
Other Liabilities
Total Liabilities and Stockholder’s Equity
15
Statements of Cash Flows
For the Six Months Ended
July 1, 2005
Non -
Net Cash Provided by (Used in) Operating Activities
Net Cash Used in Investing Activities
Net Cash (Used in) Provided by Financing Activities
Net Change In Cash & Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Period
Net Cash Provided by Financing Activities
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ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment for the second quarter and six month period of 2005 compared to the same periods of 2004. The segment discussion also presents certain product line fluctuations. With the acquisition of the remaining 50% interest in Armkel, LLC (“Armkel”) that the Company did not previously own from affiliates of Kelso & Company (“Kelso”) on May 28, 2004 (the “Armkel Acquisition”), and Armkel’s subsequent merger with the Company, the results of operations of the former Armkel business are consolidated in the accompanying financial statements from the date of acquisition. To enhance comparability to prior periods, discussion and analysis pertaining to the results and impact of the former Armkel product lines are for the two month period ended May 27, 2005 (with respect to the discussion of results for the quarter ended July 1, 2005) and the five month period ended May 27, 2005 (with respect to the discussion of results for the six months ended July 1, 2005).
Consolidated Results
Net sales for the quarter ended July 1, 2005 increased $101.0 million or 29.6% to $441.8 million, as compared to $340.8 million in the previous year’s second quarter. Of the increase, $85.5 million reflects sales of former Armkel products during the two month period ended May 27, 2005, which are included in the Company’s condensed consolidated results, and $1.6 million is attributable to favorable foreign exchange rates. This year’s second quarter includes a $2.4 million reversal of prior year’s promotion reserves due to a change in estimate. Last year’s second quarter included a similar reversal of $2.7 million.
Net sales for the six months ended July 1, 2005 increased $225.7 million or 35.4% to $862.5 million, as compared to $636.8 million last year. Of the increase, $208.1 million reflects sales of former Armkel products during the five month period ended May 27, 2005, which are included in the Company’s condensed consolidated results, and $2.4 million is attributable to favorable foreign exchange rates. Included in the six month sales results are the previously noted reversal of prior year’s promotion reserves.
Operating Costs
The Company’s gross margin in the quarter ended July 1, 2005 increased to 38.2% from 35.1% in the prior year. The increase is in large part a result of the products formerly owned by Armkel, which carry on average a higher gross profit margin than other Company products. Gross margin in 2004 reflected an acquisition related inventory step-up charge of $4.1 million in connection with the Armkel acquisition. Gross margin of the Company’s other products declined. This decline is due to a change in product mix, (higher laundry product sales and less personal care product sales), and sharp price increases for oil-based raw and packaging materials and certain commodity chemicals during the second half of 2004. Gross margin for the six month period was 38.2% as compared to 34.0% last year due to the same factors as described above.
Marketing expenses in the quarter ended July 1, 2005 were $51.1 million, an increase of $14.9 million as compared to the same period of 2004 primarily as a result of approximately $13 million in expenses associated with the former Armkel products for the two months ended May 27, 2005. Marketing expenses for the Company’s pre-existing product lines and former Armkel products for June 2005 were slightly higher than last year as a result of higher expenses for certain personal care products. For the six month period, marketing expenses increased $28.4 million as compared to the six month period of 2004. Expenses associated with the former Armkel products during the five months ended May 27, 2005 were approximately $28 million. Marketing expenses for the Company’s pre-existing product lines were slightly lower than last year as a result of lower expenses for certain deodorizing and cleaning products.
Selling, general and administrative (“SG&A”) expenses in the quarter ended July 1, 2005 increased $15.9 million as compared to the same period last year. This is a result of costs associated with the former Armkel business of approximately $15.1 million for the two months ended May 27, 2005. Excluding the effect of Armkel for the months of April and May, SG&A expenses were slightly higher due to $3.8 million of intangible asset impairment charges, partially offset by lower deferred and performance-based compensation costs and lower Sarbanes-Oxley Act related expenses. For the six month period SG&A expenses increased $37.4 million as compared to last year. Costs associated with the former Armkel business for the five months ended May 27, 2005 were approximately $38.0 million. The reason for the difference includes the other factors described above, as well as lower information system costs.
Other Income and Expenses
The decrease in equity in earnings of affiliates of $0.9 million in the quarter ended July 1, 2005 and $9.4 million for the six month period ended July 1, 2005 as compared to the year ago periods is due to the Company’s acquisition of Kelso’s interest in Armkel on May 28, 2004. The combined earnings of the Company’s other equity investments increased $0.8 million and $1.3 million in the current quarter and six month period, respectively.
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ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
Other income and expense in the 2005 periods includes the effect of foreign exchange remeasurement losses related to intercompany loans between the Company’s subsidiaries. Other income and expense for the six month period ended July 2, 2004 reflects a gain on the sale of a warehouse by our Canadian subsidiary.
Interest expense increased in the quarter and six month periods ended July 1, 2005 due to interest associated with the assumption of Armkel’s indebtedness and the Company’s additional indebtedness incurred to purchase Kelso’s interest in Armkel.
Taxation
The effective tax rate for the six month period ended July 1, 2005 was 34.5% as compared to 33.2% for the same period of last year. Last year’s tax rate was impacted favorably by an amended prior year tax return that resulted in a benefit related to a prior year research and development tax credit.
Segment results
The Company maintains three reportable segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”). Segment revenues are derived from the sale of the following products:
Segment sales and income before taxes and minority interest for the second quarter and six month period of 2005 and 2004 are as follows:
Consumer Domestic
For the second quarter of 2005, Consumer Domestic Net Sales increased $48.3 million or 18.6% to $307.1 million. Personal care products increased $37.3 million primarily due to sales associated with the domestic results of the former Armkel products for the two months ended May 27, 2005, continued growth of condoms and diagnostic kits for the month of June 2005, and flat deodorant sales and slightly lower toothpaste sales. Sales of liquid laundry products and Arm & Hammer Super Scoop cat litter were higher than last year while sales of powder laundry detergent were lower. Included in the segment’s results in the current quarter is $1.8 million associated with the reversal of prior year’s promotion reserves due to a change in estimate. Last year’s second quarter included a similar reversal of $2.7 million. Net Sales for the six month period increased $109.9 million or 22.2% to $604.9 million. Personal care products increased $98.3 million primarily due to sales associated with the domestic results of the former Armkel products for the five months ended May 27, 2005 and higher sales of condoms and diagnostic kits. Sales of liquid laundry products and Arm & Hammer Super Scoop cat litter also increased while sales of powder laundry detergent were lower. Included in the six month sales results are the previously noted reversal of prior year’s promotion reserves. Reflective in
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the higher sales for the current quarter and six month period are price increases for condoms, cat litter and soap pads. The Company has also implemented pricing and size changes for about 20% of its laundry products, and expects to announce similar actions for many of its remaining laundry products during the second half of 2005.
Consumer Domestic Income Before Taxes and Minority Interest for the quarter ended July 1, 2005 increased $16.7 million to $37.4 million. This is primarily due to the increased contribution from the former Armkel products and the 2004 inventory related step-up charge of $3.4 million. The higher profitability was partially offset by higher oil based and natural gas manufacturing and freight costs in 2005, slightly higher selling, general and adminstrative expenses for the reasons noted previously attributable to the non-Armkel portion of the business, which includes an intangible asset impairment charge of $1.6 million and higher marketing expenses for certain personal care products. The segment was also impacted by higher interest costs resulting from the Armkel purchase. For the six month period, Income before Taxes and Minority Interest increased $24.2 million to $78.4 million. The reasons for the increase are consistent with the increase in the three month period ended July 1, 2005, with the exception of slightly lower marketing costs for certain deodorizing and cleaning products during the six month period.
Consumer International
Consumer International Net Sales for the quarter ended July 1, 2005 as compared to the same period of last year increased $49.3 million to $78.1 million. The current quarter included $46.1 million of sales attributable to the former Armkel international business during the two months ended May 27, 2005 and $1.5 million relating to favorable foreign exchange rates. Net Sales for the six month period increased $109.6 million to $147.5 million. This is primarily due to $105.8 million of sales associated with the former Armkel international business during the five months ended May 27, 2005 and $ 2.1 million relating to favorable foreign exchange rates.
Income before Taxes and Minority Interest for the three months ended July 1, 2005 increased $4.3 million to $8.2 million as a result of the inclusion of the former Armkel international business results following the acquisition, partially offset by higher selling, general and administrative costs, which include an intangible asset impairment charge of $2.2 million and higher interest costs associated with the Armkel acquisition. The second quarter of 2004 was negatively impacted by a $0.7 million inventory step-up charge. For the six month period, Income before Taxes and Minority Interest increased $10.2 million for the same reasons as described above with respect to the second quarter.
Specialty Products (SPD)
Specialty Products Net Sales for the three months ended July 1, 2005 grew $3.5 million or 6.6% to $56.6 million in the second quarter of 2005, as a result of higher sales of animal nutrition products and specialty chemical products. For the six month period, sales increased $6.2 million or 5.9% to $110.2 million for the same reasons as described above with respect to the second quarter.
Specialty Products Income before Taxes and Minority Interest increased $0.8 million to $4.7 million and was essentially unchanged for the six month period. The increase for the quarter was due to higher profit contribution associated with higher animal nutrition products sales, partially offset by higher manufacturing costs for certain specialty chemicals, and an increase in allocated interest expense. For the six month period, the higher animal nutrition profit contribution helped to offset the higher manufacturing and interest costs.
Liquidity and Capital Resources
The Company had outstanding total debt of $770.9 million at July 1, 2005. This compares to total debt of $858.7 million at December 31, 2004. The reduction of debt since the beginning of the fiscal year is primarily due to voluntary bank debt payments of $100.0 million, partially offset by $10.0 million of bank overdrafts to fund outstanding checks at July 1, 2005. In April 2005, the accounts receivable securitization facility was renewed with similar terms and a new maturity date of April 2006. At July 1, 2005, the Company had cash and cash equivalents of $109.5 million, of which approximately $47.4 million resides in foreign subsidiaries.
Adjusted EBITDA is a required component of the financial covenants contained in the Company’s primary credit facility and management believes that the presentation of Adjusted EBITDA is useful to investors as a financial indicator of the Company’s ability to service its indebtedness. Adjusted EBITDA may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to cash flows from operating activities, which is determined in accordance with accounting principles generally accepted in the United States. Financial covenants include a total debt to Adjusted EBITDA leverage ratio and an interest coverage ratio, which if not met, could result in an event of default and trigger the early termination of the credit facility, if not remedied within a certain period of time. Adjusted EBITDA was approximately $156.1 million for the first six months of 2005. The leverage ratio (total debt to Adjusted EBITDA) for the 12 months ended July 1, 2005 was approximately 2.65, which is below the maximum of 4.25 permitted under the agreement, and the interest coverage ratio (Adjusted EBITDA to total interest expense) for the twelve months ended July 1, 2005 was approximately 5.61 which is above the minimum of 3.0 permitted under the agreement. This credit facility is secured by the assets of the Company and certain domestic subsidiaries. The reconciliation of Net Cash Provided by Operating Activities (the most directly comparable GAAP financial measure) to Adjusted EBITDA for the six months ended July 1, 2005 is as follows (in millions):
Net Cash Provided by Operating Activities
Interest Expense
Current Income Tax Provision
Change in Working Capital and Other Liabilities
Investment Income
Adjusted EBITDA (per loan agreement)
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During the first half of 2005, cash flow from operating activities was $64.0 million. Major factors affecting cash flow from operating activities included operating earnings before non-cash charges for depreciation and amortization, and a $40.3 million increase in working capital (excluding cash and cash equivalents) and other liabilities. The Company anticipates working capital (excluding cash and cash equivalents) to decline during the second half of 2005 primarily as a result of lower accounts receivable. Operating cash flow, together with proceeds from stock option exercises and existing cash, were used to make voluntary and mandatory debt repayments, additions to property, plant and equipment, and the payment of dividends.
During the month of July, the Company issued a Notice of Intention to Redeem all the remaining outstanding 9 ½% Senior Subordinated Notes due 2009 on August 15, 2005 at a redemption price of 104.75% of the principal amount of the notes plus accrued interest to the redemption date. Cash required to redeem the notes will be approximately $7 million, which will be funded from available cash.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revised version of SFAS No. 123, “Share-Based Payment”, ( “SFAS No. 123R”). This statement supercedes Accounting Principles Board Opinion No. 25 (“APB 25”) which was permitted in Statement 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS No. 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards in their income statements. For the Company, this Statement becomes effective January 1, 2006. The Company is still evaluating the impact of the statement and its method of adoption.
The American Jobs Creation Act of 2004 (the “AJCA”) was enacted on October 22, 2004. The AJCA repeals an export incentive, creates a new deduction for qualified domestic manufacturing activities and includes a special one-time deduction of 85% of certain foreign earnings repatriated to the U.S. The FASB issued FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP FAS 109-1) on December 21, 2004. In accordance with FSP FAS 109-1, the Company will treat the deduction for qualified domestic manufacturing activities, which is effective for the Company beginning January 1, 2005, as a reduction of the income tax provision in future years as realized. In December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allowing companies additional time to evaluate the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. The Company is in the process of evaluating the effects of the repatriation provision.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is facing higher costs for several categories of raw and packaging materials, particularly those based on energy prices. In response, the Company has intensified its margin enhancement strategies, and is in the process of implementing a range of formulation, packaging, logistics and other cost reduction programs.
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ITEM 4. CONTROLS AND PROCEDURES
Cautionary Note on Forward-Looking Statements
This report contains forward-looking statements relating to, among other things, short- and long-term financial objectives, sales and earnings growth, gross profit margin, earnings per share, non-cash accounting charges, cash flow, adoption of new accounting guidance, financial forecasts and cost improvement programs. These statements represent the intentions, plans, expectations and beliefs of the Company, and are subject to risks, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. The uncertainties include assumptions as to market growth and consumer demand (including the effect of political and economic events on consumer demand), increases in raw material, packaging and energy prices, the Company’s ability to raise prices or reduce promotion spending, the Company’s ability to implement cost reduction programs in response to commodity price increases, the financial condition of major customers, the risks of currency fluctuations, changes in foreign laws and other risks associated with our international operations and trade, and competitive and consumer reactions to the Company’s products. 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, as well as factors discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2004 in Item 1 under the caption, “Risk Factors”.
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 our filings with the U.S. Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
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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.
/s/ Zvi Eiref
/s/ Gary P. Halker
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EXHIBITS
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