UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2001
March 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from to
Commission File No. 333-76055
UNITED INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) | 43-1025604 ( Identification No.) |
8825 Page Boulevard
St. Louis, Missouri 63114
(Address of principal executive office, including zip code)
(314) 427-0780
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: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 12 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/ý No / /o
As of June 30, 2001,March 31, 2002, the Registrant had 27,550,00027,721,000 Class A voting and 27,550,00027,721,000 Class B non-voting shares of common stock outstanding and 15,00037,600 non-voting shares of Class A preferred stock outstanding.
FINANCIAL INFORMATIONITEM
Item 1. Financial Statements
JUNE 30,
MARCH 31, 2002 AND 2001, AND 2000, AND DECEMBER 31, 20002001
(Dollars in thousands)
(Unaudited)
| June 30, | June 30, | December 31, | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2000 | | March 31, 2002 | March 31, 2001 | December 31, 2001 | ||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | — | Cash and cash equivalents | $ | — | $ | — | $ | — | |||||||||||
Accounts receivable (less allowance for doubtful accounts of $1,419 and $1,609 at June 30, 2001 and 2000 and $777 at December 31, 2000) | 77,040 | 76,041 | 19,944 | Accounts receivable (less allowance for doubtful accounts of $2,845 and $1,164 at March 31, 2002 and 2001 and $1,147 at December 31, 2001) | 106,083 | 70,769 | 21,585 | |||||||||||||||||
Inventories | 38,149 | 38,899 | 47,007 | Inventories | 61,472 | 48,618 | 49,092 | |||||||||||||||||
Prepaid expenses | 4,835 | 2,924 | 6,357 | Prepaid expenses | 5,763 | 5,204 | 6,491 | |||||||||||||||||
Total current assets | 120,024 | 117,864 | 73,308 | Total current assets | 173,318 | 124,591 | 77,168 | |||||||||||||||||
Equipment and leasehold improvements, net | Equipment and leasehold improvements, net | 24,276 | 26,336 | 24,736 | Equipment and leasehold improvements, net | 26,642 | 24,068 | 27,930 | ||||||||||||||||
Deferred income tax | Deferred income tax | 116,763 | 116,268 | 116,763 | Deferred income tax | 112,505 | 116,763 | 112,505 | ||||||||||||||||
Intangible assets, net | Intangible assets, net | 42,833 | 5,764 | 43,116 | ||||||||||||||||||||
Other assets | Other assets | 18,632 | 20,489 | 20,087 | Other assets | 11,953 | 13,594 | 11,837 | ||||||||||||||||
Total assets | $ | 279,695 | $ | 280,957 | $ | 234,894 | Total assets | $ | 367,251 | $ | 284,780 | $ | 272,556 | |||||||||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | LIABILITIES AND STOCKHOLDERS' DEFICIT | LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||||||||
Current maturities of long-term debt and capital lease obligation | $ | 5,693 | $ | 6,096 | $ | 5,675 | Current maturities of long-term debt and capital lease obligation | $ | 5,852 | $ | 5,684 | $ | 5,711 | |||||||||||
Accounts payable | 29,527 | 24,109 | 18,625 | Accounts payable | 40,177 | 31,114 | 23,459 | |||||||||||||||||
Accrued expenses | 33,887 | 27,840 | 24,791 | Accrued expenses | 39,209 | 27,177 | 34,006 | |||||||||||||||||
Short-term borrowings | 18,550 | 21,050 | 15,000 | Short-term borrowings | 58,377 | 47,500 | 23,450 | |||||||||||||||||
Total current liabilities | 87,657 | 79,095 | 64,091 | Total current liabilities | 143,615 | 111,475 | 86,626 | |||||||||||||||||
Long-term debt | Long-term debt | 323,693 | 349,125 | 329,000 | Long-term debt | 345,507 | 326,346 | 318,386 | ||||||||||||||||
Capital lease obligation | Capital lease obligation | 4,428 | 5,345 | 4,626 | Capital lease obligation | 4,133 | 4,528 | 4,221 | ||||||||||||||||
Other liabilities | Other liabilities | 16,167 | 11,922 | 7,940 | Other liabilities | 9,765 | 9,532 | 7,740 | ||||||||||||||||
Total liabilities | 431,945 | 445,487 | 405,657 | Total liabilities | 503,020 | 451,881 | 416,973 | |||||||||||||||||
Stockholders' deficit | ||||||||||||||||||||||||
Stockholders' deficit: | Stockholders' deficit: | |||||||||||||||||||||||
Common Stock (27.6 million shares of $0.01 par value Class A and 27.6 million $0.01 par value Class B) | 554 | 554 | 554 | Common Stock (27.7 million shares of $0.01 par value Class A and 27.7 million $0.01 par value Class B) | 556 | 554 | 556 | |||||||||||||||||
Preferred Stock (15,000 shares of $0.01 par value Class A) | — | — | — | Preferred Stock (37,600 shares of $0.01 par value Class A) | — | — | — | |||||||||||||||||
Warrants | 2,784 | — | 2,784 | Warrants and options | 11,745 | 2,784 | 11,745 | |||||||||||||||||
Additional paid-in capital | 139,081 | 126,865 | 139,081 | Additional paid-in capital | 152,543 | 139,081 | 152,543 | |||||||||||||||||
Accumulated deficit | (291,640 | ) | (289,249 | ) | (310,482 | ) | Accumulated deficit | (297,719 | ) | (306,820 | ) | (306,048 | ) | |||||||||||
Accumulated other comprehensive loss | (329 | ) | — | — | Accumulated other comprehensive loss | (194 | ) | — | (513 | ) | ||||||||||||||
Common stock held in grantor trust | (2,700 | ) | (2,700 | ) | (2,700 | ) | Common stock held in grantor trust | (2,700 | ) | (2,700 | ) | (2,700 | ) | |||||||||||
Total stockholders' deficit | (152,250 | ) | (164,530 | ) | (170,763 | ) | Total stockholders' deficit | (135,769 | ) | (167,101 | ) | (144,417 | ) | |||||||||||
Total liabilities and stockholders' deficit | $ | 279,695 | $ | 280,957 | $ | 234,894 | Total liabilities and stockholders' deficit | $ | 367,251 | $ | 284,780 | $ | 272,556 | |||||||||||
See accompanying notes to financial statementsstatements.
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FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2002 AND 2001 AND 2000
(Dollars in thousands)
(Unaudited)
| | Three months ended June 30, | Six months ended June 30, | | Three months ended March 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2001 | 2000 | | 2002 | 2001 | |||||||||||||
Sales before promotion expense | Sales before promotion expense | $ | 124,428 | $ | 123,508 | $ | 212,864 | $ | 212,054 | Sales before promotion expense | $ | 149,191 | $ | 88,436 | |||||||
Promotion expense | Promotion expense | 9,781 | 9,307 | 18,298 | 16,958 | Promotion expense | 12,800 | 8,517 | |||||||||||||
Net sales | Net sales | 114,647 | 114,201 | 194,566 | 195,096 | Net sales | 136,391 | 79,919 | |||||||||||||
Operating costs and expenses: | Operating costs and expenses: | Operating costs and expenses: | |||||||||||||||||||
Cost of goods sold | 60,748 | 62,134 | 104,707 | 105,971 | Cost of goods sold | 87,163 | 43,959 | ||||||||||||||
Selling, general and administrative expenses | 22,121 | 17,767 | 42,185 | 39,406 | Selling, general and administrative expenses | 27,239 | 20,064 | ||||||||||||||
Total operating costs and expenses | 82,869 | 79,901 | 146,892 | 145,377 | Total operating costs and expenses | 114,402 | 64,023 | ||||||||||||||
Operating income | Operating income | 31,778 | 34,300 | 47,674 | 49,719 | Operating income | 21,989 | 15,896 | |||||||||||||
Interest expense | Interest expense | 9,388 | 10,479 | 19,401 | 21,084 | Interest expense | 8,512 | 10,013 | |||||||||||||
Income before provision for income taxes | Income before provision for income taxes | 22,390 | 23,821 | 28,273 | 28,635 | Income before provision for income taxes | 13,477 | 5,883 | |||||||||||||
Income tax expense | Income tax expense | 6,637 | 5,366 | 8,284 | 6,363 | Income tax expense | 3,315 | 1,647 | |||||||||||||
Net income | Net income | $ | 15,753 | $ | 18,455 | $ | 19,989 | $ | 22,272 | Net income | $ | 10,162 | $ | 4,236 | |||||||
Preferred stock dividends | Preferred stock dividends | $ | 1,833 | $ | 573 | ||||||||||||||||
Income available to common stockholders | Income available to common stockholders | $ | 8,329 | $ | 3,663 | ||||||||||||||||
See accompanying notes to financial statements.
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FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2002 AND 2001 AND 2000
(Dollars in thousands)
(Unaudited)
| | Six months ended June 30, | | Three months ended March 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | | 2002 | 2001 | |||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | |||||||||||||||||||||
Net income | $ | 19,989 | $ | 22,272 | |||||||||||||||||||
Adjustments to reconcile net income to net cash used by operating activities: | |||||||||||||||||||||||
Non cash reduction of capital lease obligation | — | (1,182 | ) | ||||||||||||||||||||
Depreciation and amortization | 2,436 | 2,881 | Net income | $ | 10,162 | $ | 4,236 | ||||||||||||||||
Amortization of deferred financing fees | 1,346 | 1,140 | Adjustments to reconcile net income to net cash used by operating activities: | ||||||||||||||||||||
Unrealized loss on interest rate swap, net of taxes | (329 | ) | — | Depreciation and amortization | 2,464 | 1,199 | |||||||||||||||||
Provision for deferred income tax expense | 8,284 | 6,363 | Amortization of deferred financing fees | 695 | 673 | ||||||||||||||||||
Changes in assets and liabilities: | Provision for deferred income tax expense | 3,315 | 1,647 | ||||||||||||||||||||
Increase in accounts receivable | (57,096 | ) | (56,876 | ) | Changes in assets and liabilities: | ||||||||||||||||||
Decrease in inventories | 8,858 | 14,344 | Increase in accounts receivable | (84,498 | ) | (50,825 | ) | ||||||||||||||||
Decrease in prepaid expenses | 1,522 | 577 | Increase in inventories | (12,380 | ) | (1,611 | ) | ||||||||||||||||
Increase in accounts payable and accrued expenses | 23,465 | 11,153 | Decrease in prepaid expenses | 728 | 1,153 | ||||||||||||||||||
Decrease in Dursban charge | (4,614 | ) | — | Increase in accounts payable and accrued expenses | 20,538 | 18,652 | |||||||||||||||||
Decrease in other assets | 11 | 33 | Decrease in Dursban related expenses | (82 | ) | (4,350 | ) | ||||||||||||||||
Other, net | (57 | ) | 77 | Other, net | (1,080 | ) | (45 | ) | |||||||||||||||
Net cash used by operating activities | 3,815 | 782 | Net cash used by operating activities | (60,138 | ) | (29,271 | ) | ||||||||||||||||
Investing activities: | Investing activities: | Investing activities: | |||||||||||||||||||||
Purchases of equipment and leasehold improvements | (1,878 | ) | (2,606 | ) | Purchases of equipment and leasehold improvements | (892 | ) | (486 | ) | ||||||||||||||
Net cash used by investing activities | (1,878 | ) | (2,606 | ) | Net cash used by investing activities | (892 | ) | (486 | ) | ||||||||||||||
Financing activities: | Financing activities: | Financing activities: | |||||||||||||||||||||
Transaction costs related to the redemption of treasury stock | — | (12,175 | ) | Debt issuance costs | (1,071 | ) | — | ||||||||||||||||
Debt issuance costs | — | (903 | ) | Proceeds from additional term debt | 30,000 | — | |||||||||||||||||
Proceeds from the issuance of debt | 3,550 | 21,050 | Proceeds from borrowing on revolver | 34,927 | 32,500 | ||||||||||||||||||
Repayment of borrowings on revolver and other debt | (5,487 | ) | (6,148 | ) | Repayment of borrowing on revolver and other debt | (2,826 | ) | (2,743 | ) | ||||||||||||||
Net cash provided by (used for) financing activities | (1,937 | ) | 1,824 | Net cash provided by financing activities | 61,030 | 29,757 | |||||||||||||||||
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | — | — | Net increase (decrease) in cash and cash equivalents | — | — | |||||||||||||||||
Cash and cash equivalents—beginning of period | Cash and cash equivalents—beginning of period | — | — | Cash and cash equivalents—beginning of period | — | — | |||||||||||||||||
Cash and cash equivalents—end of period | Cash and cash equivalents—end of period | $ | — | $ | — | Cash and cash equivalents—end of period | $ | — | $ | — | |||||||||||||
Noncash financing activity: | |||||||||||||||||||||||
Execution of capital lease | $ | — | $ | 5,344 | Noncash financing activity: | ||||||||||||||||||
Dividends declared | $ | 1,146 | $ | — | Dividends accrued | $ | 1,833 | $ | 573 |
See accompanying notes to financial statements.
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UNITED INDUSTRIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 1—Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments considered necessary for a fair presentation have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K of United Industries Corporation (the "Company") for the year ended December 31, 2000.2001.
Note 2—Inventories
Inventories are as follows:
| June 30, | June, 30 | December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2000 | March 31, 2002 | March 31, 2001 | December 31, 2001 | ||||||||||||||
Raw materials | $ | 8,895 | $ | 7,494 | $ | 10,663 | $ | 20,948 | $ | 9,633 | $ | 11,104 | ||||||||
Finished goods | 30,658 | 32,391 | 37,343 | 44,580 | 40,602 | 40,688 | ||||||||||||||
Allowance for obsolete and slow-moving inventory | (1,404 | ) | (986 | ) | (999 | ) | (4,056 | ) | (1,617 | ) | (2,700 | ) | ||||||||
Total inventories | $ | 38,149 | $ | 38,899 | $ | 47,007 | $ | 61,472 | $ | 48,618 | $ | 49,092 | ||||||||
Note 3—Equipment and leasehold improvements, net
Equipment and leasehold improvements are as follows:
| June 30, | June 30, | December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2000 | March 31, 2002 | March 31, 2001 | December 31, 2001 | ||||||||||||
Machinery and equipment | $ | 28,773 | $ | 27,421 | $ | 27,435 | $ | 30,746 | $ | 27,663 | $ | 30,279 | ||||||
Office furniture and equipment | 10,951 | 9,784 | 10,565 | 15,608 | 10,808 | 15,181 | ||||||||||||
Automobiles, trucks and aircraft | 6,156 | 6,290 | 6,067 | 6,156 | 6,062 | 6,157 | ||||||||||||
Leasehold improvements | 7,108 | 6,956 | 7,043 | 7,405 | 7,062 | 7,405 | ||||||||||||
52,988 | 50,451 | 51,110 | 59,915 | 51,595 | 59,022 | |||||||||||||
Less: accumulated depreciation | 28,712 | 24,115 | 26,374 | 33,273 | 27,527 | 31,092 | ||||||||||||
$ | 24,276 | $ | 26,336 | $ | 24,736 | $ | 26,642 | $ | 24,068 | $ | 27,930 | |||||||
Note 4—Intangible assets, net
Intangible assets are as follows:
| March 31, 2002 | March 31, 2001 | December 31, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Intangibles | $ | 44,675 | $ | 7,175 | $ | 44,675 | ||||
Accumulated amortization | (1,842 | ) | (1,411 | ) | (1,559 | ) | ||||
$ | 42,833 | $ | 5,764 | $ | 43,116 | |||||
5
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets". SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 eliminates the amortization of goodwill and instead requires goodwill to be tested for impairment annually. Under SFAS 142, if the intangible asset has an indefinite useful life, it is not amortized until its life is determined to be finite. SFAS No. 142 provides a staggered timeline for completing transitional impairment testing of goodwill and indefinite-lived intangible assets. The Company will complete its transitional impairment analysis in the second quarter of 2002. The Company does not expect to record an impairment charge related to this analysis.
As required by SFAS 142, the results for prior periods were not restated in the accompanying statements of operations. A reconciliation between income available to common stockholders as reported by the Company and income available to common stockholders to reflect the impact of SFAS 142 is as follows:
| Quarter Ended March 31, 2001 | |||
---|---|---|---|---|
Income available to common stockholders: | ||||
As reported | $ | 3,663 | ||
Amortization of goodwill | 49 | |||
Adjusted income available to common stockholders | $ | 3,712 | ||
On December 17, 2001 the Company acquired Vigoro®, Sta-Green® and Bandini®, as well as acquiring licensing rights to the Best® line of fertilizer products for $37,500. The acquired brands are amortized over 40 years.
Note 4—5—Other assets
Other assets are as follows:
| June 30, | June 30, | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2000 | |||||||
Goodwill | $ | 7,175 | $ | 7,988 | $ | 7,988 | ||||
Accumulated amortization | (1,461 | ) | (2,075 | ) | (2,175 | ) | ||||
5,714 | 5,913 | 5,813 | ||||||||
Deferred financing fees | 18,067 | 17,087 | 18,067 | |||||||
Accumulated amortization | (5,757 | ) | (3,131 | ) | (4,411 | ) | ||||
12,310 | 13,956 | 13,656 | ||||||||
Other | 608 | 620 | 618 | |||||||
Total other assets | $ | 18,632 | $ | 20,489 | $ | 20,087 | ||||
Note 5—Accrued expenses
Accrued expensed are as follows:
| June 30, | June 30, | December 31, | ||||||
---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2000 | ||||||
Advertising and promotional | $ | 13,506 | $ | 11,615 | $ | 5,520 | |||
Dursban charge | 1,452 | — | 6,066 | ||||||
Interest | 3,834 | 4,019 | 3,886 | ||||||
Cash overdraft | 7,414 | 6,586 | 6,181 | ||||||
Dividend payable | 1,466 | — | 320 | ||||||
Severence charges | 457 | 1,168 | 1,010 | ||||||
Other | 5,758 | 4,452 | 1,808 | ||||||
Total accrued expenses | $ | 33,887 | $ | 27,840 | $ | 24,791 | |||
| March 31, 2002 | March 31, 2001 | December 31, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Deferred financing fees | $ | 19,138 | $ | 18,067 | $ | 18,067 | ||||
Accumulated amortization | (7,797 | ) | (5,084 | ) | (7,102 | ) | ||||
11,341 | 12,983 | 10,965 | ||||||||
Other | 612 | 611 | 872 | |||||||
Total other assets | $ | 11,953 | $ | 13,594 | $ | 11,837 | ||||
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Note 6—Accrued expenses
Accrued expenses are as follows:
| March 31, 2002 | March 31, 2001 | December 31, 2001 | ||||||
---|---|---|---|---|---|---|---|---|---|
Advertising and promotional | $ | 16,007 | $ | 8,502 | $ | 12,125 | |||
Facilities rationalization | 3,445 | — | 3,500 | ||||||
Dursban related expenses | — | 1,716 | 82 | ||||||
Interest | 7,771 | 9,433 | 3,763 | ||||||
Cash overdraft | — | 2,336 | 7,126 | ||||||
Preferred dividend payable | 4,445 | 893 | 2,612 | ||||||
Severence charges | 1,458 | 734 | 1,679 | ||||||
Other | 6,083 | 3,563 | 3,119 | ||||||
Total accrued expenses | $ | 39,209 | $ | 27,177 | $ | 34,006 | |||
Note 7—Long-term debt and credit facilities
Long-term debt is comprised of the following:
| June 30, | June 30, | December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2000 | | March 31, 2002 | March 31, 2001 | December 31, 2001 | ||||||||||||||
Senior Credit Facility: | Senior Credit Facility: | Senior Credit Facility: | ||||||||||||||||||||
Term Loan A | $ | 43,817 | $ | 57,500 | $ | 48,430 | Term Loan A | $ | 36,899 | $ | 46,124 | $ | 39,205 | |||||||||
Term Loan B | 135,183 | 147,375 | 135,878 | Term Loan B | 164,064 | 135,530 | 134,488 | |||||||||||||||
Revolving Credit Facility | 18,550 | 21,050 | 15,000 | Revolving Credit Facility | 58,377 | 47,500 | 23,450 | |||||||||||||||
97/8% Series B Registered Senior Subordinated Notes | 97/8% Series B Registered Senior Subordinated Notes | 150,000 | 150,000 | 150,000 | 97/8% Series B Registered Senior Subordinated Notes | 150,000 | 150,000 | 150,000 | ||||||||||||||
347,550 | 375,925 | 349,308 | 409,340 | 379,154 | 347,143 | |||||||||||||||||
Less portion due within one year | Less portion due within one year | (23,857 | ) | (26,800 | ) | (20,308 | ) | Less portion due within one year | (63,833 | ) | (52,808 | ) | (28,757 | ) | ||||||||
Total long-term debt net of current portion | Total long-term debt net of current portion | $ | 323,693 | $ | 349,125 | $ | 329,000 | Total long-term debt net of current portion | $ | 345,507 | $ | 326,346 | $ | 318,386 | ||||||||
The Senior Credit Facility was provided by NationsBank, N.A., Morgan Stanley Senior Funding, Inc. and CIBC Inc. and consists of (i) a $80,000$90,000 revolving credit facility (the "Revolving Credit Facility"); (ii) a $75,000 term loan facility ("Term Loan A"); and (iii) a $150,000$215,000 term loan facility ("Term Loan B"). The Revolving Credit Facility and Term Loan A matures on January 20, 2005, and Term Loan B matures on January 20, 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed $10.0 million for 30 consecutive days occurring during the period between August 1 and November 30 in each calendar year. On June 30, 2001, $18,550March 31, 2002, $58,377 was outstanding under the Revolving Credit Facility. There were no compensating balance requirements for the Revolving Credit Facility at June 30, 2001.March 31, 2002.
On February 13, 2002 the Company received approval from its banking syndicate for an amendment to its Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $150,000 to $180,000 as well as provide additional capital expenditure flexibility. The
7
amendment and add-on provide additional liquidity for the Company given its recently completed acquisition of the fertilizer brands from Pursell Industries, Inc. The Senior Credit Facility retains Banc of America Securities, L.L.C. as sole Lead Arranger and Lead Agent.
On May 9, 2002 the Company merged with Schultz Company. In conjunction with the Schultz Company acquisition the Company received approval from its banking syndicate for an amendment to its Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $180,000 to $215,000, increased the revolving credit facility from $80,000 to $90,000 and provided additional capital expenditure flexibility. The Senior Credit Facility retains Banc of America Securities, L.L.C. as sole Lead Arranger and Lead Agent.
The principal amount of Term Loan A is to be repaid in twenty-three consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2005. The principal amount of Term Loan B is to be repaid in twenty-seven consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2006.
The Senior Credit Facility agreement contains restrictive affirmative, negative and financial covenants. Affirmative and negative covenants put restrictions on levels of investments, indebtedness, insurance and capital expenditures. Financial covenants require the maintenance of certain financial ratios at defined levels. At June 30, 2001,March 31, 2002, the Company was in compliance with all financial covenants. While the Company does not anticipate an event of non-compliance with financial covenants in the future, the effect of non-compliance with financial covenants would cause the Company to request an amendment to the Senior Credit Facility.
Under the covenants, interest on the Revolving Credit Facility, Term Loan A and Term Loan B ranges from 250 to 400 basis points above LIBOR depending on certain financial ratios. Unused commitments under the Revolving Credit Facility are subject to a 50 basis point annual commitment fee. LIBOR was 3.86%1.91% at June 30, 2001.
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Note 6—Long-term debt and credit facilities (continued)March 31, 2002.
The Senior Credit Facility may be prepaid at any time in whole or in part without premium or penalty. During fiscal 2000,2001, principal payments on Term Loans A and B of $14.1$9.2 million and $12.2$1.4 million, respectively, were paid, which included optional principal prepayments of $4.1 million and $10.8$0.7 on Term Loan A and Term Loan B, respectively. During the sixthree month period ended June 30, 2001,March 31, 2002, optional principal prepayments of $4.6$2.3 million and $.7$.4 million on Term Loan A and Term Loan B, respectively, were paid. The optional payments were made in order for the Company to remain two quarterly payments ahead.ahead of the regular payment schedule. According to the Senior Credit Facility agreement, each prepayment on Term Loan A and Term Loan B can be applied to the next principal repayment installments. Management intends to pay a full year of principal repayment installments in 20012002 in accordance with the Senior Credit Facility agreement.
In November 1999, the Company issued 97/8% Senior Subordinated Notes for $150 million that are due April 1, 2009.
Interest accrues at the rate of 97/8% per annum, payable semi-annually on each April 1 and October 1.
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Substantially all of the properties and assets of the Company and substantially all of the properties and assets of the Company's future domestic subsidiaries secure obligations under the Senior Credit Facility.
The carrying amount of the Company's obligation under the Senior Credit Facility approximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.
Aggregate maturities under the Senior Credit Facility (excluding the Revolving Credit Facility) and the Senior Subordinated Notes, subsequent to the May 9, 2002 Senior Credit Facility Amendment, are as follows:
2001 Remainder of year | $ | — | ||||
2002 | 10,614 | |||||
2002 Remainder of year | $ | 2,819 | ||||
2003 | 15,804 | 16,464 | ||||
2004 | 17,534 | 18,194 | ||||
2005 | 102,382 | 150,002 | ||||
2006 | 48,485 | |||||
Thereafter | 182,666 | 150,000 | ||||
$ | 329,000 | $ | 385,964 | |||
Note 7—8—Commitments
The Company leases the majority of its operating facilities from a company owned by a significant shareholder of the Company under various operating leases expiring December 31, 2010. The Company has options to terminate the leases on a year-to-year basis by giving advance notice of at least twelve months. The Company leases a portion of its operating facilities from the same company under a sublease agreement expiring on December 31, 2005. The Company has two five-year options to renew this lease, beginning January 1, 2006. Management believes that the terms and expenses associated with
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the related party leases described above are similar to those negotiated by unrelated parties at arm's length.
The Company is obligated under other operating leases for use of warehouse space. The leases expire at various dates through December 1, 2006.31, 2012. Five of the leases provide as many as five five-year options to renew.
Note 9—Contingencies
The Company is involved in litigation and arbitration proceedings in the normal course of business that assert product liability and other claims. The Company is contesting all such claims. When it appears probable in management's judgment that the Company will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, appropriate liabilities are recorded in the financial statements and charges are made against earnings.
Management believes the possibility of a material adverse effect on the Company's consolidated financial position, results of operations and cash flows from the claims and proceedings described above isare remote.
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Note 10—Dursban Charge
During 2000 the US Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for withdrawal of virtually all residential uses of Dursban. Formulation of new Dursban products intended for residential use were required to cease by December 1, 2000. Formulators can no longer sell such products to retailers as of February 1, 2001 and retailers will no longer be able to sell Dursban products after December 31, 2001. A charge of $8,000 was recorded in September 2000 for costs associated with this agreement. The Company believes that the accrual is adequate as of June 30, 2001.
Details of this charge and the accrual balances remaining are as follows:
| Accrual Balances at the end of 2000 | Year to Date 2001 Utilization | Amount to be utilized during remainder of 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer returns and markdowns | $ | 4,509 | $ | 2,707 | $ | 1,802 | ||||
Inventory | 1,118 | 1,064 | 54 | |||||||
Disposal and related costs | 439 | 843 | (404 | ) | ||||||
$ | 6,066 | $ | 4,614 | $ | 1,452 | |||||
Note 11—Shipping and handling costs
Certain shippingShipping and handling costs are included in the selling, general and administrative expenses line item on the Company's Statements of Operations. The amount included is $4,230$3,784 and $4,139$3,676 for the three months ended June 30,March 31, 2002 and 2001, respectively, and 2000, respectively.represents in-bound freight and distribution cost. The amountremaining shipping and handling cost, which includes out-bound freight and product cost, are included is $7,906 and $7,752 forin the six months ended June 30, 2001 and 2000, respectively.cost of goods sold line item.
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Note 12—11—Derivatives and Hedging Activities
The Company is exposed to market risks relating to changes in interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in interest rates.
Effective April 1, 2001, the Company entered into two interest rate swaps that have fixed the interest rate as of April 30, 2001 for $75.0 million of variable rate debt under the Senior Credit Facility. The interest rate swaps are for $50.0 and $25.0 million of the Senior Credit Facility and will terminate on April 30, 2002. The fixed LIBOR interest rates are 4.74% and 4.66%, for the $50.0 and $25.0 million interest rate swaps respectively. The Company's objective is to manage the cash flow risks associated with its variable rate debt and not to trade such instruments for profit andor loss. The Company's interest rate hedges are classified as cash flow hedges. For aan effective cash flow hedge, the ineffectiveunrealized portion is deferred in accumulated other comprehensive income on the balance sheet until the transaction is realized, at which time any deferred hedging gains or losses are recorded in earnings. The fair value of the interest rate swaps is reported as a liability and as a component of comprehensive incomeloss in Stockholders' deficit at June 30, 2001.March 31, 2002. The June 30, 2001March 31, 2002 fair value is $0.3reflects a loss of $0.2 million.
Note 13—12—Comprehensive Income
Comprehensive income differs from net income due to the cash flow hedge.hedges. Comprehensive income for the three and six months ended June 30,March 2002 and 2001, was $15,424$9,968 and $19,660,$4,236, respectively.
Note 13—Facilities and organization rationalization
During the fourth quarter of 2001 the Company recorded a $5.6 million charge related to facilities and organizational rationalization. The following is a rollforward of the charge for the three months ended March 31, 2002.
| March 31, 2002 | |||
---|---|---|---|---|
Balance at beginning of year | $ | 5,158 | ||
Provision charged to expense | — | |||
Reversal credited to expense | — | |||
Charges to accrual | (255 | ) | ||
Balance at March 31, 2002 | $ | 4,903 | ||
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Note 14—Subsequent event
On May 9, 2002 the Company merged with Schultz Company. Also based in St. Louis, MO, Schultz Company is well respected as an innovative and rapidly growing consumer lawn and garden company. The Schultz® brand portfolio—which currently focuses on consumer garden fertilizers, organic growing media and outdoor living—includes Schultz® plant foods and potting soils, Expert Gardener® fertilizers and controls, Multi Cote® plant foods and a new line of natural plant care products under the Garden Safe® brand. Schultz also holds exclusive agreements to manufacture or supply gardening and outdoor living products for certain of the largest retailers in the mass merchandise and home center channels.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those contemplated or projected, forecasted, estimated or budgeted in or expressed or implied by such forward-looking statements. Such factors include, among others, the risks and other factors set forth under Item 7A in the Company's Annual Report on Form 10-K for the year ended December 31, 20002001 as well as the following: general economic and business conditions; governmental regulations; industry trends; the loss of major customers or suppliers; cost and availability of raw materials; changes in business strategy or development plans;plans including acquisition or disposition of assets; availability and quality of management; and availability, terms and deployment of capital. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company is the leading manufacturer and marketer of value-oriented branded products for the consumer lawn and garden pesticide and household insecticide markets in the United States. The Company manufactures and markets one of the broadest lines of pesticides in the industry, including herbicides and indoor and outdoor insecticides, as well as insect repellents and water-soluble fertilizers, under a variety of brand names. The Company believes that the key drivers of growth for the $2.7$2.8 billion consumer lawn and garden pesticide and household insecticide retail markets include: (a) the aging of the population of the United States;State population; (b) growth in the home improvement center and mass merchandiser channels; and (c) shifting consumers preferences'consumers' preferences toward value-oriented branded products.
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the historical financial information included in the unaudited quarterly financial statements and the related notes to the unaudited quarterly financial statements.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 to the consolidated financial statements contained elsewhereincluded in Item 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Note that the preparation of this report.Quarterly Report on Form 10-Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes that it's most critical accounting policies include revenue recognition, inventories, promotion expense and income taxes.
Revenue recognition
Net sales are gross sales of products sold to customers in accordance with the shipping terms applicable to each sale less any customer discounts from list price, customer returns and less promotion
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expense of products through cooperative programs with retailers. The Company's provision for customer returns is based on historical sales returns, analysis of credit memo data and other known factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, revenue could be overstated.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. Cost includes raw materials, direct labor and overhead. Provision for potentially obsolete or slow-moving finished goods and raw materials are made based on management's analysis of inventory levels and future sales forecasts. In the event that our estimates of future usage and sales differ from actual results, we may need to establish an additional provision for obsolete or slow-moving finished goods and raw materials.
Promotion expense
The Company advertises and promotes its products through national and regional media. Products are also advertised and promoted through cooperative programs with retailers. The Company expenses advertising and promotion costs as incurred, although costs incurred during interim periods are generally expensed ratably in relation to revenues. Significant management judgment is required to estimate the amount of costs under our cooperative programs that has been incurred by the retailers. Actual costs incurred by the Company may differ significantly from our estimates if factors such as the level of participation and success of the retailers' programs or other conditions differ from our expectations.
Income taxes
In conjunction with the Recapitalization consummated on January 20, 1999 (The "Recapitalization"), the Company converted from an "S" corporation to a "C" corporation. As a "C" corporation, the Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $112.5 million as of March 31, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and deductible goodwill created in conjunction with the Recapitalization. The valuation allowance is based on our estimates of taxable income by jurisdiction in which our deferred tax assets will be recoverable. In the event that actual results differ from those estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance or reduce our current valuation allowance, which could materially impact our financial position and results of operations.
Results of Operations
The following discussion regarding results of operations refers to net sales, cost of goods sold and selling and general and administrative expenses, which the Company defines as follows:
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The following table sets forth the percentage relationship of certain items in the Company's Statements of Operations to net sales for the three months ended June 30, 2001March 31, 2002 and June 30, 2000:March 31, 2001:
| | Three Months Ended June 30, | | Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | | 2002 | 2001 | ||||||
Net sales: | Net sales: | Net sales: | ||||||||||
Value brands | 81.9 | % | 74.1 | % | Value brands | 80.7 | % | 83.4 | % | |||
Opening price point brands | 18.1 | 25.9 | Opening price point brands | 19.3 | 16.6 | |||||||
Total net sales | Total net sales | 100.0 | 100.0 | Total net sales | 100.0 | 100.0 | ||||||
Operating costs and expenses: | Operating costs and expenses: | Operating costs and expenses: | ||||||||||
Cost of goods sold | 63.9 | 55.0 | ||||||||||
Cost of goods sold | 53.9 | 54.4 | Selling, general and administrative expenses | 20.0 | 25.1 | |||||||
Selling, general and administrative expenses | 19.3 | 15.6 | ||||||||||
Total operating costs and expenses | Total operating costs and expenses | 72.3 | 70.0 | Total operating costs and expenses | 83.9 | 80.1 | ||||||
Operating income | Operating income | 27.7 | 30.0 | Operating income | 16.1 | 19.9 | ||||||
Interest expense | Interest expense | 8.2 | 9.2 | Interest expense | 6.2 | 12.5 | ||||||
Income before provision for income taxes | Income before provision for income taxes | 19.5 | 20.8 | Income before provision for income taxes | 9.9 | 7.4 | ||||||
Income tax expense | Income tax expense | 5.8 | 4.6 | Income tax expense | 2.4 | 2.1 | ||||||
Net income | Net income | 13.7 | % | 16.2 | % | Net income | 7.5 | % | 5.3 | % | ||
Three Months Ended June 30, 2001March 31, 2002 compared to Three Months Ended June 30, 2000March 31, 2001
Net Sales. Net sales increased 0.4%70.7% to $114.6$136.4 million for the three months ended June 30, 2001March 31, 2002 from $114.2$79.9 million for the three months ended June 30,March 31, 2001. ThisThe increase was driven by a combination of offsetting factors including:
Net sales of the Company's value brands increased 11.0%65.2% to $93.9$110.1 million for the three months ended June 30, 2001March 31, 2002 from $86.4$66.7 million for the three months ended June 30, 2000. Value brand sales to hardware channels increased $4.2 million primarily due to additional product listings that were secured.March 31, 2001. The gains achievedCompany advanced its strategic plan for growth in the hardware channel,consumer lawn and garden category by acquiring leading consumer fertilizer brands Vigoro®, Sta-Green® and Bandini®, as well as acquiring licensing rights to the Best® line of fertilizer products on December 17, 2001. Net sales from fertilizer brands were partially offset bysubstantially all of the lostincrease in net sales of products that contain chlorpyrifos. During 2000 the US Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provided for the withdrawal of virtually all residential uses of Dursban.three months ended March 31, 2002. The Increaseincrease in promotion expense was due to growthprimarily driven by sales of the home centers business. The Increase in demand for insect repellants and termiticides was related primarily to weather conditions.fertilizer brands acquired.
Net sales of opening price point brands decreased 30.0%increased 98.4% to $20.7$26.3 million for the three months ended June 30, 2001March 31, 2002 from $29.6$13.2 million for the three months ended June 30, 2000. The decrease was driven by the lossMarch 31, 2001. Net sales from fertilizer brands were substantially all of the Kmart Kgro business that was discontinuedincrease in net sales for the third quarter of 2000.three months ended March 31, 2002.
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Gross Profit. Gross profit increased 3.5%36.9% to $53.9$49.2 million for the three months ended June 30, 2001March 31, 2002 compared to $52.1$36.0 million for the three months ended June 30, 2000.March 31, 2001. The increase in gross profit was primarily driven by the fertilizer brands recently acquired. As a percentage of sales, gross profit increaseddecreased to 47.0%36.1% for the three months ended June 30, 2001March 31, 2002 as compared to 45.6%45.0% for
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the three months ended June 30, 2000.March 31, 2001. The increasedecrease in gross profit as a percentage of sales was primarily due to the resultfertilizer brands acquired, which have margins that are lower than the margins of the change inCompany's other mix of sales to more value brand sales, which are higher margin products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 24.5%35.8% to $22.1$27.2 million for the three months ended June 30, 2001March 31, 2002 from $17.8$20.1 million for the three months ended June 30, 2000.March 31, 2001. The majority of the increase is related to supporting the fertilizer brands acquired. As a percentage of net sales, selling, general and administrative expenses increaseddecreased to 19.3%20.0% for the three months ended June 30, 2001March 31, 2002 from 15.6%25.1% for the three months ended June 30, 2000.March 31, 2001. The increase is attributed to greater advertising spending to support the value brands, along with additional spending for in-store sales and support in the home centers. Prior year expenses also reflect a cost reductionoverall decrease was due to additional sales related to the impactrecently acquired fertilizer brands that do not require a direct percent increase in selling, general and administrative expenses of the termination of a capital lease. The double-digit percentage increase should not be viewed as a trend for the future.Company.
Operating Income. Operating income decreased 7.4%increased 38.3% to $31.8$22.0 million for the three months ended June 30, 2001March 31, 2002 from $34.3$15.9 million for the three months ended June 30, 2000.March 31, 2001. As a percentage of net sales, operating income decreased to 27.7%16.1% for the three months ended June 30, 2001March 31, 2002 from 30.0%19.9% for the three months ended June 30, 2000.March 31, 2001. The decrease was primarily driven by the lower margins of the fertilizer brands as compared to the Company's other products.
Income tax expense. For the three months ended June 30, 2001,March 31, 2002, the Company's effective income tax rate is 28.0%24.6%, which reflects the estimated utilization of the goodwill deduction in fiscal year 2001.2002. The goodwill deduction and corresponding release of valuation allowance is related to the step up in tax basis that occurred in conjunction with the Recapitalization. On January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL Parties"), the Company was recapitalized (the "Recapitalization").
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The following table sets forth the percentage relationship of certain items in the Company's Statements of Operations to net sales for the six months ended June 30, 2001 and June 30, 2000:
| Six Months Ended June 30, | |||||
---|---|---|---|---|---|---|
| 2001 | 2000 | ||||
Net sales: | ||||||
Value brands | 82.6 | % | 75.7 | % | ||
Opening price point brands | 17.4 | 24.3 | ||||
Total net sales | 100.0 | 100.0 | ||||
Operating costs and expenses: | ||||||
Cost of goods sold | 53.8 | 54.3 | ||||
Selling, general and administrative expenses | 21.7 | 20.2 | ||||
Dursban charge | — | — | ||||
Total operating costs and expenses | 75.5 | 74.5 | ||||
Operating income | 24.5 | 25.5 | ||||
Interest expense | 10.0 | 10.8 | ||||
Income before provision for income taxes | 14.5 | 14.7 | ||||
Income tax expense | 4.3 | 3.3 | ||||
Net income | 10.2 | % | 11.4 | % | ||
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Net Sales. Net sales decreased 0.3% to $194.6 million for the six months ended June 30, 2001 from $195.1 million for the six months ended June 30, 2000. This decrease was driven by a combination of offsetting factors including:
Net sales of the Company's value brands increased 8.7% to $160.6 million for the six months ended June 30, 2001 from $147.7 million for the six months ended June 30, 2000. Value brand sales of Spectracide Terminate™ increased $6.0 million primarily due to focused marketing programs and replenishment of inventory levels at retail. The gains achieved by Spectracide Terminate™, were partially offset by loss sales of products that contained chlorpyrifos. During 2000 the US Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provided for the withdrawal of virtually all residential uses of Dursban. The increase in demand for insect repellants is related primarily to weather conditions.
Net sales of opening price point brands decreased 28.3% to $33.9 million for the six months ended June 30, 2001 from $47.4 million for the six months ended June 30, 2000. The decrease was driven by the loss of the Kmart Kgro business that was discontinued in the third quarter of 2000.
Gross Profit. Gross profit increased 0.8% to $89.9 million for the six months ended June 30, 2001 compared to $89.1 million for the six months ended June 30, 2000. As a percentage of sales, gross profit increased to 46.2% for the six months ended June 30, 2001 as compared to 45.7% for the six
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months ended June 30, 2000. The increase in gross profit as a percentage of sales was the result of change in mix of sales to value brands, which are higher margin products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 7.1% to $42.2 million for the six months ended June 30, 2001 from $39.4 million for the six months ended June 30, 2000. As a percentage of net sales, selling, general and administrative expenses increased to 21.7% for the six months ended June 30, 2001 from 20.2% for the six months ended June 30, 2000. The increase is attributed to greater advertising spending to support the value brands, along with additional spending for in-store sales and support in the home centers. Prior year expenses also reflect a cost reduction due to the impact of the termination of a capital lease.
Operating Income. Operating income decreased 4.1% to $47.7 million for the six months ended June 30, 2001 from $49.7 million for the six months ended June 30, 2000. As a percentage of net sales, operating income decreased to 24.5% for the six months ended June 30, 2001 from 25.5% for the six months ended June 30, 2000.
Income tax expense. For the six months ended June 30, 2001, the Company's effective income tax rate is 28.0%, which reflects the estimated utilization of the goodwill deduction in fiscal year 2001. The goodwill deduction and corresponding release of valuation allowance is related to the step up in tax basis in conjunction with the Recapitalization. On January 20, 1999, pursuant to a Recapitalization agreement with UIC Holdings, L.L.C. (the "Equity Investor"), which is owned by Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV" and, together with its affiliates, the "THL Parties"), the Company was recapitalized (the "Recapitalization").
Liquidity and Capital Resources
Historically, the Company has utilized internally generated funds and borrowings under credit facilities to meet ongoing working capital and capital expenditure requirements. As a result of the Recapitalization, the Company has significantly increased cash requirements for debt service relating to the Company's Senior Subordinated Notes and Senior Credit Facility. As of December 31, 2000, the Company had total debt outstanding of $354.3 million. As of June 30, 2001, the Company had total debt outstanding of $352.4$351.8 million. As of March 31, 2002, the Company had total debt outstanding of $413.9 million. The Company will rely on internally generated funds and, to the extent necessary, borrowings under the Company's Revolving Credit Facility to meet liquidity needs.
The Company's Senior Credit Facility consists of:
The Company's Revolving Credit Facility and the Term Loan A mature in January 2005, and the Term Loan B matures in January 2006. The Revolving Credit Facility is subject to a clean-down period during which the aggregate amount outstanding under the Revolving Credit Facility shall not exceed $10.0 million for 30 consecutive days occurring during the period August 1 and November 30 in each calendar year. The Company was in compliance with financial covenants at March 31, 2002. While the
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Company does not anticipate an event of non-compliance with financial covenants in the future, the effect of non-compliance with financial covenants would cause the Company to request an amendment to the Senior Credit Facility.
The Company's principal liquidity requirements are for working capital, capital expenditures and debt service under the Senior Credit Facility and the notes. Cash flow from continuing operations provided net cash ofused by operating activities was approximately $3.8$60.1 million and $0.8$29.3 million for the sixthree months ended June 30,March 31, 2002 and 2001, and June 30, 2000, respectively. Net cash used by operating activities fluctuates during the year as the seasonal nature of the Company's sales results in a significant increase in working capital (primarily
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accounts receivable and inventory) during the first half of the year, with the second and third quarters being significant cash collection periods. The acquisition of the fertilizer brands does not change the seasonal nature of the Company's working capital.
The Company is the sole customer of Pursell Industries, Inc. and currently sources all of its fertilizer products from Pursell Industries, Inc. under a long-term supply agreement. The Company does not believe that the ability to source the fertilizer brands will be a concern in the future.
On May 9, 2002 the Company merged with Schultz Company. In conjunction with the Schultz Company acquisition the Company received approval from its banking syndicate for an amendment to its Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $180,000 to $215,000, increased the revolving credit facility from $80,000 to $90,000 and provided additional capital expenditure flexibility. The Senior Credit Facility retains Banc of America Securities, L.L.C. as sole Lead Arranger and Lead Agent.
In November 1999, the Company issued 97/8% Senior Subordinated Notes for $150 million that are due April 1, 2009.
Interest accrues at the rate of 97/8% per annum, payable semi-annually on each April 1 and October 1.
Capital expenditures are related to the enhancement of the Company's existing facilities and the construction of additional productions and distribution capacity. Cash used for capitalby investing activities was $1.9$0.9 million and $2.6$0.5 million for the sixthree months ended June 30,March 31, 2002 and 2001, and June 30, 2000, respectively. In addition, the Company entered into a capital lease agreement in March 2000 for $5.3 million. Cash used for capital expenditures for the remainder of fiscal 20012002 is expected to be less than $5.0 million.
The principal amountPrincipal on Term Loan A is to be repaid in twenty-three consecutive quarterly installments commencing June 30, 1999 with a final installment due January 20, 2005. The principal amount of Term Loan B is to be repaid in twenty-seven consecutive quarterly installments commencing June 30, 1999 with a final balloon installment due January 20, 2006.
The Company believes that cash flow from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet the anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments for at least the next two years. However, the Company cannot ensure that sufficient cash flow will be generated from operations to repay the notes and amounts outstanding under the Senior Credit Facility at maturity without requiring additional financing. The Company's ability to meet debt service and clean-down obligations and reduce debt will be dependent on the Company's future performance, which in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. Because a portion of the Company's debt bears interest at floating rates, the Company's financial condition is and will continue to be affected by changes in prevailing interest rates.
The Company has not entered into any off-balance sheet arrangements.
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Seasonality
The Company's business is highly seasonal because the Company's products are used primarily in the spring and summer. For the past two years, approximately 75% of the Company's net sales have occurred in the first and second quarters. The Company's working capital needs, and correspondingly the Company's borrowings, peak near the end of the Company's first quarter.
Impact of 2000 Dursban Withdrawal
During 2000, the U.S. Environmental Protection Agency and manufacturers of chlorpyrifos (the active ingredient in Dursban pesticidal products) entered into a voluntary agreement that provides for withdrawal of virtually all residential uses of Dursban. Formulation of new Dursban products intended for residential use were required to cease by December 1, 2000. Formulators can no longer sell such products to retailers as of February 1, 2001. Retailers will no longer be able to sell Dursban products after December 31, 2001.
The Company recorded a charge of $8.0 million in September 2000 for costs associated with this agreement. The Company currently has replacement chemicals for Dursban, and the replacement chemicals are currently being used in production of new pesticidal products.
Recently Issued Accounting Pronouncements
The Emerging Issues Task Force (EITF) issued EITF 00-25. This issue addresses when consideration from a vendor to a retailer (a) in connection with the retailer's purchase of the vendor's
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products or (b) to promote sales of the vendor's products by the retailer should be classified in the vendor's income statement as a reduction of revenue. The Company has adopted EITF 00-25 for fiscal year 2001. The Company has reclassified all trade and co-op promotional expense in the Statements of Operations to net sales.
In July 2001,On April 30, the Financial Accounting Standards Board (FASB)(FASB or the "Board") issued FASB Statement No. 145 (FAS 145), Rescission of Financial Accounting StandardsFASB Statements No. 141 (SFAS 141)4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS 145 rescinds both FASB Statement No. 4 (FAS 4), "Business Combinations." SFAS 141 requiresReporting Gains and Losses from Extinguishment of Debt, and the amendment to FAS 4, FASB Statement No. 64 (FAS 64), Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through this rescission, FAS 145 eliminates the requirement (in both FAS 4 and FAS 64) that gains and losses from the purchase methodextinguishment of accountingdebt be used for all business combinations initiated after June 30, 2001aggregated and, establishes specific criteria for recognition of intangible assets separately from goodwill. For business combinations initiated after June 30, 2001, SFAS 141 also requires that unallocated negative goodwill be written off immediatelyif material, classified as an extraordinary gain. Any unamortized deferred credit arisingitem, net of the related income tax effect. However, an entity is not be prohibited from a business combination completed before July 1, 2001 will be recognizedclassifying such gains and losses as extraordinary items, so long as they meet the cumulative effectcriteria in paragraph 20 of Accounting Principles Board 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.
FAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, which was originally issued to establish accounting standards for the effects of the transition to the provisions of the Motor Carrier Act of 1980. That transition is complete.
Further, FAS 145 amends paragraph 14(a) of FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the financial statements, (2) is subject to FASB Statement No. 66, Accounting for Sales of Real Estate, if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases.
FAS 145 also makes several other technical corrections to existing pronouncements that may change in accounting principle. The Companypractice. Generally, FAS 145 is currently evaluating theeffective for transactions occurring after May 15, 2002. There is no impact of SFAS 141FAS 145 on itsthe Company's financial statements.
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". SFAS 142 eliminates the amortization of goodwill and instead requires goodwill to be tested for impairment annually. Also, intangible assets are required to be amortized over their useful lives and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Under SFAS 142, if the intangible asset has an indefinite useful life, it is not amortized until its life is determined to be finite. The Company is required to adopt SFAS 142 no later than the first quarter of fiscal 2003, but is permitted to adopt as of the first quarter of fiscal 2002. The Company is currently evaluating the impact of SFAS 142 on its financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate
The Company is exposed to market risks relating to changes in interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in interest rates.
The Company manages interest rate risk by balancingEffective April 1, 2001, the amount of fixed and variable debt. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely for variable rate debt, interest rate changes generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. As of June 30, 2001, variable rate debt was $197.6 million, which includes the interest rate swaps as discussed below.
The Company entered into two interest rate swaps that have fixed the interest rate as of April 30, 2001 for $75.0 million of variable rate debt under the Senior Credit Facility. The interest rate swaps are for $50.0 and $25.0 million of the Senior Credit Facility and will terminate on April 30, 2002. The fixed LIBOR interest rates are 4.74% and 4.66%, for the $50.0 and $25.0 million interest rate swaps respectively. The changeCompany's objective is to manage the cash flow risks associated with its variable rate debt and not to trade such instruments for profit or loss. The Company's interest
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rate hedges are classified as cash flow hedges. For a cash flow hedge, the unrealized portion is deferred in accumulated other comprehensive income on the balance sheet until the transaction is realized, at which time any deferred hedging gains or losses are recorded in earnings. The fair value of the interest rate swaps is reported as a liability and as a component of comprehensive incomeloss in Stockholders' deficit at June 30, 2001.March 31, 2002. The June 30, 2001, reduction inMarch 31, 2002 fair value is a loss of $0.3 million is net of taxes.$0.2 million.
Interest ranges from 250 to 400 basis points above LIBOR depending on certain financial ratios. LIBOR was 3.86%1.91% on June 30, 2001.March 31, 2002.
Exchange Rate
The Company does not use derivative instruments to hedge against foreign currency exposures related to transactions denominated in other than the Company's functional currency. Substantially all foreign currency transactions are denominated in United States dollars.
Commodity Price
The Company does not use derivative instruments to hedge its exposures to changes in commodity prices. The Company utilizes various commodity and specialty chemicals in its production process. Purchasing procedures and arrangements with major customers serve to mitigate its exposure to price changes in commodity and specialty chemicals.
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Item 1. Legal Proceedings.
The Company has no reportable legal proceedings in the current period.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted.
Item 5. Other Information.None.
On May 9, 2002 the Company merged with Schultz Company. In conjunction with the Schultz Company acquisition the Company received approval from its banking syndicate for an amendment to its Senior Credit Facility. The newly amended Senior Credit Facility increased the Term Loan B from $180,000 to $215,000, increased the revolving credit facility from $80,000 to $90,000 and provided additional capital expenditure flexibility. The Senior Credit Facility retains Banc of America Securities, L.L.C. as sole Lead Arranger and Lead Agent.
Item 6. Exhibits and Reports on Form 8-K
None.
None.Amendment to Senior Credit Facility was filed on February 26, 2002. No financial statements were filed.
Addition of Gary M. Rodkin to the Company's Board of Directors was filed on March 7, 2002. No financial statements were filed.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITED INDUSTRIES CORPORATION | |||
Dated: | By: | /s/ DANIEL J. JOHNSTON Name: Daniel J. Johnston Title: Executive Vice President and Chief Financial Officer |