Armored AutoGroup 10-Q 2014 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2014

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT

For the transition period from         TO

Commission file number 333-180736

ARMORED AUTOGROUP INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	27-3620112
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

44 Old Ridgebury Road, Suite 300
Danbury, Connecticut	06810
(Address of principal executive officers)	(Zip Code)

(203) 205-2900

 (Registrant’s Telephone Number, Including Area Code)

Indicate by check 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 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.  x  Yes  o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The aggregate number of shares of the registrant’s common stock outstanding on May 1, 2014 was 1,000 shares of common stock $.01 par value.

Armored AutoGroup Inc.

INDEX

	PAGE
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of  March 31, 2014 and December 31, 2013	6
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013	7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	8
Notes to Condensed Consolidated Financial Statements	9
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.   Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.   Controls and Procedures	26
PART II — OTHER INFORMATION	26
Item 1.   Legal Proceedings	26
Item 1A.Risk Factors	26
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.   Defaults Upon Senior Securities	26
Item 4.   Mine Safety Disclosures	26
Item 5.   Other Information	26
Item 6.   Exhibits	27

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Cautionary Note Regarding Forward-Looking Statements

Some of the statements contained in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including, in particular, statements about our plans, strategies, prospects and industry estimates. These statements identify prospective information and can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) our liquidity, including our belief that our existing cash, cash equivalents and anticipated revenues are sufficient to fund our existing operating expenses, capital expenditures and liquidity requirements for at least the next twelve months; (ii) our outlook and expectations including, without limitation, statements made regarding continued market expansion and penetration for our products and (iii) expected new product launch dates and market exclusivity periods. The foregoing is not an exclusive list of all forward-looking statements we make. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this Quarterly Report may not in fact occur. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

·Our historical financial information may not be indicative of our future financial performance.

·Our operating results and net earnings may not meet expectations.

·Our quarterly results of operations are subject to fluctuations due to the seasonality of our business and other events and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance.

·Our financial results could suffer if we are unable to implement and successfully manage our core strategic initiatives or if our core strategic initiatives do not achieve the intended results.

·Sales growth may be difficult to achieve.

·We face intense competition in our business, which could lead to reduced profitability if we cannot compete effectively.

·A significant portion of our net sales and net earnings is derived from a few key customers. The loss of any one or more of these customers could cause a material decline in our operating results.

·Changes in marketing distributor relationships that are not managed successfully could result in a disruption in one or more of the affected markets.

·Customer support of our marketing and advertising programs and new product launches is critical for our success.

·Providing price concessions or trade terms that are acceptable to our customers, or the failure to do so, could adversely affect our sales and profitability.

·We may not successfully develop and introduce new products and line extensions.

·Our dependence upon third parties for the manufacture and supply of a substantial portion of our products could prevent us from delivering our products to our customers in the required quantities or within the required timeframe, which could result in order cancellations and decreased net sales.

·Volatility and cost increases in raw materials, energy, shipping and transportation and other necessary supplies or services could harm our financial condition and results of operations.

·We are exposed to commodity fluctuation risk and may not be able to adequately hedge our exposure, if at all.

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·Reliance on a limited base of third party contract manufacturers, logistics, procurement and information systems service providers may result in disruption to our business.

·Our facilities and those of our suppliers, service providers and common use facilities operators such as ports are subject to disruption by events beyond our control.

·We may not be able to hire or retain the number of qualified personnel required for our business, which would harm the development and sales of our products and limit our ability to grow.

·If we lose the services of our key personnel, our business could be adversely affected.

·Global economic conditions may negatively impact the Company’s financial condition and results of operations.

·Operations outside the United States expose us to uncertain conditions and other risks in international markets.

·Because we operate and sell our products in foreign countries, changes in currency exchange rates could adversely affect our operations and financial results.

·Harm to our reputation or the reputation of one or more of our leading brands could have an adverse effect on our business.

·We may not be able to attain synergies for our business and the IDQ business following our investment in IDQ Acquisition Corp.

·Acquisitions, new venture investments and divestitures may not be successful.

·Our substantial indebtedness, including the terms of our credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes, restricts our current and future operations and could adversely affect our ability to raise additional capital to fund our operations or to exploit business opportunities, limit our ability to respond to changes in the economy or our industry and prevent us from making debt service payments.

·Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more indebtedness. This could further exacerbate the risks to our financial condition.

·We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

·Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

·Goodwill, intangible and other long lived assets are subject to impairment risk.

·Failure to protect our intellectual property rights could impact our competitiveness, allow our competitors to develop and market products with features similar to our products and demand for our products could decline.

·If we are found to have infringed the intellectual property rights of others or cannot obtain necessary intellectual property rights from others, our competitiveness could be adversely impacted.

·In the ordinary course of business, we may be subject to product liability claims and lawsuits, including potential class actions, alleging that our products have resulted in or could result in unsafe condition or injury.

·We operate under an FTC consent order, which requires certain compliance policies and procedures. Should we violate our requirements thereunder, we may face significant fines and penalties.

·Compliance with environmental law and other government regulations could impose material costs.

·Litigation may adversely affect our business, financial condition and results of operations.

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·Changes in tax laws could adversely affect the taxes we pay and our profitability.

·Our judgments regarding the accounting for tax positions and the resolution of tax disputes may impact the Company’s earnings and cash flow.

·Changes in our effective tax rate may adversely affect our earnings and cash flow.

·A failure of a key information technology system could adversely impact our ability to conduct business.

·Our continued growth and expansion and increasing reliance on third party service providers could adversely affect our internal control over financial reporting, which could harm our business and financial results.

·We may incur increased ongoing costs as a result of being obligated to file reports with the SEC and our management may be required to devote substantial time to new compliance initiatives.

·Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses and this could negatively impact the Company’s business, financial condition and results of operations.

·The estimates and assumptions on which our financial statements are based may prove to be inaccurate, which may adversely affect the Company’s financial condition and results of operations.

·We can be adversely affected by the implementation of new, or changes in, GAAP.

·As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

Any forward-looking statement made by us in this Quarterly Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

As used herein, “Company”, “AAG”, “we”, “us” or “our” and similar terms refer to Armored AutoGroup Inc. and its subsidiaries unless the context in which the term is used indicates otherwise.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Armored AutoGroup Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	(unaudited)
	March 31, 2014			December 31, 2013
ASSETS
Current assets:
Cash	$	13,182		$	21,253
Accounts receivable, net	80,940			62,210
Inventories	36,629			34,043
Other current assets	7,400			9,790
Total current assets	138,151			127,296
Property, plant and equipment, net	27,559			28,936
Goodwill	357,507			358,826
Intangible assets, net	303,654			313,470
Investment in affiliate	10,000			—
Deferred financing costs and other assets, net	3,352			3,719
Total assets	$	840,223		$	832,247
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	21,233		$	8,128
Accrued expenses and other current liabilities	32,285			23,455
Due to Clorox	91			91
Due to Parent	695			745
Current portion of long-term debt, less discount	79			71
Total current liabilities	54,383			32,490
Long-term debt, less discount and current portion	544,464			553,511
Other liability	2,500			2,500
Deferred income taxes	86,530			89,610
Total liabilities	687,877			678,111
Commitments and contingencies (Note 4)
Shareholder’s Equity:
Common stock ($0.01 par value, one thousand shares authorized, one thousand shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively)	—			—
Additional paid-in capital	261,067			261,040
Accumulated deficit	(98,880		)	(98,955		)
Accumulated other comprehensive loss	(9,841		)	(7,949		)
Total shareholder’s equity	152,346			154,136
Total liabilities and shareholder’s equity	$	840,223		$	832,247

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Armored AutoGroup Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(In thousands)

	Three months ended March 31,
	2014			2013
Net sales	$	80,559		$	74,413
Cost of products sold	41,654			40,485
Gross profit	38,905			33,928
Operating expenses:
Selling and administrative expenses	11,552			9,603
Advertising costs	5,405			3,573
Research and development costs	608			638
Amortization of acquired intangible assets	9,111			9,175
Total operating expenses	26,676			22,989
Operating profit	12,229			10,939
Non-operating expenses:
Interest expense	11,949			11,906
Other (income) expense, net	(421		)	112
Income (loss) before benefit for income taxes	701			(1,079		)
Expense (benefit) for income taxes	627			(573		)
Net income (loss)	$	74		$	(506	)
Other comprehensive loss:
Foreign currency translation	(1,892		)	(1,760		)
Comprehensive loss	$	(1,818	)	$	(2,266	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Armored AutoGroup Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Three months ended March 31,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	74		$	(506	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	11,919			11,883
Share-based compensation	27			65
Deferred income taxes	(3,098		)	(3,332		)
Other	2			—
Cash effect of changes in:
Accounts receivable, net	(18,730		)	(5,863		)
Inventories	(2,586		)	(2,933		)
Prepaid Taxes	2,830			2,022
Other current assets	(451		)	(1,846		)
Accounts payable and accrued liabilities	21,936			8,787
Due to Clorox	—			(31		)
Other	102			(49		)
Net cash provided by operating activities	12,025			8,197
Cash flows from investing activities:
Capital expenditures	(328		)	(944		)
Investment in affiliate	(10,000		)	—
Net cash used in investing activities	(10,328		)	(944		)
Cash flows from financing activities:
Principal payments on term loan	(9,750		)	(750		)
Payment on advance from Parent	(50		)	—
Net cash used in financing activities	(9,800		)	(750		)
Effect of exchange rate changes on cash	32			1
Net (decrease) increase in cash	(8,071		)	6,504
Cash at beginning of period	21,253			4,206
Cash at end of period	$	13,182		$	10,710
Supplemental cash flow disclosures:
Cash paid for interest	$	4,695		$	4,679
Cash paid for income taxes	$	555		$	737

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Armored AutoGroup Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

Armored AutoGroup Inc. is a consumer products company consisting primarily of Armor All® and STP®, two of the most recognizable brands in the automotive aftermarket appearance products and performance chemicals categories, respectively. Armored AutoGroup delivers its products to distributors, resellers and end customers (collectively the customers) through its direct operations in the United States, Canada, Mexico, Australia, China and the United Kingdom and distributor relationships in approximately 50 countries. The Armor All and STP brands offer multiple automotive appearance and performance chemical products that can be found in most of the major developed countries around the world.

In September 2010, Viking Acquisition Inc., an entity owned by affiliates of Avista Capital Holdings, L.P. (“Avista”), entered into an agreement to acquire the AutoCare Products Business, Armor All, STP and certain other brands from The Clorox Company (“Clorox”) pursuant to the terms of a Purchase and Sale Agreement dated September 21, 2010 (the “Acquisition”).  The Acquisition closed on November 5, 2010 and included employees in the United States and other countries dedicated to the Company, related product patent and developed technology and certain other assets, including the manufacturing facilities located in Painesville, Ohio and Wales, U.K. Viking Acquisition Inc. was subsequently renamed Armored AutoGroup Inc. (“AAG”).  Armored AutoGroup Parent Inc. (“AAG Parent” or “Parent”) indirectly owns all of AAG’s issued and outstanding capital stock through its direct subsidiary and AAG’s direct parent, Armored AutoGroup Intermediate Inc. (“Intermediate”).

Basis of Presentation

The interim condensed consolidated financial statements for the three month periods ended March 31, 2014 and 2013 are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated results of operations, financial position and cash flows of the Company for the periods presented. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from the estimates and assumptions made. Further, the results for the interim period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014, or for any future period.

The Company’s business is moderately seasonal and can be impacted by weather. Sales are typically higher in the first half of the calendar year as the Company’s customers in the northern hemisphere purchase inventory for the spring and summer seasons when weather is warmer than in the fall and winter months.  This pattern is largely reflective of our customers’ seasonal purchasing patterns, as well as the timing of our promotional activities. Weather can also influence consumer behavior, especially for appearance products. Our appearance products sell best during warm, dry weather, and less if weather is cold and wet.  For these reasons, among others, the Company’s results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information in this report should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2013, which includes a complete set of footnote disclosures, including the Company’s significant accounting policies. The consolidated balance sheet at December 31, 2013 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information or disclosures required by U.S. GAAP for complete financial statements.

Revenue Recognition

Sales are recognized when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer and when all of the following have occurred: a firm sales arrangement exists, pricing is fixed and determinable, and collection is reasonably assured. Revenue includes shipping and handling costs, which generally are included in the list price to the customer. Taxes collected from customers and remitted to

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governmental authorities are not included in sales. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized.

The Company routinely commits to trade promotion programs with customers, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons offered through various programs to customers and consumers. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the accrued expenses and other current liabilities line item in the Condensed Consolidated Balance Sheets and are recorded as a reduction of sales in the Condensed Statements of Comprehensive Loss.

Amounts received by the Company from the licensing of certain trademarks are recorded as deferred revenue in the Condensed Consolidated Balance Sheets and are recognized as revenue on a straight-line basis over the term of the licensing agreement when the underlying royalties are earned.

Cost of Products Sold

Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacturing of product, as well as manufacturing labor, depreciation expense, direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product, contract manufacturing costs, and provisions for inventory losses (including losses relating to excess and obsolete inventory). Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity as well as costs associated with developing and designing new packaging.

Income Taxes

The Company uses the asset and liability method to account for income taxes. For purposes of the unaudited interim condensed consolidated financial statements, the Company calculates tax with reference to the anticipated effective tax rate for the annual financial period. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to the differences between the financial statement amounts and their respective tax bases. Management reviews the Company’s deferred tax assets to determine whether their value can be realized based upon available evidence. A valuation allowance is established when management believes that it is more likely than not that some portion or all of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change. In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by accounting guidance on the accounting for uncertainty in income taxes. Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled.

None of the Company’s goodwill is expected to be deductible for tax purposes.

The Company files a consolidated federal and certain state income tax returns with its Parent.  Income taxes have been prepared on a separate return basis.  The Company pays its tax liability on behalf of its Parent.

Foreign Currency Translation

Local currencies are the functional currencies for substantially all of the Company’s foreign operations. When the transactional currency is different than the functional currency, transaction gains and losses are included as a component of other (income) expense, net.  Assets and liabilities of foreign operations are translated into U.S. dollars using the exchange rates in effect at the respective balance sheet reporting date. Income and expenses are translated at the average exchange rate during the period. Gains and losses on foreign currency translation are reported as a component of accumulated other comprehensive (loss) income. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.

Goodwill and Intangible Assets

The Company tests its goodwill and trademark and brand intangible assets with indefinite lives annually as of October 1st unless there are indications during an interim period that these assets may have become impaired.  Goodwill impairment occurs when the carrying amount of one of the Company’s reporting unit’s goodwill exceeds its implied fair value. The Company would then record an impairment charge being the difference between the carrying amount and the implied fair value of the reporting unit’s goodwill. For trademarks and brand intangible assets with indefinite lives,

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impairment occurs when the carrying amount of an asset is greater than its estimated fair value and an impairment charge is recorded for the difference between the carrying amount and the fair value. The Company’s estimates of fair value are based primarily on a discounted cash flow approach as supplemented by a market based approach. Significant judgment is necessary in the preparation of assumptions and estimates inherent in such valuation approaches, particularly with respect to the determination of future volumes, revenue and expense growth rates, changes in working capital use, foreign-exchange rates, inflation, the selection of an appropriate discount rate and the calculation of an average earnings before interest, tax, depreciation and amortization (“EBITDA”) multiple of a selected public-company peer group. In particular, the discount rates the Company utilizes in these analyses, as well as expectations for future cash flows, may be influenced by such factors as changes in interest rates, rates of inflation and changes in regional risk.  During the three months ended March 31, 2014, goodwill decreased by $1.3 million due to currency translation.

Property, Plant & Equipment and Finite-Lived Intangible Assets

Property, plant and equipment and finite-lived intangible assets are stated at cost less accumulated depreciation and amortization. The Company calculates depreciation and amortization expenses by the straight-line method using estimated useful lives of the related assets. The Company reviews property, plant and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset or asset group may not be recoverable. The Company’s impairment review is based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist and impairment occurs when the book value of the asset group exceeds the estimated future undiscounted cash flows generated by the asset group. When impairment is indicated, a charge is recorded for the difference between the book value of the asset group and its fair value. Depending on the asset or asset group, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in a similar condition.

Recent Accounting Pronouncements

The Company adopted the following pronouncements effective January 1, 2014:

In February 2013 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2013-04—Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). The ASU requires reporting and disclosure about obligations resulting from joint and several liability arrangements within its scope for which the total amount of the obligation is fixed at the reporting date. For the Company, ASU 2013-04 is effective January 1, 2014 for fiscal year 2014 and interim periods therein. The guidance in ASU 2013-04 is to be applied retrospectively for those obligations resulting from joint and several liability arrangements within its scope that exist at January 1, 2014. Adoption of ASU 2013-04 did not have a material impact on the Company.

Note 2 — Inventories

Inventories consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Finished goods	$	29,285		$	28,400
Raw materials and packaging	9,724			7,896
Allowances for obsolescence	(2,380		)	(2,253		)
	$	36,629		$	34,043

Note 3 - Fair Value Measurement of Assets and Liabilities

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value which is intended to increase consistency and comparability and related disclosures. An asset or liability’s classification is based on the lowest level of input that is significant to the fair value measurement and is disclosed in one of the following three categories:

Level 1—Quoted market prices in active markets for identical assets or liabilities.

Level 2—Observable market-based inputs or unobservable inputs that are corroborated by market data.

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Level 3—Unobservable inputs reflecting the reporting entity’s own assumptions.

The Company’s financial instruments consist of cash, trade accounts receivable, trade accounts payable and long-term debt. Due to their short-term maturity, the carrying amounts of cash, trade accounts receivable and trade accounts payable approximate their fair market values. The carrying and fair values of the Company’s long-term debt were as follows (in thousands):

	March 31, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Term loan	$	276,637	$	281,953	$	285,982	$	291,000
Senior notes	267,906		288,750		267,600		267,438

The fair value of the Term Loan and the Senior Notes was determined using broker quotes, which use discounted cash flows, an income approach, and the then-applicable forward LIBOR rates and, therefore, meets the definition of Level 2 fair value, as defined above.

Note 4 — Commitments and Contingencies

Litigation and Other Legal Matters

In connection with the Acquisition, Clorox retained liability associated with a potential contract claim and the Company agreed to indemnify and reimburse Clorox for 50% of the first $5,000,000 in settlement costs related to the contract claim. As of March 31, 2014 and December 31, 2013, the Company has accrued $2,500,000 in long-term liabilities related to this contingency.

The Company is subject to various lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Company’s financial statements taken as a whole.

Note 5 — Income taxes

The Company’s effective tax rate was as follows:

	Three months ended March 31,
	2014		2013
Effective tax rate	89.4	%	53.1	%

The Company’s effective tax rate for the three month period ended March 31, 2014 differs from the statutory tax rate primarily due to U.S. federal manufacturing benefits recognized and state taxes. Further, the Company’s effective tax rate has increased for the three month period ended March 31, 2014 as compared to the corresponding period in 2013 primarily as a result of a discrete tax charge of $0.4 million recorded during the three month period ending March 31, 2014.  The discrete tax charge is primarily the result of a change in the uncertain tax positions recorded by Clorox, for which the Company has recorded a corresponding benefit in income from operations due to the indemnification agreement between the entities.

Note 6 — Segment Data

The Company manages its business through two geographic segments: North America and International.

·North America—consists of auto-care products marketed and sold in the United States and Canada. Products within this segment include auto-care products primarily under the Armor All and STP brands.

·International—consists of products sold outside North America, including Australia, Europe and other international locations. Products within this segment include auto-care products primarily under the Armor All and STP brands.

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The Company does not allocate its amortization of intangible assets or interest expense between its North America and International segments but includes them in the tables below under Corporate in order to reconcile the North America and International segments’ performance to the Company’s Condensed Consolidated Statements of Comprehensive Loss. All intersegment sales are eliminated and are not included in the Company’s reportable segments’ net sales.

The following summarizes the financial performance of the Company’s operating segments (in thousands):

	Three Months Ended March 31, 2014
	North America		International		Corporate			Consolidated
Net sales	$	61,567	$	18,992	$	—		$	80,559
Earnings (loss) before income taxes	18,758		3,003		(21,060		)	701
Capital expenditures	276		52		—			328
Depreciation of property, plant and equipment and amortization of intangible assets	1,577		122		9,111			10,810
Share based compensation	24		3		—			27

	Three Months Ended March 31, 2013
	North America		International		Corporate			Consolidated
Net sales	$	56,614	$	17,799	$	—		$	74,413
Earnings (loss) before income taxes	18,276		1,726		(21,081		)	(1,079		)
Capital expenditures	793		151		—			944
Depreciation of property plant and equipment and amortization of intangible assets	1,511		146		9,175			10,832
Share based compensation	62		3		—			65

Note 7 — Financial Information for the Company and Its Subsidiaries

The Company’s payment obligations under the Senior Notes are guaranteed, jointly and severally, by all of the Company’s wholly owned domestic subsidiaries that guarantee the obligations of the Company under the Credit Facility. These guarantees are full and unconditional, subject, in the case of the subsidiary guarantors, to customary release provisions. The Company conducts substantially all of its business through its subsidiaries. In servicing payments to be made on the Senior Notes and other indebtedness, and to satisfy other liquidity requirements, the Company will rely, in large part, on cash flows from these subsidiaries, mainly in the form of dividends, royalties and advances or payments on account of intercompany loan arrangements. The ability of these subsidiaries to make dividend payments to the Company will be affected by, among other factors, the obligations of these entities to their creditors, requirements of corporate and other law, and restrictions contained in agreements entered into by or relating to these entities.

The following supplemental condensed consolidating financial information sets forth balance sheets, statements of comprehensive (loss) income and statements of cash flows for the Company, the guarantor subsidiaries, the non-guarantor subsidiaries and elimination entries necessary to consolidate the Company and its subsidiaries. This information is presented in lieu of separate financial statements and other related disclosures pursuant to Regulation S-X Rule 3-10 of the Securities Exchange Act of 1934, as amended, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

The operating and investing activities of the separate legal entities are fully interdependent and integrated. Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a standalone basis.

13

Condensed Consolidating Balance Sheet

March 31, 2014

	Issuer		Combined Guarantor Subsidiaries			Combined Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	4,789	$	—		$	8,393		$	—		$	13,182
Accounts receivable, net	6		63,100			17,834			—			80,940
Inventories	—		26,716			9,913			—			36,629
Other current assets	60,487		(54,367		)	1,280			—			7,400
Total current assets	65,282		35,449			37,420			—			138,151
Property, plant and equipment, net	7,823		17,078			2,658			—			27,559
Goodwill	—		310,576			46,931			—			357,507
Intangible assets, net	—		268,916			35,982			(1,244		)	303,654
Investment in subsidiaries	627,915		113,737			—			(741,652		)	—
Investment in affiliate	10,000		—			—			—			10,000
Deferred financing costs and other assets, net	3,265		87			—			—			3,352
Total assets	$	714,285	$	745,843		$	122,991		$	(742,896	)	$	840,223
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	786	$	16,255		$	4,192		$	—		$	21,233
Accrued expenses and other current liabilities	16,981		10,283			5,021			—			32,285
Due to Clorox	69		23			(1		)	—			91
Due to Parent	695		—			—			—			695
Current portion of long-term debt, less discount	79		—			—			—			79
Total current liabilities	18,610		26,561			9,212			—			54,383
Long-term debt, less discount and current portion	544,464		—			—			—			544,464
Other liability	2,500		—			—			—			2,500
Deferred income taxes	5,121		81,367			42			—			86,530
Total liabilities	570,695		107,928			9,254			—			687,877
Shareholder’s equity	143,590		637,915			113,737			(742,896		)	152,346
Total liabilities and shareholder’s equity	$	714,285	$	745,843		$	122,991		$	(742,896	)	$	840,223

14

Condensed Consolidating Balance Sheet

Year Ended December 31, 2013

	Issuer		Combined Guarantor Subsidiaries			Combined Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash	$	14,843	$	—		$	6,410		$	—		$	21,253
Accounts receivable	78		44,885			17,247			—			62,210
Inventory	—		24,553			9,490			—			34,043
Other current assets	53,853		(45,072		)	1,009			—			9,790
Total current assets	68,774		24,366			34,156			—			127,296
Property, plant and equipment	8,061		18,037			2,838			—			28,936
Goodwill	—		310,576			48,250			—			358,826
Intangible assets	—		276,461			38,198			(1,189		)	313,470
Investment in subsidiaries	647,107		115,394			—			(762,501		)	—
Other assets	3,632		87			—			—			3,719
Total assets	$	727,574	$	744,921		$	123,442		$	(763,690	)	$	832,247
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	169	$	5,103		$	2,856		$	—		$	8,128
Accrued expenses and other current liabilities	10,063		8,263			5,129			—			23,455
Due to Clorox	69		23			(1		)	—			91
Due to Parent	745		—			—			—			745
Notes payable, current portion	71		—			—			—			71
Total current liabilities	11,117		13,389			7,984						32,490
Notes payable, less current portion and discount	553,511		—			—			—			553,511
Other liabilities	2,500		—			—			—			2,500
Deferred income taxes	5,121		84,425			64			—			89,610
Total liabilities	572,249		97,814			8,048			—			678,111
Shareholder’s equity	155,325		647,107			115,394			(763,690		)	154,136
Total liabilities and shareholder’s equity	$	727,574	$	744,921		$	123,442		$	(763,690	)	$	832,247

15

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three months ended March 31, 2014

	Issuer			Combined Guarantor Subsidiaries			Combined Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	66,428		$	20,359		$	(6,228	)	$	80,559
Cost of products sold	—			33,765			14,117			(6,228		)	41,654
Gross profit	—			32,663			6,242			—			38,905
Operating expenses:
Selling and administrative expenses	5,729			2,941			2,882			—			11,552
Advertising costs	—			3,924			1,481			—			5,405
Research and development costs	—			608			—			—			608
Amortization of acquired intangible assets	—			7,545			1,566			—			9,111
Total operating expenses	5,729			15,018			5,929			—			26,676
Operating (loss) profit	(5,729		)	17,645			313			—			12,229
Non-operating expenses:
Interest expense	11,949			—			—			—			11,949
Other expense, net	(425		)	—			4			—			(421		)
(Loss) earnings before (benefit) provision for income taxes	(17,253		)	17,645			309			—			701
(Benefit) provision for income taxes	(6,406		)	6,775			258			—			627
Equity earnings (loss) of subsidiaries, net of taxes	10,921			51			—			(10,972		)	—
Net (loss) earnings	$	74		$	10,921		$	51		$	(10,972	)	$	74
Other comprehensive loss:
Foreign currency translation	(1,892		)	(1,892		)	(1,892		)	3,784			(1,892		)
Comprehensive loss	$	(1,818	)	$	9,029		$	(1,841	)	$	(7,188	)	$	(1,818	)

16

Condensed Consolidating Statement of Comprehensive (Loss) Income

Three months ended March 31, 2013

							Combined
				Combined			Non-
				Guarantor			Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	61,797		$	18,606		$	(5,990	)	$	74,413
Cost of products sold	—			34,238			12,237			(5,990		)	40,485
Gross profit	—			27,559			6,369			—			33,928
Operating expenses:
Selling and administrative expenses	4,300			2,742			2,561			—			9,603
Advertising costs	—			2,099			1,474			—			3,573
Research and development costs	—			638			—			—			638
Amortization of acquired intangible assets	—			7,545			1,630			—			9,175
Total operating expenses	4,300			13,024			5,665			—			22,989
Operating (loss) profit	(4,300		)	14,535			704			—			10,939
Non-operating expenses:
Interest expense	11,906			—			—			—			11,906
Other expense, net	—			4			108			—			112
(Loss) earnings before income taxes	(16,206		)	14,531			596			—			(1,079		)
(Benefit) provision for income taxes	(6,103		)	5,373			157			—			(573		)
Equity earnings of subsidiaries, net of taxes	9,597			439			—			(10,036		)	—
Net (loss) earnings	$	(506	)	$	9,597		$	439		$	(10,036	)	$	(506	)
Other comprehensive (loss) income:
Foreign currency translation	(1,760		)	(1,760		)	(1,760		)	3,520			(1,760		)
Comprehensive (loss) income	$	(2,266	)	$	7,837		$	(1,321	)	$	(6,516	)	$	(2,266	)

17

Condensed Consolidating Statement of Cash Flows

Three months ended March 31, 2014

	Issuer			Combined Guarantor Subsidiaries			Combined Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net (loss) earnings	$	74		$	10,921		$	51		$	(10,972	)	$	74
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	1,550			8,577			1,792			—			11,919
Share-based compensation	27			—			—			—			27
Deferred income taxes	(16		)	(3,060		)	(22		)	—			(3,098		)
Equity earnings of subsidiaries, net of taxes	(10,921		)	(51		)	—			10,972			—
Other	—			—			2			—			2
Cash effect of changes in:
Accounts receivable, net	72			(18,215		)	(587		)	—			(18,730		)
Inventories	—			(2,163		)	(423		)	—			(2,586		)
Prepaid taxes	(6,432		)	9,262						—			2,830
Other current assets	(216		)	34			(269		)	—			(451		)
Accounts payable and accrued liabilities	7,537			13,171			1,228			—			21,936
Intercompany and other	18,277			(18,406		)	231			—			102
Net cash provided by operating activities:	9,952			70			2,003			—			12,025
Cash flows from investing activities:
Capital expenditures	(206		)	(70		)	(52		)	—			(328		)
Acquisition, net	(10,000		)	—			—			—			(10,000		)
Net cash used in investing activities	(10,206		)	(70		)	(52		)	—			(10,328		)
Cash flows from financing activities:
Principal payments on term loan	(9,750		)	—			—			—			(9,750		)
Payment of advance from Parent	(50		)	—			—			—			(50		)
Net cash used in by financing activities	(9,800		)	—			—			—			(9,800		)
Effect of exchange rate changes on cash	—			—			32			—			32
Net increase in cash	(10,054		)	—			1,983			—			(8,071		)
Cash at beginning of period	14,843			—			6,410			—			21,253
Cash at end of period	$	4,789		$	—		$	8,393		$	—		$	13,182

18

Condensed Consolidating Statement of Cash Flows
Three months ended March 31, 2013

							Combined
				Combined			Non-
				Guarantor			Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net (loss) earnings	$	(506	)	$	9,597		$	439		$	(10,036	)	$	(506	)
Adjustments:
Depreciation and amortization	1,493			8,593			1,797			—			11,883
Share-based compensation	65			—			—			—			65
Deferred income taxes	—			(3,648		)	316			—			(3,332		)
Equity earnings of subsidiaries, net of taxes	(9,597		)	(439		)	—			10,036			—
Cash effect of changes in:
Accounts receivable	34			(8,225		)	2,328			—			(5,863		)
Inventories	—			(2,200		)	(733		)	—			(2,933		)
Prepaid taxes	1,940			—			82			—			2,022
Other current assets	485			(2,391		)	60			—			(1,846		)
Accounts payable and accrued liabilities	3,964			7,682			(2,859		)	—			8,787
Due from Clorox	—			—			(31		)	—			(31		)
Intercompany and other	3,637			(8,176		)	4,490			—			(49		)
Net cash (used in) provided by operating activities	1,515			793			5,889			—			8,197
Cash flows from investing activities:
Capital expenditures	—			(793		)	(151		)	—			(944		)
Net cash used in investing activities	—			(793		)	(151		)	—			(944		)
Cash flows from financing activities:
Principal payments on term loan	(750		)	—			—			—			(750		)
Net cash provided by financing activities	(750		)	—			—			—			(750		)
Effect of exchange rate on cash							1						1
Net increase (decrease) in cash	765			—			5,739			—			6,504
Cash at beginning of period	1,477			—			2,729			—			4,206
Cash at end of period	$	2,242		$	—		$	8,468		$	—		$	10,710

19

Note 8 — Investment in Affiliate

On March 17, 2014, the Company paid $10.0 million to acquire a non-controlling equity interest in IDQ Acquisition Corp. (“IDQ”) and also paid $1.2 million in transaction fees and closing costs.  The investment is accounted for under the cost method of accounting.  The Company did not evaluate the investment for impairment due the limited holding time period.  The transaction fees and closing costs included $0.3 million paid to a board member for services rendered in connection with the transaction.  The transaction fees and closing costs are reported in selling and administrative expenses on the Condensed Consolidated Statements of Comprehensive Loss.  On the same date, Parent acquired a controlling equity interest in IDQ.  In connection with the investment, the Company entered into a Shared Services and Supply Agreement (the “Shared Services Agreement”) with IDQ and Parent pursuant to which certain products and services will be provided on an arm’s-length basis by one party to another, as agreed by the Company and IDQ, with the purpose of utilizing the assets and operations of each company to increase sales and lower the combined costs for the mutual benefit of both IDQ and us.  On March 11, 2014, the Company entered into an amendment of its Credit Facility revising a defined term, Consolidated EBITDA.  Consolidated EBITDA is used in the calculation of certain financial condition covenants under the Credit Facility.  The revision to the definition of Consolidated EBITDA excludes from Consolidated EBITDA fees and expenses incurred for the Company’s investment in IDQ Acquisition Corp., the Company’s implementation of a management services agreement with IDQ Acquisition Corp. and the Company’s pursuit of cost savings, expense reductions and other operating improvements and synergies related to IDQ.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors, including the factors we describe under “Cautionary note regarding forward-looking statements,” elsewhere in this Quarterly Report.

Overview

We are a consumer products company consisting primarily of Armor All and STP, two of the most recognizable brands in the automotive aftermarket appearance products and performance chemical products categories, respectively. The current Armor All product line of protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes are designed to clean, shine, refresh and protect interior and exterior automobile surfaces. The offering of STP oil and fuel additives, functional fluids and automotive appearance products has a broad customer base ranging from professional racers to car enthusiasts and “Do-it-Yourselfers.” Our brands offer over 200 individual automotive appearance and performance chemical products that can be found in most of the major developed countries around the world. We have a diversified geographic footprint with direct operations in the United States, Canada, Mexico, Australia, the United Kingdom and China and distributor relationships in approximately 50 countries.

Armor All is the most recognized automotive aftermarket appearance product brand in the United States with a comprehensive and competitively priced product line. The Armor All advertising campaigns, such as the “Go ahead. Stare,” “Care for your car”,”Armor All Way” and the new “A car is a privilege. Respect it.” build on what we believe to be the strong Armor All brand equity established over the business’s 50 year history to maintain a high level of consumer awareness. We further believe that Armor All has distinguished itself as the leader in the automotive aftermarket appearance products category based upon its household name, high quality product formulations, convenient application methods and tradition of innovation.

The STP brand has been characterized by a commitment to technology, performance and motor sports partnerships for over 50 years. Regular use of STP additives as part of basic maintenance helps engines run better by boosting the cleaning performance of gas and saving gas by keeping fuel intake systems clean. We believe the STP brand fuel and oil additives, functional fluids and automotive appearance products benefit from a rich heritage in the car enthusiast and racing scenes.

Industry trends

The general economic environment in our primary markets has stabilized in the latest 12 to 18 months allowing for moderate growth in the appearance and performance chemical products categories.  We believe the current economic environment and category growth trends are indicative of sustaining trends.  We also believe the trend toward an aging car fleet in our primary markets has reached its height and will likely decrease somewhat as sales of new cars increased as the economy stabilized.

We believe innovation is an important contributor to category growth because new product introductions stimulate consumer interest in the category by fulfilling unmet consumer needs and bringing attention to the appearance and performance chemical products categories. Truly innovative products have a history of driving category growth in appearance and performance chemical products. We continue to introduce new products and invest in advertising and promotion to elevate engagement of our customers and consumers with our brands.

Competition remains intense in the categories we serve. Recently, smaller brands in both the appearance and performance chemical products categories continued to have success gaining market share.  The Company continues to invest significant resources in advertising campaigns and with trade partners on promotional activities for established brands. While we believe our brands and customer relationships are strong, there is no assurance we will be able to maintain or improve our current competitive position.

21

Key performance indicators

Management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of, and potential variability of, our earnings and cash flows. These key performance indicators include:

·Net sales—which is an indicator of our overall business growth;

·Gross profit—is a key factor in the relative strength of our brands as gross profits enable us to generate cash to maintain marketing support, and therefore improve brand health; and

·Operating expenses—outright and as a percentage of net sales which is an indicator of the efficiency of our business and our ability to manage our business to budget.

Results of Operations

Three month periods ended March 31, 2014 compared to the corresponding periods in 2013

Financial data for the three months ended March 31, 2014 and 2013 are as follows (in thousands, except percentages):

	Three months ended March 31,
	2014			2013			Change			%
Net sales	$	80,559		$	74,413		$	6,146		8
Cost of products sold	41,654			40,485			1,169			3
Gross profit	38,905			33,928			4,977			15
Operating expenses:
Selling and administrative expenses	11,552			9,603			1,949			20
Advertising costs	5,405			3,573			1,832			51
Research and development costs	608			638			(30		)	(5	)
Amortization of acquired intangible assets	9,111			9,175			(64		)	(1	)
Total operating expenses	26,676			22,989			3,687			16
Operating profit	12,229			10,939			1,290			12
Non-operating expenses:
Interest expense	11,949			11,906			43			0
Other (income) expense, net	(421		)	112			(533		)	(476	)
Income (Loss) before benefit for income taxes	701			(1,079		)	1,780			(165	)
Expense (benefit) for income taxes	627			(573		)	1,200			(209	)
Net income (loss)	$	74		$	(506	)	$	580		(115	)

Net sales

Our sales are typically higher in the first half of the calendar year as our customers purchase stock for the spring and summer seasons when weather is warmer in the northern hemisphere than in the fall and winter months. This pattern is largely reflective of our customers’ seasonal purchasing patterns, as well as the timing of our promotional activities. Weather can also influence consumer behavior, especially for appearance products. Our appearance products sell best during warm, dry weather, and sell less strongly if weather is cold and wet.

Net sales for our North America segment include products marketed and sold to customers in the United States and Canada. Our International segment represents net sales to all other regions outside of the United States and Canada, primarily being Europe, Australia and Latin America. The following table summarizes our net sales for the three months ended March 31, 2014 and 2013 (in thousands, except percentages):

22

	Three Months Ended March 31,				Change					% of Net Sales
	2014		2013		$			%		2014	2013
Net sales
North America:
Armor All products	$	45,874	$	40,556	$	5,318		13		56	54
STP products	13,626		13,868		(242		)	(2	)	17	19
Other brands	2,067		2,190		(123		)	(6	)	3	3
Total North America	61,567		56,614		4,953			9		76	76
International	18,992		17,799		1,193			7		24	24
Consolidated net sales	$	80,559	$	74,413	$	6,146		8		100	100

In North America, the increase in net sales during the three months ended March 31, 2014 as compared to the same period in 2013 was driven by the Armor All brand which had strong product placement, especially in wipes and specially packaged products.  Additionally, Armor All was positively impacted by improved weather conditions compared to 2013. The STP brand sales were substantially the same in the three months ended March 31, 2014 compared to the same period last year.

International net sales for the three month period ended March 31, 2014 were up compared to the corresponding period in 2013.  This increase was driven by higher sales in the United Kingdom business of $1.7 million driven by an acquisition in the third quarter of 2013 and Australia experienced strong seasonal sales and timing of sales related to promotional activity.  Partially offsetting these increases were lower sales in Asia export due to the impact of currency fluctuations on customer orders.

Gross profit

Our gross profit for the three months ended March 31, 2014 and 2013 are as follows (in thousands, except percentages):

	Three months ended March 31,
	2014			2013			Change		%
Gross profit	$	38,905		$	33,928		$	4,977	15
Stated as a percentage of net sales	48.3		%	45.6		%

The increase in gross profit dollars in the three months ended March 31, 2014 compared to the same period in 2013 was driven by higher sales volume and improvements in logistics spending.  As a percentage of net sales, the gross profit increase was driven by the cost savings initiatives impact on product and logistic costs.

Selling and administrative expense, advertising costs, and research and development costs

Our selling and administrative expenses, advertising costs, and research and development costs for the three months ended March 31, 2014 and 2013 are as follows (in thousands, except percentages):

	Three months ended March 31,
	2014			2013			Change			%
Selling and administrative expenses	$	11,552		$	9,603		$	1,949		20
Advertising costs	5,405			3,573			1,832			51
Research and development costs	608			638			(30		)	(5	)
	$	17,565		$	13,814		$	3,751		27
Stated as a percentage of net sales	21.8		%	18.6		%

23

The increase in our selling and administrative expense in the three months ended March 31, 2014 as compared to the corresponding period in 2013 is primarily due to transaction fees related to an investment in affiliate of $0.6 million, higher bonus, profit sharing and commission expense of $0.7 million, bad debt reserve expense of $0.2 million and packaging costs to support the specially package product sales of $0.2 million.

The increase in our advertising costs in the three month period ended March 31, 2014 compared to the corresponding period in 2013 was primarily due to the timing of STP advertising spend, sponsorship costs for the Martinsville STP 500 race moving from the second quarter of 2013 to the first quarter of 2014.

Income taxes

Our effective tax rate for the three months ended March 31, 2014 and 2013 are as follows:

	Three months ended March 31,
	2014		2013
Effective tax rate	89.4	%	53.1	%

Our effective tax rate for the three month period ended March 31, 2014 differs from the statutory tax rate primarily due to U.S. federal manufacturing benefits recognized and state taxes. Further, the Company’s effective tax rate has increased for the three month period ended March 31, 2014 as compared to the corresponding period in 2013 primarily as a result of a discrete tax charge of $0.4 million recorded during the three month period ending March 31, 2014.  The discrete tax charge is primarily the result of a change in the uncertain tax positions recorded by Clorox, for which the Company has recorded a corresponding benefit in income from operations due to the indemnification agreement between the entities.

Liquidity and capital resources

Our principal sources of liquidity are our cash of $13.2 million as of March 31, 2014, and our $50.0 million revolving credit loan, the entirety of which, is undrawn and fully available to us as of March 31, 2014. Our principal source of operating cash inflows is from sales of product to customers. Our principal cash outflows relate to the purchase and production of inventory and related costs, advertising, selling and administrative expenses, and capital expenditures. At March 31, 2014, $8.4 million of our cash is held by foreign subsidiaries to fund their working capital needs. To date, net cash generated in operations and borrowed funds under our Revolving Credit Facility have been sufficient to service our debts and other obligations and fund seasonal and other cash flow requirements. We believe that, as of March 31, 2014, cash on hand, cash expected to be generated from future operating activities and cash available under the Revolving Credit Facility will be sufficient to fund our operations, including contractual obligations and capital expenditures for the next 12 months. However, in the event that funds are not available from our operating activities or from the Revolving Credit Facility, we may have to delay certain business initiatives and adjust our strategy accordingly.  As of March 31, 2014, the Company was in compliance with all convenants related to the Credit Facility.

On March 11, 2014, the Company entered into an amendment of its Credit Facility revising a defined term, Consolidated EBITDA.  Consolidated EBITDA is used in the calculation of certain financial condition covenants under the Credit Facility.  The revision to the definition of Consolidated EBITDA excludes from Consolidated EBITDA fees and expenses incurred for the Company’s investment in IDQ Acquisition Corp., the Company’s implementation of a management services agreement with IDQ Acquisition Corp. and the Company’s pursuit of cost savings, expense reductions and other operating improvements and synergies related to IDQ.

Cash flows

The following table summarizes our cash flows (in thousands):

	Three Months Ended March 31,
	2014			2013
Net cash provided by operating activities	$	12,025		$	8,197
Net cash used in investing activities	(10,328		)	(944		)
Net cash used in financing activities	(9,800		)	(750		)

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Operating activities

Significant elements of our $12.0 million net cash provided by operating activities for the three months ended March 31, 2014 include our net income of $0.1 million, a decrease in net operating assets of $3.1 million and non-cash charges of $8.9 million for depreciation and amortization of our long lived, tangible and intangible assets, deferred financing costs, debt discount amortization and deferred income taxes. Elements of the $8.2 million net cash provided by operating activities for the three months ended March 31, 2013 included our net loss of $0.5 million and a decrease in net operating assets of $0.1 million, offset by non-cash charges of $8.6 million for depreciation and amortization. The increase in our operating assets in 2014 included an increase of $18.7 million in accounts receivable and a increase of $21.9 million in accounts payable and accrued liabilities commensurate with our seasonal sales volume during the quarter.

Investing activities

Our cash used in investing activities of $10.3 million for the three month period ended March 31, 2014 was comprised of $0.3 million of capital expenditures and $10.0 million for an investment in an affiliate in the quarter.  Cash used in investing activities for the three month period ended March 31, 2013 consisted solely of capital expenditures.  Capital spending declined to 0.4% of net sales in the three month period ended March 31, 2014 as compared to 1.3% for the corresponding period in 2013.

Financing activities

Net cash used in financing activities for the three months ended March 31, 2014 included $0.8 million of principal payments on our term loan as well as an additional mandatory prepayment of principal in the amount of $9.0 million due to excess cash generated in the year ended December 31, 2013 pursuant to the Term Loan agreement.  Net cash used in financing activites for the three months ended March 31, 2013 included $0.8 million of principal payment on our term loan.

Indebtedness

We have a significant amount of indebtedness stemming from the November 5, 2010 Acquisition, including a revolving credit loan and a term Loan under the Credit Facility and Senior Notes. As of March 31, 2014 we have aggregate gross amount of indebtedness of approximately $556.3 million, exclusive of issuance discounts, including a remaining $281.3 million owed on our Term Loan having quarterly principal payments of $0.8 million and the remaining principal maturing in November 2016, and $275.0 million in aggregate principal amount of 9.25% Senior Notes due 2018.  Our significant indebtedness could affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments. Further, the terms of our credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on our current and future operations, particularly our ability to respond to changes or to take certain actions. Although such encumbrances have not proven unexpectedly burdensome to date, these restrictions may limit our ability to engage in certain financial and operational business activities that may be in our long-term best interest. As of March 31, 2014, the Company was in compliance with all covenants related to the Credit Facility.  For additional details related to our debts, please see Note 9 of the Notes to the Consolidated Financial Statements, “Debt”, contained in the Company’s Annual Report on Form 10-K filed with the SEC (file number 333-180736) incorporated herein by reference.

Commitments and contingencies

For details related to our contractual obligations and other commitments and contingencies, please see (i) Note 4 of the Notes to Condensed Consolidated Financial Statements, “Commitments and Contingencies” included in this Quarterly Report, and (ii) Note 11 of the Notes to the Consolidated Financial Statements for the fiscal year ended December 31, 2013, “Commitments and Contingencies”, and Management’s Discussion and Analysis of Financial Condition and Results of Operations “Certain Information Concerning Contractual Obligations” included in the Company’s Annual Report on Form 10-K filed with the SEC (file number 333-180736) incorporated herein by reference.

Off-Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For details about our market risk, please see Item 7A., “Quantitative and Qualitative Disclosures About Market Risk”, included in the Company’s Annual Report on Form 10-K filed with the SEC (file number 333-180736) incorporated herein by reference.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management team, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2014, including controls and procedures to timely alert management to material information relating to the Company and its subsidiaries required to be included in the reports the Company files or submits under the Exchange Act. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.  As of March 31, 2014, we had no material ongoing litigation, regulatory or other proceedings and had no knowledge of any investigations by governmental or regulatory authorities in which we are a target that could have a material adverse effect on our current business.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed under “Risk Factors” included within Company’s Annual Report on Form 10-K filed with the SEC (file number 333-180736) incorporated herein by reference. The risks described in the Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There has been no material changes in our risk factors from those disclosed in the Annual Report referred to above.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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ITEM 6. EXHIBITS

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.

EXHIBIT NO.	DESCRIPTION
31.1†	Certificate by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†	Certificate by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial statements from Armored AutoGroup’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the Securities and Exchange Commission on May 7, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Loss; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Stockholders’ Equity and (iv) the Notes to Consolidated Financial Statements.

†Filed herewith.

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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.

Dated:  May 7, 2014

ARMORED AUTOGROUP INC.

/s/ MICHAEL KLEIN

Michael Klein

Chief Executive Officer

/s/ J. ANDREW BOLT

J. Andrew Bolt

Executive Vice President, Chief Financial Officer and Principal Accounting Officer

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