EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) discusses the Company's performance for 2002 and compares it
to previous years. This MD&A is an integral part of the Annual Report and should
be read in conjunction with all other sections.
CONSOLIDATED RESULTS
2002 COMPARED TO 2001
Net Sales
Net sales increased by $87.4 million or 9.1% to $1047.1 million, compared
to $959.7 million in the previous year. The majority of this increase was due to
the additional sales in Consumer Products stemming from businesses acquired from
Carter-Wallace in the fourth quarter of 2001 amounting to approximately $73.8
million, and additional sales in the Specialty Products acquisition of Biovance
Products Inc. of approximately $7.1 million at the beginning of 2002. Adjusting
for acquisitions and discontinued product lines, as well as the reversal of
prior year promotion liabilities of approximately $5 million (based on latest
estimates), sales of existing products increased approximately 2%.
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on Issue 01-9 (formerly
EITF issues 00-14 and 00-25), "Accounting for Consideration Given to a Customer
or Reseller of the Vendor's Products." This EITF addressed the recognition,
measurement and income statement classification of consideration from a vendor
to a customer in connection with the customer's purchase or promotion of the
vendor's products. The EITF requires the cost of such items as coupons, slotting
allowances, cooperative advertising arrangements, buydowns, and other allowances
to be accounted for as a reduction of revenues, not as a marketing expense as
the Company did previously. The full year 2001 and 2000 net sales have been
reclassified to conform with this pronouncement. The impact was a reduction of
net sales of approximately $130.3 million in 2002, $121.2 million in 2001, and
$104.5 million in 2000. This consensus did not have an effect on net income. In
accordance with the consensus reached, the Company adopted the required
accounting beginning January 1, 2002.
Operating Costs
The Company's gross margin increased to 29.7% from 29.1% in the prior
year. This improvement reflects a significant improvement in Laundry Products
gross margins of 2.7 points due to the virtually full year benefits of the USA
Detergents acquisition and the prior year promotion liability adjustment of $5
million, partially offset by a reduced gross margin of 3.9 points on Personal
Care resulting from higher promotional spending related to 2002 sales, and
higher manufacturing costs associated with the Cranbury production of Arrid
Antiperspirant earlier in the year. To a lesser extent, gross margin was further
hampered by approximately $4 million of equipment obsolescence charges related
to process improvements at two plants, and downsizing and impairment charges at
two other plants. The start-up costs of the Madera, California animal nutrition
facility also negatively impacted gross margin.
Marketing expenses increased $11.4 million to $86.2 million. This increase
is mainly due to the acquired brands and higher spending in support of
deodorizing products, partially offset by lower spending on existing personal
care products.
Selling, general and administrative expenses increased $8.7 million.
Higher personnel related expenses and transition expenses associated with
acquired products, and a $2.3 million impairment charge related to the tradename
valuation of a recently acquired brand name, were partially offset by the
elimination of Goodwill and certain tradename amortization expense associated
with the Company's adoption of SFAS No. 142.
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Other Income and Expenses
The increase in equity in earnings of affiliates is due to the inclusion
of $18.1 million of allocated full year profits from Armkel LLC, which reflected
a disproportionate recapture of $5 million of allocated losses sustained in the
fourth quarter of 2001 (See footnote 6 for further explanation of Armkel's
results). The Company's other equity investments, Armand Products and Armakleen,
were virtually unchanged.
Investment income was slightly lower due to lower interest rates on funds
invested.
Interest expense increased significantly from the prior year as a result
of the Company carrying the debt used to finance the two significant
acquisitions in 2001.
Other expenses consist mostly of foreign exchange losses of approximately
$2 million associated with the Company's Brazilian subsidiary QGN.
Taxation
The effective tax rate for 2002 was 34.0%, compared to 36.4% in the
previous year. The lower rate in 2002 reflects the impact of Armkel's foreign
subsidiaries, whose post-tax results are included in equity in earnings of
affiliates, partially offset by a higher state tax rate.
Net Income and Earnings Per Share
The Company's net income for 2002 was $ 66.7 million, equivalent to
diluted earnings of $1.60 per share, compared to $47.0 million or $1.15 per
share in 2001.
2001 COMPARED TO 2000
Net Sales
Net sales increased by $268.5 million or 38.8% to $959.7 million, compared
to $691.2 million in the previous year. The majority of this increase was due to
growth in the Consumer Products business as part of the USA Detergents
acquisition earlier in 2001, and the addition of the Carter-Wallace acquisition
in the fourth quarter of 2001. Excluding these acquisitions, sales of existing
consumer products were about 3% above the prior year.
Operating Costs
The Company's gross margin decreased to 29.1% from 34.8% in the prior
year. The acquisition of the lower margin USA Detergents brands affected the
Company's overall margin structure and accounted for most of the more than five
point reduction in gross margin since the prior year. However, these brands,
which are sold on an "everyday low price" basis, require lower marketing and
sales support, which largely offsets the effect of the lower gross margin. To a
lesser extent, gross margin was also adversely impacted by lower personal care
brand sales, and start-up costs associated with new brands.
Marketing expenses increased $.7 million to $74.8 million. This increase
was mainly due to the addition of the brands acquired from USA Detergents and
Carter-Wallace mentioned earlier in this report.
Selling, general and administrative expenses increased $19.1 million.
Major factors contributing to this increase included higher personnel costs,
which included a $3.5 million increase in deferred compensation expense, from a
$1.0 million gain in 2000 to a $2.5 million charge in 2001, as well as the
ongoing and transitional costs resulting from the aforementioned acquisitions.
Other factors contributing to this increase included goodwill and intangible
amortization costs related to the USA Detergents acquisition, and a higher bad
debt reserve.
During the third quarter of 2000, as a step in implementing the ARMUS
joint venture, the Company announced that it would close its Syracuse plant in
early 2001, and recorded a pre-tax charge of $21.9 million. In 2001, the Company
recorded a $.7 million recovery of expected costs from the plant closure.
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Other Income and Expenses
The decrease in equity in earnings of affiliates was due mostly to the
inclusion of a $10 million net loss in the fourth quarter from the Company's new
affiliate, Armkel LLC.
On September 28, the Company completed the acquisition of the consumer
products business of Carter-Wallace in a partnership with the private equity
group, Kelso & Company. As part of this transaction, the Company purchased
outright the Arrid Antiperspirant business in the United States and Canada and
the Lambert Kay pet care business. Armkel LLC, a 50/50 joint venture with Kelso,
purchased the remainder of Carter-Wallace's domestic and international consumer
products business, including Trojan condoms, Nair depilatories and First
Response pregnancy kits. Armkel reported fourth quarter sales of $95.4 million
and a net loss of $15.6 million. The major reason for this loss was an
accounting charge related to a step-up in the value of opening inventories in
accordance with purchase accounting principles. As these inventories were sold,
the step-up was charged to current operations. The total step-up was
approximately $23.2 million, of which $15.1 million was charged in the fourth
quarter and the balance was charged in 2002. Other factors contributing to the
loss included integration costs, and promotional activity of the predecessor
company prior to the acquisition, which shifted sales and profit to the third
quarter from the fourth quarter of 2001.
Under the agreement with Kelso, the Company is allocated 50% of all losses
up to $10 million, and 100% of such losses above that level. As a result, the
Company recorded a loss of $10 million on its investment in Armkel.
This Armkel loss was partially offset by equity in earnings of affiliates
from the Armand Products Company, and by an increase in profitability from the
ArmaKleen Company. The ArmaKleen Company is a 50/50 joint venture with the
Safety-Kleen Company, the latter of which filed for chapter 11 during the second
quarter of 2000. This caused the ArmaKleen Company to record a $1.4 million
charge, half of which resulted in a reduction in our profitability during 2000.
Should the Safety-Kleen Company be unable to emerge from Chapter 11, the results
of operations and financial position of the ArmaKleen Company would be adversely
affected.
Investment income was relatively unchanged from the prior year.
Interest expense increased approximately $6.7 million as a result of the
debt incurred to finance the USA Detergents acquisition at the end of May, and
the Carter-Wallace acquisition at the end of September.
Minority interest expense is primarily the 35% of the earnings generated
by the ARMUS joint venture through the month of May that accrued to USA
Detergents.
Taxation
The effective tax rate for 2001 was 36.4%, compared to 35.3% in the
previous year. The higher effective rate in 2001 was primarily due to the impact
of a relatively lower level of tax depletion deductions and other tax credits on
higher pre-tax income.
Net Income and Earnings Per Share
The Company's net income for 2001 was $47.0 million, equivalent to diluted
earnings of $1.15 per share, compared to $33.6 million or $.84 per share in
2000.
SEGMENT RESULTS
Current and prior year results by segment are presented based upon
segments as described in Note 17 of the Notes to Consolidated Financial
Statements. Product-based segment results exclude items that are not included in
measuring business performance for management reporting purposes, most notably
certain financing, investing, and plant shutdown charges.
Sales in affiliate companies over which the Company exerts significant
influence, but does not control the financial and operating decisions, are
reported for segment purposes in a manner similar to consolidated subsidiaries.
The effect of this convention is eliminated in the corporate segment and certain
reclassifications of expenses between cost of sales and selling, general and
administrative expenses are also reflected in the corporate segment to adjust
management reporting results to the amounts appearing in the financial
statements. Key segment operating results for the years 2000 through 2002 are as
follows:
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CONSUMER SPECIALTY
PRODUCTS PRODUCTS SUBTOTAL CORPORATE TOTAL
-------- -------- -------- --------- -----
NET SALES
2002 $1,246,547 $223,375 $1,469,922 $(422,773) $1,047,149
2001 864,457 219,223 1,083,680 (123,973) 959,707
2000 529,585 211,668 741,253 (50,062) 691,191
OPERATING PROFIT
2002 152,855 28,628 181,483 (76,969) 104,514
2001 66,323 29,285 95,608 (2,087) 93,521
2000 52,753 26,981 79,734 (27,573) 52,161
CONSUMER PRODUCTS
2002 compared to 2001
Combined Consumer Product sales of the Company and its affiliates grew
44.2% to $1246.5 million in 2002 primarily due to the businesses acquired from
Carter-Wallace of approximately $380.0 million at the end of September 2001.
These acquired businesses were the key drivers behind the domestic Personal Care
Products growth in net sales of over 140% to $385.3 million in 2002 from $160.0
million in 2001, and the growth in International net sales in excess of 150% to
$205.0 million in 2002 from $81.3 in 2001. Excluding the acquired businesses,
and adjusting for discontinued product line sales and the adjustment for prior
year promotion liabilities, sales of existing products grew approximately 2%
with higher Deodorizing and Cleaning and Laundry Product sales more than
offsetting lower personal care sales.
Operating profit increased 130% to $152.9 million in 2002 from $66.3
million in 2001 due to the acquired businesses, which included an $8.1 million
charge for the remaining step-up of opening inventory values established as part
of purchase accounting. In addition, operating profit benefited from improved
Laundry Product profit margins of 2.7 points due to the virtually full year
benefits of the USA Detergents acquisition, the prior year promotion adjustment
of $5 million, partially offset by a reduced gross margin of 3.9 points on
existing Personal Care products from higher promotional spending related to 2002
sales, and higher manufacturing costs associated with the Cranbury production of
Arrid Antiperspirant and Nair depilatories earlier in the year. To a lesser
extent operating profit absorbed approximately $4 million of equipment
obsolescence charges related to process improvements at two plants, and
downsizing and impairment charges at two other plants. The Consumer Product
segment also recorded a $2.2 million impairment charge related to the tradename
valuation of a recently acquired brand name.
2001 compared to 2000
Combined Consumer Product sales grew 63.2% to $864.5 million in 2001 from
$529.6 million in 2000. The majority of this increase was due to the USA
Detergents acquisition in May 2001 and the addition of the Carter-Wallace
acquisition in the fourth quarter of 2001. Excluding both acquisitions, sales of
existing consumer products grew approximately 4.5% above the year 2000 level,
with higher sales of deodorizers and cleaners, and laundry products more than
offsetting lower personal care sales.
Operating profit increased 25.6% to $66.3 million in 2001 from $52.8
million due to the acquired businesses, which was net of a $15.1 million initial
charge for the step-up of opening inventory values established as part of
purchase accounting as well as the increased goodwill and intangible
amortization costs related to the USA Detergents acquisition, and the ongoing
and transitional costs resulting from the aforementioned acquisitions.
SPECIALTY PRODUCTS
2002 compared to 2001
Combined Specialty Product sales grew approximately 2% to $223.4 million
in 2002 from $219.2 million in 2001 largely as a result of the acquisition of
Biovance Technologies Inc. of approximately $7.1 million at the
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beginning of 2002. These higher sales were partially offset by lower sales of
Armakleen's aqueous cleaning products and discontinued sales of certain
immaterial product lines.
Operating profit declined slightly by approximately 2% reflecting the
start-up costs of the new Madera, California animal nutrition facility, for the
production of Megalac Rumen Bypass Fats and related higher-value Megalac
products for the West Coast dairy feed additives market. Operating profit was
also negatively impacted by higher raw material costs for Megalac related
products. A partial offset to these operating profit decreases was the higher
profit contribution from the addition of the Biovance acquisition.
2001 compared to 2000
Combined Specialty Product sales grew approximately 3.5% to $219.2 million
in 2001 from $211.7 million in 2000. This increase was mostly attributable to
growth in animal nutrition products, particularly Megalac Rumen Bypass Fats, and
higher sales of QGN, the Company's then 85% owned Brazilian subsidiary.
Operating profit
The combination of growth in animal nutrition sales together with lower
raw material costs, particularly for Megalac Rumen Bypass Fats, were the major
reasons for the operating profit growth of 8.5% to $29.3 in 2001 from $27.0 in
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had outstanding long-term debt of $352.5 million, and cash
less short-term debt of $60.4 million, for a net debt position of $292.1 million
at December 31, 2002. This compares to $365.7 million at December 31, 2001.
In the fourth quarter of 2001, the Company financed its investment in
Armkel, the acquisition of USA Detergents and the Anti-perspirant and Pet Care
businesses from Carter-Wallace with a $510 million credit facility consisting of
$410 million in 5 and 6 year term loans. The entire amount of the term loans was
drawn at closing and a $100 million revolving credit facility remains fully
un-drawn. The term loans pay interest at 200 and 250 basis points over LIBOR,
depending on the ratio of total debt to EBITDA. Financial covenants include a
leverage ratio and an interest coverage ratio, which if not met, could result in
an event of default and trigger the early termination of the credit facility, if
not remedied within a certain period of time. EBITDA, as defined by the
Company's loan agreement, which includes an add-back of certain acquisition
related costs, was approximately $144 million in 2002. The leverage ratio at
December 31, 2002 per the loan agreement, therefore, was approximately 2.5
versus the agreement's maximum 3.5, and the interest coverage ratio was 6.00
versus the agreement's minimum of 4.25. This credit facility is secured by a
blanket lien on all of the Company's assets. The reconciliation of Net Cash
Provided by Operating Activities to the Company's key liquidity measure,
"EBITDA", per the term loan agreement, is as follows (in millions):
Net Cash Provided by Operating Activities ........ $114.0
Plus:
Interest Expense .............................. 24.0
Current Income Tax Provision .................. 16.6
Distributions from Affiliates ................. 4.7
Other ......................................... 2.2
Less:
Decrease in Working Capital ................... (15.8)
Interest Income ............................... (1.8)
------
EBITDA ........................................... $143.9
======
In 2002, operating cash flow was $114.0 million. Major factors
contributing to the cash flow from operating activities included higher
operating earnings before non-cash charges for depreciation and amortization,
and a significant reduction in working capital, particularly inventories, offset
by the net non-cash impact from the equity in earnings of affiliates. Operating
cash flow was used for additions to property, plant and equipment and to
consummate the acquisition of Biovance. Operating cash together with proceeds
from stock options exercised and a
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collected note receivable, were used to make both voluntary and mandatory debt
repayments and to pay cash dividends.
Commitments as of December 31, 2002. The table below summarizes the
Company's material contractual obligations and commitments as of December 31,
2002.
PAYMENTS DUE BY PERIOD
(THOUSANDS OF DOLLARS)
2004 TO 2007 TO AFTER
TOTAL 2003 2006 2008 2008
-------- -------- -------- -------- --------
Principal payments on borrowings:
Long-term debt
Syndicated Financing Loans ...... $358,470 $ 10,770 $103,644 $244,056 $ --
Various Debt from Brazilian Banks 5,888 4,490 1,254 144 --
Industrial Revenue Bonds ................. 4,075 685 2,055 1,335 --
Other commitments:
Operating Leases Obligations ........ $ 52,245 $ 9,503 $ 18,591 $ 10,100 $ 14,051
Letters of Credit (1) ............... 5,692 5,692 -- -- --
Guarantees(2) ....................... 2,969 2,969 -- -- --
Surety/Performance bonds(3) ......... 830 830 -- -- --
Raw Materials ....................... 16,841 16,841 -- -- --
Joint Venture Agreement(4) .......... 111,750 -- -- -- 111,750
-------- -------- -------- -------- --------
Total .................................... $558,760 $ 51,780 $125,544 $255,635 $125,801
======== ======== ======== ======== ========
(1) Letters of credit with several banks guarantee payment for such things as
insurance claims in the event of the Company's insolvency, a year's worth
of lease payments on a warehouse, and 200 days of interest on the
Industrial Revenue Bond borrowing.
(2) Guarantees represent minimum performance based payment obligations in
connection with the Biovance acquisition.
(3) Surety/performance bonds were established for construction of the
Company's headquarters addition in Princeton, NJ and for construction
activities at the Company's North Brunswick, NJ plant.
(4) Reflects the amount payable to Kelso in the event of a sale of Armkel or
as a result of Kelso's exercise of its put option under the Joint Venture
Agreement.
The Company generally relies on operating cash flows supplemented by
borrowings to meet its financing requirements. Our diverse product offerings,
strong brand names and market positions have provided a stable base of cash
flow. Our diverse product line is marketed through multiple distribution
channels, reducing our dependence on any one category or type of customer.
Similar to other basic consumer products, we believe that consumers purchase our
products largely independent of economic cycles. However, the Company's ability
to meet its financial obligations depends on successful financial and operating
performance. The Company cannot guarantee that its business strategy will
succeed or that it will achieve the anticipated financial results. The Company's
financial and operational performance depends upon a number of factors, many of
which are beyond its control. These factors include:
- - Competitive conditions in the categories of the consumer products industry
in which we compete;
- - Operating difficulties, operating costs or pricing pressures we may
experience;
- - Passage of legislation or other regulatory developments that affects us
adversely;
- - Delays in implementing any strategic projects; and
- - Current geo-political events.
The Company cannot give assurance that it will generate sufficient cash
flow from operations or that it will be able to obtain sufficient funding to
satisfy all its obligations, including those noted above. If the Company is
unable to pay its obligations, it will be required to pursue one or more
alternative strategies, such as selling assets, refinancing or restructuring
indebtedness or raising additional equity capital. However, the Company cannot
give assurance that any alternative strategies will be feasible or prove
adequate to satisfy its obligation.
The Company has a total debt-to-capital ratio of approximately 52%. At
December 31, 2002 the Company had $100 million of additional domestic borrowing
capacity available through its revolving credit agreement. Capital expenditures
in 2003 are expected to be moderately lower than the level of the prior year.
Management believes that operating cash flow, coupled with the Company's access
to credit markets, will be sufficient to meet the anticipated cash requirements
for the coming year.
In 2001, operating cash flow was $41.6 million. Major factors contributing
to the cash flow from operating activities included higher operating earnings
before non-cash charges for depreciation and amortization, and the
aforementioned
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impact from the loss in earnings of affiliates. Operating cash flow was used to
meet increased working capital needs to support the higher sales stemming from
the two acquisitions during the year, and to fund the related transitional
activities. Operating cash flow with net proceeds from long-term borrowings,
were used to consummate the two acquisitions made that year, and to finance the
Company's investment in Armkel. To a lesser extent available cash was used to
finance additions to property, plant and equipment, to make investments in notes
receivable, and to pay dividends.
Recent Event
On January 16, 2003, the Company entered into a receivables purchase
agreement with an issuer of receivables-backed commercial paper in order to
refinance a portion, $60,000,000, of its primary credit facility. Under this
arrangement, the Company sold, and will sell from time to time, throughout the 3
year term of the agreements, its trade accounts receivable to a wholly-owned
special purpose finance subsidiary, Harrison Street Funding LLC, a Delaware
limited liability company ("Harrison"). Harrison in turn sold, and will sell on
an ongoing basis, to the commercial paper issuer an undivided interest in the
pool of accounts receivable. The transactions were entered into to reduce
certain expenses associated with the credit facility in addition to lowering the
Company's financing costs by accessing the commercial paper market. These
transactions will be reflected as borrowings on the consolidated financial
statements of the Company. Consequently, the receivables assets of Harrison will
be included in the consolidated assets of the Company shown on such financial
statements. However, under these agreements, as was the case under the credit
facility, such assets will not be available to satisfy claims of creditors other
than the commercial paper issuer.
Armkel
The Armkel venture was initially financed with $229 million in equity
contributions, of which approximately $112 million was contributed by the
Company, and an additional $445 million of debt.
Armkel LLC had outstanding long-term debt of $412 million, and cash less
short-term debt of $24 million, for a net debt position of $388 million at
year-end including discontinued operations. In addition, Armkel had unused
revolving credit bank lines of $85 million. Any debt on Armkel's balance sheet
is without recourse to the Company.
Under the terms of its joint venture agreement with Kelso, the Company has
a call option to acquire Kelso's interest in Armkel in three to five years after
the closing, at fair market value as defined in the agreement subject to a floor
and a cap. If the Company does not exercise its call option, then Kelso may
request the Company to purchase its interest. If the Company elects not to
purchase Kelso's interest, then Kelso's and the Company's equity in the joint
venture may be offered to a third party. If such a sale should occur, depending
on the proceeds received, the Company may be required to make a payment to Kelso
up to an amount of approximately $112 million. Kelso also may elect to have the
Company purchase its interest for $112 million. This amount is not payable until
the eighth year from the formation of the venture. Finally, Kelso may require
the Company to purchase its interest upon a change in control as defined in the
joint venture agreement. The venture's Board has equal representation from both
the Company and Kelso.
OTHER ITEMS
MARKET RISK
Concentration of Risk
A group of three Consumer Product customers accounted for approximately
23% of consolidated net sales in 2002, including a single customer Walmart,
which accounted for approximately 16%. A group of three customers accounted for
approximately 23% of consolidated net sales in 2001 adjusted for EITF issue
01-9, including Walmart, which accounted for approximately 14%. This group
accounted for 21% in 2000 and is adjusted for the aforementioned EITF.
Although it is not included in the top three customers noted above, Kmart
Corporation historically has represented approximately 3% of our consolidated
net sales. Kmart's bankruptcy followed by its announcement to close an
additional 329 stores in the first half of 2003 could cause a reduction in sales
to Kmart of approximately 15% to 20%. It is not clear, and to what extent, these
lost sales may be made to other retailers.
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As part of the USA Detergents merger agreement, the Company divested USA
Detergents non-laundry business and other non-core assets to former USA
Detergents executives under the new company name of USA Metro, Inc. ("USAM"),
subsequently renamed USA Detergents.
The Company has a concentration of risk with USAM at December 31, 2002 in
the form of trade accounts receivable and an amount due for leased space of
approximately $3.1 million, a 16% equity interest in USAM of $0.4 million and a
note receivable for other assets of $2.0 million-payments start with the
beginning of 2006. This note has a carrying value of approximately $1.4 million
using an effective interest rate of 17%.
Should USAM be unable to meet these obligations, the impact would have an
adverse effect on the Company's Consolidated Statement of Income.
Interest Rate Risk
The Company's primary domestic borrowing facility is made up of a $ 510
million credit agreement of which $358.5 million remained outstanding as of
December 31, 2002; and $100 million of a revolving credit agreement all of which
was un-drawn at December 31, 2002. The weighted average interest rate on these
borrowings at December 31, 2002, excluding deferred financing costs and
commitment fees, was approximately 5.1% including the effect of hedges. The
Company entered into interest rate swap agreements to reduce the impact of
interest rate fluctuations on this debt, as required by the credit agreement.
The swap agreements are contracts to exchange floating rate for fixed interest
rate payments periodically over the life of the agreements without the exchange
of the underlying notional amounts. As of December 31, 2002, the Company entered
into agreements for a notional amount of $235 million, swapping debt with a one-
month LIBOR rate for a fixed rate that averages 5.8 %. As a result, the swap
agreements eliminate the variability of interest expense for that portion of the
Company's debt. On an annualized basis a drop of 10% in interest rates would
result in a $.9 million payment under the swap agreement in excess of what would
have been paid based on the variable rate. Under these circumstances, a little
more than half of this payment would be offset by the amount of reduced interest
expense on the $123.5 million of variable debt not hedged. However, a 10%
increase in interest rates would result in a $.5 million increase in interest
expense on the debt not hedged.
The Company's domestic operations and its Brazilian subsidiary have short
and long- term debts that are floating rate obligations. If the floating rate
were to change by 10% from the December 31, 2002 level, annual interest expense
associated with the floating rate debt would be immaterial.
Foreign Currency
The Company is subject to exposure from fluctuations in foreign currency
exchange rates, primarily U.S. Dollar/British Pound, U.S. Dollar/Japanese Yen,
U.S. Dollar/Canadian Dollar and U.S. Dollar/Brazilian Real.
The Company, from time to time, enters into forward exchange contracts to
hedge anticipated but not yet committed sales denominated in the Canadian
dollar, the British pound and the Japanese Yen. The terms of these contracts are
for periods of under 12 months. The purpose of the Company's foreign currency
hedging activities is to protect the Company from the risk that the eventual
dollar net cash inflows from the sale of products to foreign customers will be
adversely affected by changes in exchange rates. The Company did not have any
forward exchange contracts outstanding at December 31, 2002 and December 31,
2001.
The Company is also subject to translation exposure of the Company's
foreign subsidiary's financial statements. A hypothetical 10% change in the
exchange rates for the U.S. Dollar to the Canadian Dollar, the British Pound and
the Brazilian Real from those at December 31,2002 and 2001, would result in an
annual currency translation gain or loss of approximately $.3 million in 2002
and $.4 million in 2001.
Equity Derivatives
The Company has entered into equity derivative contracts of its own stock
in order to minimize the impact on earnings resulting from fluctuations in
market price of shares in the Company's deferred compensation plan. These
contracts, which consist of cash settled call options in the amount of 165,000
shares, hedge approximately 50% of the shares related to the plan and are marked
to market through earnings. As a result, the Company recognized income of
approximately $.4 million in 2002, and expense of $.5 million in 2001.
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Related Party Transactions
The Company has achieved substantial synergies by combining certain of its
operations with those of Armkel, particularly in the areas of sales,
manufacturing and distribution, and most service functions. Armkel has retained
its core marketing, research & development, and financial planning capabilities,
and continues to manufacture condoms, but purchases virtually all the support
services it requires for its U.S. domestic business from the Company under a
management services agreement, which has a term of five years with possible
renewal. As a first step, the Company merged the two sales organizations during
the fourth quarter of 2001. In early 2002, the Company began transferring
production of antiperspirants and depilatories from the former Carter-Wallace
plant at Cranbury, NJ, to the Company's plant at Lakewood, NJ, which is a more
efficient producer of antiperspirants and other personal care products. This
process was completed by the third quarter 2002. During this time, the Company
also integrated the planning and purchasing, accounting and management
information systems, and other service functions.
During 2002, the Company invoiced Armkel $22.5 million for primarily
administrative and management oversight services (which is included as a
reduction of selling general and administrative expenses), and purchased $7.1
million of deodorant anti-perspirant inventory produced by Armkel at its cost.
The Company sold Armkel $1.4 million of Arm & Hammer products to be sold in
international markets. Armkel invoiced the Company $1.7 million of transition
administrative services. The Company has an open receivable from Armkel at
December 31, 2002 of approximately $4.8 million that primarily related to
administrative services, partially offset by amounts owed for inventory.
As noted in the Concentration of Risk section of this exhibit, the Company
divested USA Detergents non-laundry business and other non-core assets to former
USA Detergents executives concurrent with the merger agreement. The Company has
a 16% ownership interest in the newly formed company USAM. The Company supplies
USAM with certain laundry and cleaning products it produces to meet the needs of
the markets USAM is in at cost plus a mark-up. In addition, the Company leases
manufacturing and office space to USAM under a separate agreement.
During 2002, the Company sold $23.2 million of laundry and cleaning
products to USAM. Furthermore, the Company billed USAM $.5 million and USAM
billed the Company $.2 million for leased space. For open amounts receivable at
December 31, 2002, see Concentration of Risk section of this exhibit.
Significant Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
our consolidated financial statements. Certain of our accounting policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on our historical experience, our observance of trends in
the industry, information provided by our customers and information available
from other outside sources, as appropriate. Our significant accounting policies
include:
Promotional and Sales Returns Reserves.
The reserves for consumer and trade promotion liabilities, and sales
returns are established based on our best estimate of the amounts necessary to
settle future and existing claims on products sold as of the balance sheet date.
Promotional reserves are provided for sales incentives made directly to
consumers such as coupons, and sales incentives made to vendors such as
slotting, cooperative advertising, incentive discounts based on volume of sales
and other arrangements. The Company relies on historical experience and
forecasted data to determine the required reserves. For example, the Company
uses historical experience to project coupon redemption rates to determine
reserve requirements. Based on the total face value of coupons dropped over the
past couple of years, a .1% deviation in the actual rate of redemptions versus
the rate accrued for in the financial statements could result in approximately a
$3 million difference in the reserve required. With regard to other promotional
reserves and sales returns, we use forecasted appropriations, customer and sales
organization inputs, and historical trend analysis in arriving at the reserves
required. If the Company's estimates for vendor promotional activities and sales
returns were to differ by 10%, the impact to promotional spending and sales
return accruals would be approximately $4 million. While we believe that our
promotional and sales returns reserves are adequate and that the judgment
applied is appropriate, such amounts estimated to be due and payable could
differ materially from what will actually transpire in the future. During 2002,
the Company reversed prior year promotion liabilities of approximately $5
million based on adjustments to previous estimates.
9
Impairment of Goodwill, Trademarks and Other Intangible Assets and Property,
Plant and Equipment
Carrying values of goodwill, trademarks and other intangible assets are
reviewed periodically for possible impairment in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets". The Company's impairment review is based
on a discounted cash flow approach that requires significant judgment with
respect to future volume, revenue and expense growth rates, and the selection of
an appropriate discount rate. With respect to goodwill, impairment occurs when
the carrying value of the reporting unit exceeds the discounted present value of
cash flows for that reporting unit. For trademarks and other intangible assets,
an impairment charge is recorded for the difference between the carrying value
and the net present value of estimated cash flows, which represents the
estimated fair value of the asset. The Company uses its judgment in assessing
whether assets may have become impaired between annual valuations. Indicators
such as unexpected adverse, economic factors, unanticipated technological change
or competitive activities, acts by governments and courts, may signal that an
asset has become impaired.
Property, plant and equipment and other long-lived assets are reviewed
periodically for possible impairment in accordance with SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". The Company's impairment
review is based on an undiscounted cash flow analysis at the lowest level for
which identifiable cash flows exist. The analysis requires management judgment
with respect to changes in technology, the continued success of product lines,
and future volume, revenue and expense growth rates. The Company conducts annual
reviews for idle and underutilized equipment, and reviews business plans for
possible impairment implications. Impairment occurs when the carrying value of
the asset exceeds the future undiscounted cash flows. When an impairment is
indicated, the estimated future cash flows are then discounted to determine the
estimated fair value of the asset and an impairment charge is recorded for the
difference between the carrying value and the net present value of estimated
future cash flows.
The estimates and assumptions used are consistent with the business plans
and estimates that the Company uses to manage its business operations. The use
of different assumptions would increase or decrease the estimated value of
future cash flows and would have increased or decreased any impairment charge
taken. Future outcomes may also differ. If the Company's products fail to
achieve estimated volume and pricing targets, market conditions unfavorably
change or other significant estimates are not realized, then the Company's
revenue and cost forecasts may not be achieved, and the Company may be required
to recognize additional impairment charges. In 2002, the Company recognized
trademark, equipment obsolescence and plant impairment charges of approximately
$6.2 million.
Inventory Reserves
When appropriate, the Company provides allowances to adjust the carrying
value of its inventory to the lower of cost or market (net realizable value),
including any costs to sell or dispose. The Company identifies any slow moving,
obsolete or excess inventory to determine whether a valuation allowance is
indicated. The determination of whether inventory items are slow moving,
obsolete or in excess of needs requires estimates and assumptions about the
future demand for the Company's products, technological changes, and new product
introductions. The estimates as to the future demand used in the valuation of
inventory are dependent on the ongoing success of its products. In addition, the
Company's allowance for obsolescence may be impacted by the rationalization of
the number of stock keeping units. To minimize this risk, the Company evaluates
its inventory levels and expected usage on a periodic basis and records
adjustments as required. Reserves for inventory obsolescence were $5.3 million
at December 31, 2002, and $6.7 million at December 31, 2001.
Valuation of Pension and Postretirement Benefit Costs
The Company's pension and postretirement benefit costs are developed from
actuarial valuations. Inherent in these valuations are key assumptions provided
by the Company to our actuaries, including the discount rate and expected
long-term rate of return on plan assets. Material changes in the Company's
pension and postretirement benefit costs may occur in the future due to changes
in these assumptions.
The discount rate is subject to change each year, consistent with changes
in applicable high-quality, long-term corporate bond indices. Based on the
expected duration of the benefit payments for our pension plans and
10
postretirement plans we refer to applicable indices such as the Moody's AA
Corporate Bond Index to select a rate at which we believe the pension benefits
could be effectively settled. Based on the published rates as of December 31,
2002, the Company used a discount rate of 6.75% for both plans, a decline of 50
basis points from the 7.25% rate used in 2001. This had the effect of increasing
the projected benefit obligation for pensions and postretirement benefits by
approximately $1.1 million and $0.7 million, respectively, for the year ended
December 31, 2002.
The expected long-term rate of return on pension plan assets is selected
by taking into account a historical trend based on a 15 year average, the
expected duration of the projected benefit obligation for the plans, the asset
mix of the plans, and known economic and market conditions at the time of
valuation. Based on these factors, the Company's expected long-term rate of
return as of December 31, 2002 is 8.75%, a decline of 50 basis points from the
9.25% rate used at December 31, 2001. A 50 basis point change in the expected
long-term rate of return would result in less than a $0.1 million change in
pension expense for 2003.
On December 31, 2002 the accumulated benefit obligation related to our
pension plans exceeded the fair value of the pension plan assets (such excess is
referred to as an un-funded accumulated benefit obligation). This difference is
attributed to (1) an increase in the accumulated benefit obligation that
resulted from the decrease in the interest rate used to discount the projected
benefit obligation to its present settlement amount from 7.25% to 6.75% and (2)
a decline in the market value of the plan assets at December 31, 2002. As a
result, in accordance with SFAS No. 87, the Company recognized an additional
minimum pension liability of $3.9 million included in benefit obligations, and
recorded a charge, net of tax, to accumulated other comprehensive loss of $2.4
million which decreased stockholders' equity. The charge to stockholders' equity
for the excess of additional pension liability represents a net loss not yet
recognized as pension expense. Based on the aforementioned assumptions, the
income statement impact for 2003 is estimated to be approximately $.4 million
charged to earnings. On a cash basis, a minimum contribution of approximately $1
million will be required in 2003.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company has assessed SFAS
No. 143 and does not anticipate it to have a material impact on the Company's
financial statements. The effective date for the Company is January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business (as previously defined in that
Opinion). This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company has evaluated the impact of
the SFAS No. 144 and has determined there is no material impact on the Company's
consolidated financial statements (See Significant Accounting Policies contained
elsewhere in this report).
During the second quarter of 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB
Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions. The
Company will adopt the provisions of this Statement upon its effective date and
does not anticipate it to have a material effect on its financial statements.
11
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize certain costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently evaluating the
impact this pronouncement will have on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued Statement No 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure (SFAS 148)". SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for the
year ended December 31, 2002 and for interim financial statements for the first
quarter of 2003. The Company is currently evaluating whether or not to elect the
fair value method of accounting for stock compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No.51)". This
Interpretation addresses consolidation by business enterprises of certain
variable interest entities, commonly referred to as special purpose entities
(SPEs). The Company has implemented the disclosure provisions of this
Interpretation in these financial statements. The Company will be required to
implement the other provisions of this Interpretation in 2003.
Competitive Environment
The Company operates in highly competitive consumer-product markets, in
which cost efficiency, new product offerings and innovation are critical to
success.
Currently, over 90% of our sales are generated in the United States, where
consumer product markets are mature and characterized by high household
penetration, particularly with respect to our most significant product
categories such as laundry detergents. The consumer products industry,
particularly the detergent, personal care and deodorizing categories, is
intensely competitive. To protect our existing market share or to capture
increased market share, the Company may need to increase expenditures for
promotions and advertising and to introduce and establish new products.
Many of our competitors are large companies, including The Procter &
Gamble Company, Unilever, Inc., The Clorox Company, Colgate-Palmolive Company,
and S.C. Johnson & Son, Inc., which have greater financial resources than the
Company. These companies have the capacity to outspend the Company in an attempt
to gain market share.
Because of the competitive environment facing retailers, the Company faces
pricing pressure from these customers, particularly the high-volume retail store
customers, who have increasingly sought to obtain pricing concessions or better
trade terms. These concessions or terms could reduce the Company's margins.
Furthermore, if the Company is unable to maintain price or trade terms
acceptable to its trade customers, the customers could increase product
purchases from our competitors, which would harm the Company's sales and
profitability.
Consumer products, particularly those that are value-priced, are subject
to significant price competition. From time to time, the Company may need to
reduce the prices for some of its products to respond to competitive and
customer pressures and to maintain market share.
12
Most of the Company's laundry and household cleaning products are sold as
value brands, which makes their cost position most important. To stay
competitive in this category, the Company acquired USA Detergents outright on
May 25, 2001, after a short-lived joint venture had been formed which combined
both laundry detergent businesses. The acquisition combined Church & Dwight's
ARM & HAMMER Powder and Liquid Laundry Detergents and USA Detergents' XTRA
Powder and Liquid Detergents and NICE 'N FLUFFY Liquid Fabric Softener brands.
This combination increased the Company's laundry product sales to over $400
million a year, making it the third largest entity in the $7 billion U.S.
laundry detergent business. The Company expected the synergies from the
combination to potentially reach an annual rate of $15 million a year once the
integration was completed. In 2002, the Company gained the full-year benefit of
the manufacturing, distribution and back office integration programs completed
in the back half of the previous year. In addition, about mid-year 2002, the
Company implemented a series of packaging and formulation changes designed to
more fully integrate the two product lines. Based on this activity, the Company
significantly increased the contribution from the laundry business in 2002, and
is operating at or above its target synergy levels by year-end.
The Company has entered the oral care and personal care and deodorizing
businesses using the unique strengths of its ARM & HAMMER trademark and baking
soda technology. These are highly innovative markets, characterized by a
continuous flow of new products and line extensions, and requiring heavy
advertising and promotion.
In the toothpaste category, after two years of leading its category in
growth, driven by the success of ARM & HAMMER ADVANCE WHITE toothpaste, the
Company's share dropped in both 2001 and 2002 mainly as a result of competitive
new products and aggressive spending by other manufacturers in the category.
In the personal care category, several new products and line extensions in
oral care were expanded during the final quarter of 2001, in particular ARM &
HAMMER Advance Breath Care, a line of oral deodorization products including
mouthwash, mints and toothpaste. This oral care line of products did not live up
to our expectations in 2002 particularly since key retailers started moving away
from mints and therapeutic gums in the oral care aisle of the store. Unless this
trend can be halted or reversed, this particular line of products could
potentially be de-listed by those retailers. On the other hand, the Company's
re-launch of its deodorant antiperspirant with the introduction of ARM & HAMMER
UltraMax Deodorant Antiperspirant performed well during 2002.
Early in 2002, the Company transferred production of Arrid and Lady's
Choice antiperspirants from the former Carter-Wallace plant at Cranbury, New
Jersey, to the more efficient Company plant at Lakewood, New Jersey. The Company
completed this process, as well as the full integration of the supply chain and
other systems, during the third quarter of 2002.
In the final quarter of 2000, the Company introduced a line extension in
the deodorizing area: ARM & HAMMER Shaker Baking Soda, and in early 2001, ARM &
HAMMER Vacuum Free Foam Carpet Deodorizer, a companion product to ARM & HAMMER
Carpet & Room Deodorizer. The latter of these introductions enabled the Company
to lead the category growth in carpet deodorizers again in 2002. In the final
quarter of 2001, the Company introduced another deodorizing line extension: ARM
& HAMMER Crystal Blend, a scoopable cat litter with silica gel crystals and
baking soda for superior deodorization.
The Company has recently announced several new consumer product
initiatives. Early in 2003, the Company launched Arrid Total Soft Solid
antiperspirants targeted primarily to women, and broadened its ARM & HAMMER
Ultramax antiperspirant line by adding a gel primarily targeted at men. To
strengthen its toothpaste franchise, the Company introduced ARM & HAMMER
Complete Care, the first ARM & HAMMER all-in-one toothpaste. In the laundry
area, the Company launched ARM & HAMMER Fresh 'N Soft Liquid Fabric Softener as
a companion product to the existing fabric softener dryer sheets. These products
should all reach broad national distribution during the second quarter. In
addition, beginning in the second quarter, the Company expects to launch Brillo
Scrub 'N Toss, a disposable cleaning pad, and the Company's first major
extension to the Brillo line. These introductions usually involve heavy
marketing costs in the year of launch, and the eventual success of these new
product and line extensions will not be known for some time.
In the Specialty Products business, competition within the two major
product categories, sodium bicarbonate and potassium carbonate, remained intense
in 2002. Sodium bicarbonate sales have been negatively impacted for several
years by a nahcolite-based sodium bicarbonate manufacturer, which has been
operating at the lower end of the business and has been making an effort to
enter the higher end. This particular competitor has recently sold its
13
business to another company who has entered the sodium bicarbonate business.
Furthermore, late in 2000, another major competitor, who is an affiliate of an
energy services company entered the sodium bicarbonate market using a new
nahcolite manufacturing technology process. To strengthen its competitive
position, the Company has completed the modernization of its Green River
facility to provide better availability of specialized grades, and has increased
its production capacity at Old Fort. The Company is also increasing its R & D
spending on health care, food processing and other high-end applications of
sodium bicorbonate, as well as alternative products to compete with the lower
end of the market. As for potassium carbonate, the Company expects imports of
video glass and production from foreign suppliers to affect U.S. demand in 2003
as it did in 2002.
During the year, the Company continued to pursue opportunities to build a
specialized industrial cleaning business using our aqueous-based technology. In
early 1999, the Company extended its alliance with Safety-Kleen Corp. to build a
specialty cleaning products business based on our technology and their sales and
distribution organization. The second year of this alliance was impacted by
Safety-Kleen's financial difficulties leading to a Chapter 11 filing in June of
2000, and a major reorganization implemented during the second half of that
year. While this opportunity has demonstrated more stability in 2002 and
continues to hold great promise, the outcome will not be known for some time.
Cautionary Note on Forward-Looking Statements
This annual report contains forward-looking statements relating, among
others, to short- and long-term financial objectives, sales growth, cash flow
and cost improvement programs. These statements represent the intentions, plans,
expectations and beliefs of Church & Dwight, and are subject to risks,
uncertainties and other factors, many of which are outside the Company's control
and could cause actual results to differ materially from such forward-looking
statements. The uncertainties include assumptions as to market growth and
consumer demand (including the effect of political and economic events on
consumer demand), raw material and energy prices, the financial condition of
major customers, and the Company's determination and ability to exercise its
option to acquire the remaining 50% interest in Armkel. With regard to the new
product introductions referred to in this report, there is particular
uncertainty relating to trade, competitive and consumer reactions. Other
factors, which could materially affect the results, include the outcome of
contingencies, including litigation, pending regulatory proceedings,
environmental remediation and the acquisition or divestiture of assets.
The Company undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further
disclosures the Company makes on related subjects in its filings with the U.S.
Securities and Exchange Commission. This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995.
2002 2001
---- ----
COMMON STOCK PRICE RANGE AND DIVIDENDS LOW HIGH DIVIDEND LOW HIGH DIVIDEND
------ ------ ------- ------ ------ --------
1st Quarter ........................ $25.54 $31.80 $0.075 $19.56 $24.99 $ 0.07
2nd Quarter ........................ 28.05 36.50 0.075 21.73 27.00 0.07
3rd Quarter ........................ 26.43 33.50 0.075 23.54 28.44 0.075
4th Quarter ........................ 28.00 36.00 0.075 24.35 27.18 0.075
------ ------ ------ ------ ------ ------
Full Year .......................... $25.54 $36.50 $ 0.30 $19.56 $28.44 $ 0.29
====== ====== ====== ====== ====== ======
Based on composite trades reported by the New York Stock Exchange.
Approximate number of holders of Church & Dwight's Common Stock as of December
31, 2002: 10,000.
14
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------
(Dollars in thousands, except per share data) 2002 2001 2000
----------- ----------- -----------
NET SALES .......................................... $ 1,047,149 $ 959,707 $ 691,191
Cost of sales ...................................... 735,928 680,211 450,321
----------- ----------- -----------
GROSS PROFIT ....................................... 311,221 279,496 240,870
Marketing expenses ................................. 86,195 74,803 74,080
Selling, general and administrative expenses ....... 120,512 111,832 92,718
Plant shutdown and other items ..................... -- (660) 21,911
----------- ----------- -----------
INCOME FROM OPERATIONS ............................. 104,514 93,521 52,161
Equity in earnings (loss) of affiliates ............ 21,520 (6,195) 3,011
Investment earnings ................................ 1,793 2,224 2,032
Other income (expense) ............................. (2,618) (269) (187)
Interest expense ................................... (23,974) (11,537) (4,856)
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST AND TAXES .......... 101,235 77,744 52,161
Minority interest .................................. 143 3,889 287
----------- ----------- -----------
Income before taxes ................................ 101,092 73,855 51,874
Income taxes ....................................... 34,402 26,871 18,315
----------- ----------- -----------
NET INCOME ......................................... $ 66,690 $ 46,984 $ 33,559
=========== =========== ===========
Weighted average shares outstanding (in thousands)--
Basic ......................................... 39,630 38,879 38,321
Weighted average shares outstanding (in thousands)--
Diluted ....................................... 41,809 40,819 39,933
=========== =========== ===========
NET INCOME PER SHARE--BASIC ........................ $ 1.68 $ 1.21 $ .88
NET INCOME PER SHARE--DILUTED ...................... $ 1.60 $ 1.15 $ .84
=========== =========== ===========
See Notes to Consolidated Financial Statements.
15
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
(Dollars in thousands, except share data) 2002 2001
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................... $ 76,302 $ 52,446
Accounts receivable, less allowances of $1,546 and $3,666 ...... 100,252 106,291
Inventories .................................................... 82,674 101,214
Deferred income taxes .......................................... 18,154 19,849
Note receivable and current portion of long-term note receivable 870 5,803
Prepaid expenses ............................................... 7,184 7,604
--------- ---------
TOTAL CURRENT ASSETS ........................................... 285,436 293,207
--------- ---------
PROPERTY, PLANT AND EQUIPMENT (NET) ............................ 240,007 231,449
NOTES RECEIVABLE ............................................... 9,708 11,951
EQUITY INVESTMENT IN AFFILIATES ................................ 131,959 115,121
LONG-TERM SUPPLY CONTRACTS ..................................... 6,538 7,695
TRADENAMES AND OTHER INTANGIBLES ............................... 90,036 140,873
GOODWILL ....................................................... 202,388 127,320
OTHER ASSETS ................................................... 22,169 21,469
--------- ---------
TOTAL ASSETS ................................................... $ 988,241 $ 949,085
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings .......................................... $ 4,490 $ 3,220
Accounts payable and accrued expenses .......................... 162,907 176,176
Current portion of long-term debt .............................. 11,455 8,360
Income taxes payable ........................................... 12,315 8,260
--------- ---------
TOTAL CURRENT LIABILITIES ...................................... 191,167 196,016
--------- ---------
LONG-TERM DEBT ................................................. 352,488 406,564
DEFERRED INCOME TAXES .......................................... 57,103 27,032
DEFERRED AND OTHER LONG-TERM LIABILITIES ....................... 24,014 19,164
NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS .......... 15,609 15,880
MINORITY INTEREST .............................................. 214 2,126
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock-$1.00 par value
Authorized 2,500,000 shares, none issued .................. -- --
Common Stock-$1.00 par value
Authorized 100,000,000 shares, issued 46,660,988 shares ... 46,661 46,661
Additional paid-in capital ..................................... 39,550 28,414
Retained earnings .............................................. 367,211 312,409
Accumulated other comprehensive (loss) ......................... (16,919) (9,728)
--------- ---------
436,503 377,756
Common stock in treasury, at cost:
6,763,554 shares in 2002 and 7,518,105 shares in 2001 ..... (88,857) (95,453)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ..................................... 347,646 282,303
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 988,241 $ 949,085
========= =========
See Notes to Consolidated Financial Statements.
16
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
-----------------------
(Dollars in thousands) 2002 2001 2000
--------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME ........................................................................ $ 66,690 $ 46,984 $ 33,559
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization ..................................... 27,890 27,843 23,454
Disposal and write-down of assets ............................................ 6,193 -- 15,266
(Equity) loss in earnings of affiliates ...................................... (21,520) 6,195 (3,011)
Deferred income taxes ........................................................ 17,817 7,295 (4,067)
Other ........................................................................ 2,319 93 (151)
Change in assets and liabilities: (net of effects of acquisitions and divestitures)
Decrease (increase) in accounts receivable ................................... 5,876 (25,518) (923)
Decrease (increase) in inventories ........................................... 16,771 (14,544) 17,110
(Increase) in prepaid expenses ............................................... (394) (2,161) (618)
(Decrease) increase in accounts payable ...................................... (18,982) (12,232) 20,377
Increase in income taxes payable ............................................. 10,199 5,669 291
Increase in other liabilities ................................................ 1,157 2,021 1,472
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................................... 114,016 41,645 102,759
CASH FLOW FROM INVESTING ACTIVITIES
Decrease in short-term investments ................................................ -- 2,990 1,009
Additions to property, plant and equipment ........................................ (38,739) (34,086) (21,825)
Purchase of USA Detergents common stock ........................................... -- (100,707) (10,384)
Acquisition of Biovance stock (net of cash acquired of $365) ...................... (7,756) -- --
Distributions from affiliates ..................................................... 4,670 6,350 4,132
Investment in affiliates, net of cash acquired .................................... (2,731) (108,250) (360)
Purchase of other assets .......................................................... -- (2,568) (2,321)
Proceeds from notes receivable .................................................... 5,803 3,087 3,000
Proceeds from sale of fixed assets ................................................ 1,460 2,530 --
Purchase of new product lines ..................................................... -- (129,105) --
Investment in notes receivable .................................................... -- (16,380) --
Other ............................................................................. (1,077) (1,019) (442)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................................. (38,370) (377,158) (27,191)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds (repayments) from short-term borrowing ................................... 2,457 (10,792) (12,166)
(Repayments) of long-term borrowings .............................................. (52,751) (171,114) (37,831)
Proceeds from stock options exercised ............................................. 10,868 9,168 7,465
Purchase of treasury stock ........................................................ -- -- (20,484)
Payment of cash dividends ......................................................... (11,888) (11,275) (10,744)
Deferred financing costs .......................................................... (476) (9,601) --
Proceeds from long-term borrowing ................................................. -- 560,000 --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................... (51,790) 366,386 (73,760)
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................... 23,856 30,873 1,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................... 52,446 21,573 19,765
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................................... $ 76,302 $ 52,446 $ 21,573
========= ========= ---------
Cash paid during the year for:
Interest (net of amounts capitalized) ........................................ $ 23,362 $ 9,948 $ 4,838
Income taxes ................................................................. 4,421 15,292 22,404
Acquisitions in which liabilities were assumed are as follows:
Fair value of assets .............................................................. $ 14,889 $ 293,402 $ --
Cash paid for stock and product lines ............................................. (8,121) (229,812) --
--------- --------- ---------
Liabilities assumed ............................................................... $ 6,768 $ 63,590 $ --
========= ========= =========
See Notes to Consolidated Financial Statements.
17
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Number of Share Amounts
--------------------------------- ------------------------
Additional
Common Treasury Common Treasury Paid-In
Stock Stock Stock Stock Capital
--------- -------- --------- --------- ---------
(In thousands)
JANUARY 1, 2000 ........................ 46,661 (7,805) $ 46,661 $ (87,021) $ 18,356
Net Income ............................. -- -- -- -- --
Translation adjustments ................ -- -- -- -- --
Available for sale securities,
net of taxes of $1,923 .............. -- -- -- -- --
Comprehensive Income ...................
Cash dividends ......................... -- -- -- -- --
Stock option plan transactions including
related income tax benefit of $2,245 -- 702 -- 5,629 4,081
Purchase of treasury stock ............. -- (1,185) -- (20,484) --
Other stock issuances .................. -- 5 -- 40 77
Repayment of shareholder loan .......... -- -- -- -- --
------ ------ --------- --------- ---------
DECEMBER 31, 2000 ...................... 46,661 (8,283) 46,661 (101,836) 22,514
Net Income ............................. -- -- -- -- --
Translation adjustments ................ -- -- -- -- --
Available for sale securities,
net of taxes of $1,923 .............. -- -- -- -- --
Interest rate swap agreements,
net of taxes of $823 ................ -- -- -- -- --
Comprehensive Income ...................
Cash dividends ......................... -- -- -- -- --
Stock option plan transactions including
related income tax benefit of $2,913 -- 757 -- 6,311 5,769
Other stock issuances .................. -- 8 -- 72 131
------ ------ --------- --------- ---------
DECEMBER 31, 2001 ...................... 46,661 (7,518) 46,661 (95,453) 28,414
NET INCOME ............................. -- -- -- -- --
TRANSLATION ADJUSTMENTS ................ -- -- -- -- --
MINIMUM PENSION LIABILITY,
NET OF TAXES OF $1,497 .............. -- -- -- -- --
INTEREST RATE SWAP AGREEMENTS,
NET OF TAXES OF $645 ................ -- -- -- -- --
COMPREHENSIVE INCOME
COMPENSATION EXPENSE
RELATING TO STOCK OPTIONS ........... -- -- -- -- 804
CASH DIVIDENDS ......................... -- -- -- -- --
STOCK OPTION PLAN TRANSACTIONS INCLUDING
RELATED INCOME TAX BENEFIT OF $5,923 -- 750 -- 6,556 10,235
OTHER STOCK ISSUANCES .................. -- 4 -- 40 97
------ ------ --------- --------- ---------
DECEMBER 31, 2002 ...................... 46,661 (6,764) $ 46,661 $ (88,857) $ 39,550
====== ====== ========= ========= =========
Amounts
---------------------------------------------------
Accumulated
Other Due
Retained Comprehensive From Comprehensive
Earnings Income (Loss) Shareholder Income
--------- ------------ ----------- ---------
(In thousands)
JANUARY 1, 2000 ........................ $ 253,885 $ (4,599) $ (549)
Net Income ............................. 33,559 -- -- $ 33,559
Translation adjustments ................ -- (1,599) -- (1,599)
Available for sale securities,
net of taxes of $1,923 .............. -- (3,191) -- (3,191)
--------
Comprehensive Income ................... 28,769
========
Cash dividends ......................... (10,744) -- --
Stock option plan transactions including
related income tax benefit of $2,245 -- -- --
Purchase of treasury stock ............. -- -- --
Other stock issuances .................. -- -- --
Repayment of shareholder loan .......... -- -- 549
--------- --------- ---------
DECEMBER 31, 2000 ...................... 276,700 (9,389) 0
Net Income ............................. 46,984 -- -- 46,984
Translation adjustments ................ -- (2,163) -- (2,163)
Available for sale securities,
net of taxes of $1,923 .............. -- 3,191 -- 3,191
Interest rate swap agreements,
net of taxes of $823 ................ -- (1,367) (1,367)
--------
Comprehensive Income ................... 46,645
========
Cash dividends ......................... (11,275) -- --
Stock option plan transactions including
related income tax benefit of $2,913 -- -- --
Other stock issuances .................. -- -- --
--------- --------- ---------
DECEMBER 31, 2001 ...................... 312,409 (9,728) 0
NET INCOME ............................. 66,690 -- -- 66,690
TRANSLATION ADJUSTMENTS ................ -- (3,732) -- (3,732)
MINIMUM PENSION LIABILITY,
NET OF TAXES OF $1,497 .............. -- (2,417) -- (2,417)
INTEREST RATE SWAP AGREEMENTS,
NET OF TAXES OF $645 ................ -- (1,042) (1,042)
--------
COMPREHENSIVE INCOME $ 59,499
========
COMPENSATION EXPENSE
RELATING TO STOCK OPTIONS ........... -- -- --
CASH DIVIDENDS ......................... (11,888) -- --
STOCK OPTION PLAN TRANSACTIONS INCLUDING
RELATED INCOME TAX BENEFIT OF $5,923 -- -- --
OTHER STOCK ISSUANCES .................. -- -- --
--------- --------- ---------
DECEMBER 31, 2002 ...................... $ 367,211 $ (16,919) $ 0
========= ========= =========
See Notes to Consolidated Financial Statements.
18
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Business
The Company develops, manufactures and markets a broad range of consumer
and specialty products. It sells its products, primarily under the ARM & HAMMER
trademark, to consumers through supermarkets, drug stores and mass
merchandisers; and to industrial customers and distributors. In 2002, Consumer
Products represented approximately 83% and Specialty Products 17% of the
Company's net sales. The Company does approximately 92% of its business in the
United States.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. The Company's 50% interest in
its Armand Products Company joint venture, the ArmaKleen Company joint venture
and Armkel LLC have been accounted for under the equity method of accounting.
During 2002, the Company increased its ownership of QGN, its Brazilian
subsidiary from 85% to approximately 99%. The Brazilian subsidiary has been
consolidated since May 1999 and was previously accounted for under the equity
method. All material intercompany transactions and profits have been eliminated
in consolidation. The Consolidated Financial Statements are presented in
accordance with accounting principles generally accepted in the United State of
America.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Management makes estimates regarding inventory valuation, promotional
and sales returns reserves, the carrying amount of goodwill and other intangible
assets, the realization of deferred tax assets, tax reserves, liabilities
related to pensions and other postretirement benefit obligations and other
matters that affect the reported amounts and other disclosures in the financial
statements. Estimates by their nature are based on judgement and available
information. Therefore, actual results could differ materially from those
estimates, and it is possible such changes could occur in the near term.
Revenue Recognition
Revenue is recognized when the earning process is complete and the risks
and rewards of ownership have transferred to the customer, which is considered
to have occurred upon shipment of the finished product. The Company accounts for
shipping and handling costs as a component of cost of sales. Amounts invoiced to
customers are included in determining net sales.
Promotional and Sales Returns Reserves
The reserves for consumer and trade promotion liabilities, and sales
returns are established based on the Company's best estimate of the amounts
necessary to settle future and existing claims on products sold as of the
balance sheet date. The Company uses historical trend experience and coupon
redemption provider input in arriving at coupon reserve requirements, and
forecasted appropriations, customer and sales organization inputs, and
historical trend analysis in arriving at the reserves required for other
promotional reserves and sales returns. While the Company believes that
promotional reserves are adequate and that the judgement applied is appropriate,
such amounts estimated to be due and payable could differ materially from what
will actually transpire in the future.
19
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. In such situations, long-lived assets are considered impaired when
estimated future cash flows (undiscounted and without interest charges)
resulting from the use of the asset and its eventual disposition are less than
the asset's carrying amount. While we believe that our estimates of future cash
flows are reasonable, different assumptions regarding such cash flows could
materially affect our evaluations. When an impairment is indicated, the
estimated future cash flows are then discounted to determine the estimated fair
value of the asset and an impairment charge is recorded for the difference
between the carrying value and the net present value of estimated future cash
flows.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with SFAS No. 52. Gains and losses are recorded in Other
Comprehensive Income. Gains and losses on foreign currency transactions were
recorded in the Consolidated Statement of Income and were not material.
Cash Equivalents
Cash equivalents consist of highly liquid short-term investments, which
mature within three months of purchase.
Inventories
Inventories are valued at the lower of cost or market. Approximately 57%
and 50% of the inventory at December 31, 2002 and 2001, respectively, determined
cost using the last-in, first-out (LIFO) method. The remaining inventory
determined cost using the first-in, first-out (FIFO) method. When appropriate,
the Company provides allowances to adjust the carrying value of its inventory to
the lower of cost or market (net realizable value), including any costs to sell
or dispose. The Company identifies any slow moving, obsolete or excess inventory
to determine whether a valuation allowance is indicated. The determination of
whether inventory items are slow moving, obsolete or in excess of needs requires
estimates and assumptions about the future demand for the Company's products,
technological changes, and new product introductions. The estimates as to the
future demand used in the valuation of inventory are dependent on the ongoing
success of its products. In addition, the Company's allowance for obsolescence
may be impacted by the rationalization of the number of stock keeping units. To
minimize this risk, the Company evaluates its inventory levels and expected
usage on a periodic basis and records adjustments as required. Reserves for
inventory obsolescence were $5.3 million at December 31, 2002, and $6.7 million
at December 31, 2001.
Property, Plant and Equipment
Property, plant and equipment and additions thereto are stated at cost.
Depreciation and amortization are provided by the straight-line method over the
estimated useful lives of the respective assets.
Software
The Company accounts for software in accordance with Statement of Position
(SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." The SOP requires companies to capitalize certain costs of
developing computer software. Amortization is provided by the straight-line
method over the estimated useful lives of the software.
Long-Term Supply Contracts
Long-term supply contracts represent advance payments under multi-year
contracts with suppliers of raw materials and finished goods inventory. Such
advance payments are applied over the lives of the contracts using the
straight-line method.
Derivatives
20
All derivatives are recognized as assets or liabilities at fair value in
the accompanying Consolidated Balance Sheets.
Derivatives designated as hedges are either (1) a hedge of the fair value
of a recognized asset or liability ("fair value" hedge), or (2) a hedge of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow" hedge).
- Changes in the fair value of derivatives that are designated and
qualify as fair value hedges, along with the gain or loss on the
hedged asset or liability that is attributable to the hedged risk,
are recorded in current period earnings.
- Changes in the fair value of derivatives that are designated and
qualify as cash flow hedges are recorded in Other Comprehensive Loss
until earnings are affected by the variability of cash flows of the
hedged asset or liability. Any ineffectiveness related to these
hedges are recorded directly in earnings. The amount of the
ineffectiveness was not material.
- Changes in the fair value of derivatives not designated or
qualifying as an accounting hedge are recorded directly to earnings.
Goodwill and Other Intangible Assets
The Company accounts for Goodwill and Other Intangible Assets in
accordance with SFAS No. 142. SFAS No. 142 prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. SFAS No. 142
requires these assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over their estimated
useful lives using the straight-line method. Indefinite lived assets acquired
prior to June 30, 2001 were amortized through December 31, 2001. This would
include the Brillo and related brand acquisition, the investment in QGN, the
bathroom cleaner product lines and the USAD acquisition. Indefinite lived assets
acquired as part of the anti-perspirant and pet care acquisition was not
amortized based upon the provisions of SFAS No. 142.
Selected Operating Expenses
Research & development costs in the amount of $26,877,000 in 2002,
$21,803,000 in 2001 and $19,363,000 in 2000, and marketing costs in the amount
of $86,195,000 in 2002, $74,803,000 in 2001 and $74,080,000 in 2000, were
charged to operations as incurred.
Earnings Per Share
Basic EPS is calculated based on income available to common shareholders
and the weighted-average number of shares outstanding during the reported
period. Diluted EPS includes additional dilution from potential common stock
issuable pursuant to the exercise of stock options outstanding. Antidilutive
stock options, in the amounts of 606,730, 129,000 and 547,000 for 2002, 2001 and
2000, have been excluded.
The following table reflects the components of common shares outstanding
for each of the three years ended December 31, 2002 in accordance with SFAS No.
128:
2002 2001 2000
---- ---- ----
Weighted average common shares outstanding - basic ... 39,630 38,879 38,321
Dilutive effect of stock options ..................... 2,179 1,940 1,612
------ ------ ------
Equivalent average common shares outstanding - diluted 41,809 40,819 39,933
Stock Based Compensation
The Company accounts for costs of stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair-value based method in Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." The Company recognized compensation expense (net of tax) of
approximately $497,000 in 2002, and $0 in 2001 and 2000, respectively, in
accordance with APB 25. Had compensation cost been determined based on the fair
values of the stock options at the date of grant in accordance with SFAS 123,
the Company would have recognized compensation expense, net of taxes, of
$4,480,000, $2,670,000 and $2,577,000 for 2002, 2001 and 2000,
21
respectively. The Company's pro forma net income and pro forma net income per
share for 2002, 2001 and 2000 would have been as follows:
(In thousands, except for per share data) 2002 2001 2000
---------- ---------- ----------
NET INCOME
As reported ............................... $ 66,690 $ 46,984 $ 33,559
Pro forma ................................. 62,707 44,314 30,982
NET INCOME PER SHARE: BASIC
As reported ............................... $ 1.68 $ 1.21 $ 0.88
Pro forma ................................. 1.58 1.14 0.81
NET INCOME PER SHARE: DILUTED
As reported ............................... $ 1.60 $ 1.15 $ 0.84
Pro forma ................................. 1.51 1.09 0.78
Comprehensive Income
Comprehensive income consists of net income, available for sale
securities, foreign currency translation adjustments, changes in the fair value
of certain derivative financial instruments designated and qualifying as cash
flow hedges, and minimum pension liability adjustments, and is presented in the
Consolidated Statements of Changes in Stockholders' Equity and in note 13.
Income Taxes
The Company recognizes deferred income taxes under the liability method;
accordingly, deferred income taxes are provided to reflect the future
consequences of differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Management provides
valuation allowances against the deferred tax asset for amounts which are not
considered "more likely than not" to be realized.
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on Issue 01-9 (formerly
EITF issues 00-14 and 00-25), "Accounting for Consideration Given to a Customer
or Reseller of the Vendor's Products." This EITF addressed the recognition,
measurement and income statement classification of consideration from a vendor
to a customer in connection with the customer's purchase or promotion of the
vendor's products. The EITF requires the cost of such items as coupons, slotting
allowances, cooperative advertising arrangements, buydowns, and other allowances
to be accounted for as a reduction of revenues, not as a marketing expense as
the Company did previously. The full year 2001 and 2000 net sales have been
reclassified to conform with this pronouncement. The impact was a reduction of
net sales of approximately $130.3 million in 2002, $121.2 million in 2001, and
$104.5 million in 2000. This consensus did not have an effect on net income. In
accordance with the consensus reached, the Company adopted the required
accounting beginning January 1, 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company has assessed SFAS
No. 143 and does not anticipate it to have a material impact on the Company's
financial statements. The effective date for the Company is January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business (as previously defined in that
Opinion). This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company has evaluated the impact of
the SFAS No. 144 and has determined there is no material impact on the Company's
consolidated financial statements.
22
During the second quarter of 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB
Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions. The
Company will adopt the provisions of this Statement upon its effective date and
does not anticipate it to have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize certain costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently evaluating the
impact this pronouncement will have on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued Statement No 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure (SFAS 148)". SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for the
year ended December 31, 2002 and for interim financial statements for the first
quarter of 2003. The Company is currently evaluating whether or not to elect the
fair value method of accounting for stock compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No.51)". This
Interpretation addresses consolidation by business enterprises of certain
variable interest entities, commonly referred to as special purpose entities
(SPEs). The Company has implemented the disclosure provisions of this
Interpretation in these financial statements. The Company will be required to
implement the other provisions of this Interpretation in 2003.
Reclassification
Certain prior year amounts have been reclassified in order to conform with
the current year presentation.
23
2. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 2002 and 2001.
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties.
2002 2001
---- ----
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial Assets:
Note receivable and current portion of note receivable $ 870 $ 870 $ 5,803 $ 5,803
Long-term notes receivable ........................... 9,708 9,375 11,951 11,789
Financial Liabilities:
Short-term borrowings ................................ 4,490 4,490 3,220 3,220
Current portion of long-term debt .................... 11,455 11,455 8,360 8,360
Long-term debt ....................................... 352,488 352,488 406,564 406,564
Interest rate swap contracts ......................... 3,899 3,899 2,192 2,192
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments reflected in the Consolidated Balance
Sheets:
Notes Receivable
The cost of notes receivable are initially recorded at their face value
and are then discounted using an interest factor management believes appropriate
for the credit risk involved at the date of acquisition. The market value of the
notes receivable reflects what management believes is the appropriate interest
factor at December 31, 2002, based on similar risks in the market.
Short-term Borrowings
The amounts of unsecured lines of credit equal fair value because of short
maturities and variable interest rates.
Long-term Debt and Current Portion of Long-term Debt
The Company estimates that based upon the Company's financial position and
the variable interest rate, the carrying value approximates fair value.
Interest Rate Swap Contracts
The fair values are estimated amounts the Company would receive or pay to
terminate the agreements at the balance sheet date, taking into account current
interest rates.
Foreign Currency
The Company is subject to exposure from fluctuations in foreign currency
exchange rates, primarily U.S. Dollar/British Pound, U.S. Dollar/Japanese Yen,
U.S. Dollar/Canadian Dollar and U.S. Dollar/Brazilian Real. The Company, from
time to time, enters into forward exchange contracts to hedge anticipated but
not yet committed sales denominated in the Canadian dollar, the British pound
and the Japanese Yen. The terms of these contracts are for periods of under 12
months. The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that the eventual dollar net cash inflows from
the sale of products to foreign customers will be adversely affected by changes
in exchange rates. The Company did not have any forward exchange contracts
outstanding at December 31, 2002 and December 31, 2001.
The Company is also subject to translation exposure of the Company's
foreign subsidiary's financial statements.
24
Interest Rate Risk
The Company's primary domestic borrowing facility is made up of a $ 510
million credit agreement of which $358.5 million remained outstanding as of
December 31, 2002; and $100 million of a revolving credit agreement all of which
was un-drawn at December 31, 2002. The weighted average interest rate on these
borrowings at December 31, 2002, excluding deferred financing costs and
commitment fees, was approximately 5.1% including hedges. The Company entered
into interest rate swap agreements to reduce the impact of interest rate
flucuations on this debt, as required by the credit agreement. The swap
agreements are contracts to exchange floating rate for fixed interest rate
payments periodically over the life of the agreements without the exchange of
the underlying notional amounts. As of December 31, 2002, the Company entered
into agreements for a notional amount of $235 million, swapping debt with a one-
month LIBOR rate for a fixed rate that averages 5.8 %. As a result, the swap
agreements eliminate the variability of interest expense for that portion of the
Company's debt. The Company recognized expense of approximately $4.3 million in
2002 and $1.3 million in 2001 as a result of the swap agreements and will
recognize $3.9 million of expense in 2003.
The Company's domestic operations and its Brazilian subsidiary have short
and long term debts that are floating rate obligations.
Equity Derivatives
The Company has entered into equity derivative contracts on its own stock
in order to minimize the impact on earnings resulting from fluctuations in
market price of shares in the Company's deferred compensation plan. These
contracts in the amount of 165,000 shares hedge approximately 50% of the shares
in the plan and are marked to market through earnings at December 31, 2002. The
Company recognized income of approximately $.4 million in 2002, and expense of
$.5 million in 2001.
3. INVENTORIES
Inventories are summarized as follows:
(In thousands) 2002 2001
-------- --------
Raw materials and supplies ......... $ 30,987 $ 28,869
Work in process .................... 142 651
Finished goods ..................... 51,545 71,694
-------- --------
$ 82,674 $101,214
======== ========
Inventories valued on the LIFO method totaled $47,452,000 and $49,944,000
at December 31, 2002 and 2001, respectively, and would have been approximately
$3,073,000 and $2,759,000 higher, respectively, had they been valued using the
first-in, first-out (FIFO) method.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED LIVES
(In thousands) 2002 2001 (YEARS)
-------- -------- ---------------
Land .................................................... $ 6,079 $ 6,503 N/A
Buildings and improvements .............................. 105,469 92,577 15-40
Machinery and equipment ................................. 267,568 253,749 5-20
Office equipment and other assets ....................... 30,556 25,037 3-10
Software ................................................ 5,945 5,652 5
Mineral rights .......................................... 467 257 based on volume
Construction in progress ................................ 9,920 17,593 N/A
-------- --------
426,004 401,368
Less accumulated depreciation, depletion and amortization 185,997 169,919
-------- --------
Net property, plant and equipment ....................... $240,007 $231,449
======== ========
25
Depreciation, depletion and amortization of property, plant and equipment
amounted to $22,178,000, $18,968,000 and $18,469,000 in 2002, 2001 and 2000,
respectively. Interest charges in the amount of $603,000, $432,000 and $284,000
were capitalized in connection with construction projects in 2002, 2001 and
2000, respectively.
During the year, the Company wrote-down the value of one of its plants by
approximately $2.1 million, as a result of a reduction of sales volume, which is
included in Cost of Sales in the Company's Consolidated Statement of Income. The
write-down was determined using discounted cash flows. Both the charge and the
remaining carrying value is included in the Consumer segment.
Also during the fourth quarter, the Company sold its Lambert Kay Hardware,
Winsted, Connecticut manufacturing facility for a price that approximates book
value. This facility was acquired as part of the Arrid and Lambert Kay purchase
from Carter-Wallace. It was sold as part of the Company's decision in 2001 to
discontinue the hardware portion of the product line.
5. ACQUISITIONS
a. In 1997, the Company acquired a 40% interest in QGN. The investment,
costing approximately $10.4 million, was financed internally and included
goodwill of approximately $3.3 million. The Company exercised its option
to increase its interest to 75% during the second quarter of 1999. The
additional 35% ownership cost approximately $9.1 million and included
goodwill of approximately $4.8 million. During 2001, the Company increased
its ownership position to approximately 85% at a cost of $2.6 million of
which $1.7 million was allocated to Goodwill. During 2002, the Company
increased its ownership to approximately 99% at a cost of $4.3 million, of
which $2.7 million was allocated to Goodwill. Pro forma comparative
results of operations are not presented because they are not materially
different from the Company's reported results of operations.
b. USAD Acquisition and Non-Core Business Divestiture
On May 25, 2001, the Company and USA Detergents, Inc. ("USAD")
closed on its previously announced merger agreement under which the
Company acquired USAD, its partner in the previously announced ARMUS LLC
joint venture, for $7 per share in an all-cash transaction. The
acquisition is accounted for under the purchase method. Results of
operations are included in the accompanying financial statements from May
25, 2001.
The Company and USAD formed the ARMUS joint venture to combine their
laundry products businesses in June 2000. Under its terms, the Company had
management control of the venture and an option to buy USAD's interest in
five years.
The venture became operational on January 1, 2001, and was dissolved
when the Company purchased USAD outright.
As part of the ARMUS venture, the Company had already acquired 2.1
million shares or 15% of USAD's stock for $15 million or $7 a share. The
acquisition agreement extended the same offer price to USAD's remaining
stockholders. The Company estimates the total transaction cost, including
the assumption of debt, and the initial stock purchase, was approximately
$125 million after disposal of unwanted assets. The Company financed the
acquisition with a short term bridge loan, which subsequently was
refinanced as part of the Carter-Wallace acquisition.
The Company divested USAD's non-laundry business, which accounted
for less than 20% of USAD's sales in 2000, and other non-core assets to
former USAD executives.
26
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition:
(in thousands)
Current assets ....................... $ 14,839
Property, plant and equipment ........ 46,591
Tradenames ........................... 29,930
Goodwill ............................. 82,746
Other long-term assets ............... 2,257
---------
Total assets acquired ................ 176,363
Current liabilities .................. (53,160)
Long-term debt ....................... (5,425)
Other long-term liabilities .......... (6,901)
---------
Net assets acquired .................. $ 110,877
=========
The Goodwill and tradenames were amortized until December 31, 2001,
using the straight-line method over 30 years.
As noted, the Company divested USAD's non-laundry business and other
non-core assets to former USAD executives concurrent with the merger
agreement. The Company has approximately 16% ownership interest in the
newly formed company and contributed $400,000. The new company, USA Metro,
Inc. (USAM), purchased inventory and other assets for a total of
$5,087,000, in the form of two notes receivable. The inventory note of
$3,087,000 was secured by a lien on the inventory. The note was due on
December 31, 2001 and bore interest at 8% for the first ninety days and
10% thereafter and was paid. The note for all the other assets of
$2,000,000 has a maturity of five years and bear interest at 8% for the
first two years, 9% for the third year, 10% for the fourth year and 11%
for the fifth year and is carried at approximately $1,400,000 using an
effective interest rate of 17%.
The agreement specifies that interest only payments for the first
two years may be deferred at the option of the debtor. Commencing with the
start of the third year the principal and accrued interest shall be paid
monthly based upon a five-year amortization. The unpaid principal and
accrued interest as of the maturity date shall be payable in a lump sum on
May 24,2006. In the event the unpaid principal and interest is not paid as
of the maturity date, the interest rate shall increase by 300 basis
points. In the case of default by USAM that is not remedied as provided in
the note, the Company may convert the note to additional ownership in
USAM.
In addition to the aforementioned investment in USAM and the note
receivable, the Company has a trade receivable balance with USAM of
approximately $3.1 million at December 31, 2002.
During 2002, the Company sold $23.2 million of laundry and cleaning
products to USAM. Furthermore, the Company billed USAM $.5 million and
USAM billed the Company $.2 million for leased space.
c. Carter-Wallace Acquisition
On September 28, 2001, the Company acquired the consumer products
business of Carter-Wallace, Inc. in a partnership with the private equity
group, Kelso & Company, for a total negotiated price of approximately $746
million, including the assumption of certain debt plus transaction costs.
Under the terms of its agreements with Carter-Wallace and Kelso, the
Company acquired Carter-Wallace's U.S. anti-perspirant and pet care
businesses outright for a negotiated price of approximately $129 million;
and Armkel, LLC, a 50/50 joint venture between the Company and Kelso,
acquired the rest of Carter-Wallace's domestic and international consumer
products business for a negotiated price of approximately $617 million.
The Company accounts for its interest in Armkel on the equity method. (See
note 6)
The Company made the acquisition to increase its personal care
product lines and to improve the cost structure of these and existing
products.
The following table summarizes the fair values of the assets
acquired and liabilities assumed (related to the anti-perspirant and pet
care businesses acquired directly by the Company) at the date of
acquisition:
27
(in thousands)
Current assets ....................... $ 41,587
Property, plant and equipment ........ 3,020
Tradenames ........................... 29,702
Goodwill ............................. 65,058
---------
Total assets acquired ................ 139,367
Current liabilities .................. (9,349)
---------
Net assets acquired .................. $ 130,018
=========
The results of operations are included in the accompanying financial
statements from September 28, 2001.
The purchase price allocation is based upon an independent
appraisal. Goodwill and tradenames are not being amortized, based on the
provisions of SFAS 142 "Goodwill and Other Intangible Assets." All the
Goodwill is deductible for tax purposes and is included in the consumer
products segment.
d. Pro forma results - unaudited
The following pro forma 2001 and 2000 income statements reflect the
impact as though the Company purchased USAD, its share of Armkel and the
anti-perspirant and pet care businesses as of the beginning of the period
indicated. Pro forma adjustments include the elimination of intercompany
sales, inventory set-up adjustments, additional interest expense,
depreciation and amortization charges and the related income tax impact.
(Dollars in thousands, except per share data) 2001 2000
----------------------- ----------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
CHD RESULTS CHD RESULTS
--------- --------- --------- ---------
Net Sales ............................................ $959.7 $1,054.7 $691.2 $1,023.6
Income from Operations................................ 93.5 82.8 52.2 51.1
Equity Income ........................................ (6.2) 12.2 3.0 9.8
Net Income ........................................... 47.0 43.5 33.6 21.2
EPS - Basic .......................................... $1.21 $1.12 $0.88 $0.55
EPS - Diluted ........................................ $1.15 $1.07 $0.84 $0.53
e. Early in 2002, the Company acquired Biovance Technologies, Inc., a
small Oskaloosa, Iowa-based producer of specialty feed ingredients, which
complement our existing range of animal nutrition products. The purchase
price paid in 2002 was approximately $7.8 million (net of cash acquired)
and included the assumption of debt. An additional payment of $3.4 million
was made in February 2003 based upon 2002 operating performance and was
charged to goodwill in the accompanying balance sheet. An additional
payment will be required based on 2003 operating performance which cannot
exceed $8.6 million. Pro forma comparative results of operations are not
presented because they are not materially different from the Company's
reported results of operations. Results of operations are included in the
accompanying financial statements from January 1, 2002, the date of the
acquisition.
6. ARMKEL EQUITY INVESTMENT
The following table summarizes financial information for Armkel LLC. Late
in 2002, Armkel entered into an agreement to sell its Italian subsidiary to a
group, comprising local management and private equity investors, for a price of
approximately $22 million. Armkel accounted for the subsidiary as a discontinued
operation. The 2001 results and balance sheet have reclassifications to reflect
this. Armkel closed on the sale at the end of February. The Company accounts for
its 50% interest under the equity method.
28
(in thousands) 12 MONTHS 3 MONTHS
ENDED ENDED
Income statement data: DEC. 31, 2002 DEC. 31, 2001
------------- -------------
Net sales ..................................... $383,782 $ 77,561
Gross profit .................................. 210,833 27,115
Net income (loss) ............................. 31,214 (15,648)
Equity in affiliate (loss) .................... 18,107 (10,009)
DECEMBER 31,
------------
Balance sheet data: 2002 2001
---- ----
Current assets ................................ $246,307 271,583
Noncurrent assets ............................. 562,207 540,152
Short-term debt ............................... 28,556 3,602
Current liabilities (excluding short-term debt) 110,224 140,568
Long-term debt ................................ 411,634 439,750
Other long-term liabilities ................... 28,420 24,229
Partners' equity .............................. 229,680 203,586
The venture's Board has equal representation from the Company and Kelso.
The Armkel venture was financed with $229 million in equity contributions
from the Company and Kelso and an additional $445 million in debt. Armkel
entered into a syndicated bank credit facility and also issued senior
subordinated notes to finance its investment in the acquisition of
Carter-Wallace. The long-term $305 credit facility consists of $220 million in 6
and 7-year term loans, all of which were drawn at closing and an $85 million
revolving credit facility, which remained fully undrawn at December 31, 2002.
Armkel issued $225 million of 9.5% senior debt notes due in eight years with
interest paid semi-annually, therefore, Armkel had $443 million of total debt
utilized as of December 31, 2002 after $2 million of repayments in 2002. The
weighted average interest rate on the credit facility borrowings at December 31,
2002, excluding deferred financing costs and commitment fees, was approximately
5.0% including hedges. Any debt on Armkel's balance sheet is without recourse to
the Company.
Under the partnership agreement with Kelso, the Company is allocated 50%
of all book and tax profits. If there are losses, the Company is allocated 50%
of all book and tax losses up to $10 million and 100% of such losses above that
level for the period starting September 29, 2001, the date of the acquisition.
As a result, the Company recorded a loss of approximately $10.0 million on its
investment in Armkel in 2001. In 2002, the Company was allocated the first $5
million of Armkel's net income to offset the additional loss it was allocated in
2001. Net income after the first $5 million was allocated 50% to the Company.
Substantial synergies have been achieved by combining certain of its
operations with those of Armkel, particularly in the areas of sales,
manufacturing and distribution, and most service functions. Armkel retained its
core marketing, research & development, and financial planning capabilities, and
continues to manufacture condoms, but purchases virtually all the support
services it requires for its U.S. domestic business from the Company under a
management services agreement, which has a term of five years with possible
renewal. As a first step, the Company merged the two sales organizations during
the fourth quarter of 2001. In early 2002, the Company transferred production of
antiperspirants and depilatories from the former Carter-Wallace plant at
Cranbury, NJ, to the Company's plant at Lakewood, NJ, which is a more efficient
producer of antiperspirants and other personal care products. During early 2002,
the Company completed the integration of the planning and purchasing, accounting
and management information systems, and other service functions.
During 2002, the Company invoiced Armkel $22.5 million for primarily
administrative and management oversight services (which is included as a
reduction of selling, general and administrative expenses), and purchased $7.1
million of deodorant antiperspirant inventory produced by Armkel at its cost.
The Company sold Armkel $1.4 million of ARM & HAMMER products to be sold in
international markets. Armkel invoiced the Company $1.7 million of transition
administrative services. The Company has an open receivable from Armkel at
December 31, 2002 of approximately $4.8 million that primarily related to
administrative services, partially offset by amounts owed for inventory.
Under the terms of its joint venture agreement with Kelso, the Company has
a call option to acquire Kelso's interest in Armkel in three to five years after
the closing, at fair market value as defined in the joint venture agreement
subject to a floor and cap. If the Company does not exercise its call option,
then Kelso may request the Company to purchase its interest. If the Company
elects not to purchase Kelso's interest, then Kelso's and the Company's equity
in the joint venture may be offered to a third party. If a third party sale
should occur, depending on the proceeds received, the Company may be required to
make a payment to Kelso up to an amount of approximately $112 million. Kelso
also may elect to have the Company purchase its interest for $112 million. This
amount is not payable until the eighth year from the formation of the venture.
Finally, Kelso may require the
29
Company to purchase its interest upon a change in control of the Company as
defined in the joint venture agreement.
Simultaneous with this transaction, Carter-Wallace and its pharmaceutical
business merged into a newly formed company set up by pharmaceutical industry
executives and backed by two well-known private equity firms. While the Company
and Armkel are not affiliated with the pharmaceutical venture, Armkel had agreed
to provide certain transitional services to help this venture with the start-up
of its operations at Carter-Wallace's main Cranbury, New Jersey, facility. This
was completed by the end of 2002.
7. GOODWILL AND OTHER INTANGIBLES
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." Under its
changes, SFAS No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. The Company
adopted this statement upon its effective date.
The following tables discloses the carrying value of all intangible
assets:
(In thousands) DECEMBER 31, 2002 December 31, 2001
----------------- -----------------
GROSS Gross Amort.
CARRYING IMPAIRMENT ACCUM. Carrying Accum. Period
AMOUNT CHARGE AMORT. NET Amount Amort. Net (years)
------- ------- ------- ------- -------- ------- ------- -------
Amortized intangible assets:
Tradenames ........................... $39,160 $(2,190) $(5,182) $31,788 $ 31,400 $(3,271) $28,129 10-20
Formulas ............................. 6,281 -- (866) 5,415 4,241 (302) 3,939 10-20
Non Compete
Agreement ......................... 1,143 -- (117) 1,026 -- -- -- 10
------- ------- ------- ------- -------- ------- -------
Total ................................ $46,584 $(2,190) $(6,165) $38,229 $ 35,641 $(3,573) $32,068
======= ======= ======= ======= ======== ======= =======
Unamortized intangible assets - Carrying value
Tradenames ........................... $51,807 $108,805
------- --------
Total ................................ $51,807 $108,805
======= ========
Intangible amortization expense amounted to $2.6 million in 2002 and 2001.
The estimated intangible amortization for each of the next five years is
approximately $2.9 million.
The changes in the carrying amount of goodwill for the year ended December
31, 2002 is as follows:
(In thousands) CONSUMER SPECIALTY TOTAL
-------- -------- ---------
Balance December 31, 2001 ................. $116,372 $ 10,948 $ 127,320
Purchase accounting adjustments ........... 66,124 1,916 68,040
Goodwill acquired during 2002 ............. -- 7,879 7,879
Pre-acquisition NOL's recognized .......... -- (643) (643)
Foreign exchange/other .................... 2 (210) (208)
-------- -------- ---------
Balance December 31, 2002 ................. $182,498 $ 19,890 $ 202,388
======== ======== =========
In accordance with SFAS No. 142, the Company completed the impairment test
of the valuation of goodwill and intangibles as of January 1, 2002 and its
annual review as of April 1, 2002 and based upon the results, there was no
impairment. During the year, the Company recorded a $2.2 million impairment
charge included in selling, general and administrative expenses related to one
of its unamortized tradenames due to changes in market conditions since April 1,
2002. This is included in the Company's Consumer segment. Fair value was
determined using discounted cash flows. This tradename, with a carrying value of
approximately $4.8 million, will be subsequently amortized as it has been
determined to have a finite life.
During the year, the Company completed the purchase price allocation of
the USAD acquisition and the purchase price allocation of the Carter-Wallace
acquired brands, which adjusted the valuation of indefinite lived tradenames and
goodwill. The Company in 2001 amortized tradenames and goodwill under rules in
effect prior to the issuance of SFAS No. 142 using the same useful life,
therefore, there was no impact to the 2001 amortization expense recorded by the
Company.
30
Net income results and per share amounts for the years ended December 31,
2002, 2001 and 2000, respectively, reflecting goodwill and intangible assets
that are no longer being amortized is as follows:
(Dollars in thousands, except per share data) YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Reported net income .............................................. $ 66,690 $ 46,984 $ 33,559
Goodwill amortization (net of tax) ............................... -- 2,213 1,255
Discontinued tradename amortization (net of tax) ................. -- 315 --
---------- ---------- ----------
Adjusted net income .............................................. $ 66,690 $ 49,512 $ 34,814
========== ========== ==========
Basic earnings per share
As reported .................................................. $ 1.68 $ 1.21 $ 0.88
Goodwill amortization ........................................ -- 0.06 0.03
Tradename amortization ....................................... -- 0.01 --
---------- ---------- ----------
Adjusted net income .......................................... $ 1.68 $ 1.28 $ 0.91
========== ========== ==========
Diluted earnings per share
As reported .................................................. $ 1.60 $ 1.15 $ 0.84
Goodwill amortization ........................................ -- 0.05 0.03
Tradename amortization ....................................... -- 0.01 --
---------- ---------- ----------
Adjusted net income .......................................... $ 1.60 $ 1.21 $ 0.87
========== ========== ==========
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
(In thousands) 2002 2001
-------- --------
Trade accounts payable .................... $ 88,068 $ 97,238
Accrued marketing and promotion costs ..... 39,943 50,148
Accrued wages and related costs ........... 13,451 12,645
Accrued pension and profit-sharing ........ 13,217 7,450
Other accrued current liabilities ......... 8,228 8,695
-------- --------
$162,907 $176,176
======== ========
9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company entered into a syndicated bank loan to finance its investment
in Armkel, the acquisition of USA Detergents and the Anti-perspirant and Pet
Care business from Carter Wallace. The Company extinguished all the short-term
unsecured lines of credit as a result of last year's acquisitions. This
long-term $510 million credit facility consists of $410 million in 5 and 6-year
term loans and a $100 million revolving credit facility, which remained fully
undrawn. The weighted average interest rate on these borrowings at December 31,
2002 and 2001 exclusive of deferred financing costs and commitment fees were
approximately 5.1% and 5.5%, respectively, including the effect of hedges.
In addition, the Company's Brazilian subsidiary has lines of credit which
allow it to borrow in its local currency. This amounts to $7 million, of which
approximately $4 million and $3 million was utilized as of December 31, 2002 and
2001, respectively. The weighted average interest rate on these borrowings at
December 31, 2002 and 2001 was approximately 10.0% and 9.0%, respectively.
Short-term borrowings and debt consist of the following:
(In thousands) 2002 2001
---------- ----------
Syndicated Financing Loan due September 30, 2006 .................... $ 75,280 $ 125,000
Amount due 2003 $ 7,924
Amount due 2004 $ 15,848
Amount due 2005 $ 23,773
Amount due 2006 $ 27,735
Syndicated Financing Loan due September 30, 2007 .................... 283,190 285,000
31
Amount due 2003 $ 2,846
Amount due 2004 $ 2,846
Amount due 2005 $ 2,846
Amount due 2006 $ 30,596
Thereafter $ 244,056
Various Debt from Brazilian Banks
$4,490 due in 2003, $446 in 2004, $404 in 2005, $404 in 2006 and
$144 due in 2007 ........................................ 5,888 3,384
Industrial Revenue Refunding Bond
Due in installments of $685 from 2003-2007 and $650 in 2008 ......... 4,075 4,760
---------- ----------
Total debt ..................................................... 368,433 418,144
Less: current maturities ....................................... 15,945 11,580
---------- ----------
Net long-term debt ............................................. $ 352,488 $ 406,564
========== ==========
The principal payments required to be made are as follows:
(In thousands)
2003 ........................................... 15,945
2004 ........................................... 19,825
2005 ........................................... 27,708
2006 ........................................... 59,420
2007 and subsequent ............................ 245,535
--------
$368,433
========
The Company entered into interest rate swap agreements, which are
considered derivatives, to reduce the impact of changes in interest rates on its
floating rate debt as required by the credit agreement. The swap agreements are
contracts to exchange floating interest payments for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. As of December 31, 2002, the Company had swap
agreements in the amount of $235 million, swapping debt with either a one or a
three-month LIBOR rate for a fixed interest rate. These swaps, of which, $115
million expire at various points of time in 2003 and the remaining $120 million
expire also at various points of time in 2004. These swaps were recorded as a
liability in the amount of $3.9 million at December 31, 2002 and a $2.2 million
liability in 2001. These instruments are designated as cash flow hedges as of
December 31, 2002 and any changes in value are recorded in other comprehensive
loss that are expected to be reclassified to earnings over the next 12 months.
As of December 31, 2001, the Company had swap agreements in the amount of $200
million swapping debt with either a one or a three-month libor rate for a fixed
interest rate. These instruments were designated as cash flow hedges as of
December 31, 2001 and any changes in value were recorded in other comprehensive
income.
The Industrial Revenue Refunding Bond carries a variable rate of interest
determined weekly, based upon current market conditions for short-term
tax-exempt financing. The average rate of interest charged in 2002 and in 2001
was 1.3% and 3.9%, respectively.
QGN's long-term debt is at various interest rates that are determined by
several inflationary indexes in Brazil.
The term loans pay interest at 200 and 250 basis points over LIBOR,
depending on the ratio of total debt to EBITDA. Financial covenants include
total debt to EBITDA and interest coverage, which if not met, could result in an
event of default and trigger the early termination of the credit facility, if
not remedied within a certain period of time. All assets of the Company are
pledged as collateral. For a further explanation of EBITDA, see Liquidity and
Capital Resources included in the Company's Management's Discussion and Analysis
of Financial Condition and Results of Operations.
10. INCOME TAXES
The components of income before taxes are as follows:
32
(in thousands) 2002 2001 2000
--------- --------- ---------
Domestic ............. $ 96,752 $ 68,255 $ 47,675
Foreign .............. 4,340 5,600 4,199
--------- --------- ---------
Total ................ $ 101,092 $ 73,855 $ 51,874
========= ========= =========
The following table summarizes the provision for U.S. federal, state and
foreign income taxes:
(in thousands) 2002 2001 2000
--------- --------- ---------
Current:
U.S. federal .... $ 10,487 $ 16,222 $ 18,734
State ........... 3,450 2,037 2,918
Foreign ......... 2,648 1,317 730
--------- --------- ---------
$ 16,585 $ 19,576 $ 22,382
========= ========= =========
Deferred:
U.S. federal .... $ 17,825 $ 6,033 $ (3,801)
State ........... 1,116 663 (1,047)
Foreign ......... (1,124) 599 781
--------- --------- ---------
$ 17,817 $ 7,295 $ (4,067)
--------- --------- ---------
Total provision ...... $ 34,402 $ 26,871 $ 18,315
========= ========= =========
Deferred tax (assets)/liabilities consist of the following at December 31:
(In thousands) 2002 2001
-------- --------
Current deferred tax assets:
Promotions, principally coupons .......................... $ (5,016) $ (6,121)
Reserves and other liabilities ........................... (3,151) (5,015)
Accounts receivable ...................................... (5,746) (5,708)
Net operating loss ....................................... (1,700) (1,700)
Capitalization of inventory costs ........................ (1,436) (802)
Other .................................................... (1,105) (503)
-------- --------
Total current deferred tax assets ........................ (18,154) (19,849)
-------- --------
Nonpension postretirement and postemployment benefits .... (6,041) (6,120)
Capitalization of items expensed for book purposes ....... (7,344) (5,697)
Reserves and other liabilities ................................ (2,829) (3,175)
Investment valuation difference .......................... (921) (824)
Loss carryfoward of foreign subsidiary (1) ............... (2,750) (4,401)
Foreign exchange translation adjustment .................. (4,625) (3,143)
Valuation allowance ...................................... 4,625 7,544
Depreciation and amortization ............................ 56,043 44,895
Net operating loss carryforward .......................... (5,006) (5,563)
Difference between book and tax loses of equity investment 28,461 3,014
Tax credits ................................................... (1,868) --
Other .................................................... (642) 502
-------- --------
Net noncurrent deferred tax liabilities .................. 57,103 27,032
-------- --------
Net deferred tax liability .................................... $ 38,949 $ 7,183
======== ========
- ----------
(1) The loss carryfoward existed at the date of acquisition. Any recognition
of this benefit will be an adjustment to Goodwill.
33
The difference between tax expense and the "expected" tax, which would
result from the use of the federal statutory rate is as follows:
(In thousands) 2002 2001 2000
-------- -------- --------
Statutory rate .............................................. 35% 35% 35%
Tax which would result from use of the federal statutory rate $ 35,382 $ 25,849 $ 18,156
Depletion ................................................... (420) (416) (398)
Research & development credit ............................... (600) (300) (350)
State and local income tax, net of federal effect ........... 2,968 1,765 1,216
Varying tax rates of foreign affiliates ..................... (45) (169) (87)
Benefit from foreign sales corporation ...................... (825) -- --
Effect of foreign operations of equity investment ..... (1551) 126 --
Other ....................................................... (507) 16 (222)
-------- -------- --------
(980) 1,022 159
-------- -------- --------
Recorded tax expense ........................................ $ 34,402 $ 26,871 $ 18,315
-------- -------- --------
Effective tax rate .......................................... 34.0% 36.4% 35.3%
======== ======== ========
The net operating loss carryforwards for federal, foreign and state
amounted to $19.2, $10.2 and $26.3 million, respectively. These NOL's expire on
various dates through December 31, 2020.
11. BENEFIT PLANS
The Company has defined benefit pension plans covering certain hourly
employees. Pension benefits to retired employees are based upon their length of
service and a percentage of qualifying compensation during the final years of
employment. The Company's funding policy, is consistent with federal funding
requirements.
The Company maintains unfunded plans, which provide medical benefits for
eligible domestic retirees and their dependents. The Company accounts for these
benefits in accordance with Statement of Financial Accounting Standards No. 106
(SFAS 106), "Employers' Accounting for Postretirement Benefits Other than
Pensions." This standard requires the cost of such benefits to be recognized
during the employee's active working career.
The following table provides information on the status of the plans at
December 31:
NONPENSION
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
(In thousands) 2002 2001 2002 2001
-------- -------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year ...... $ 19,514 $ 18,317 $ 11,100 $ 10,217
Service cost ................................. 140 426 446 436
Interest cost ................................ 1,338 1,268 876 734
Plan participants contributions .............. 11 -- -- --
Amount acquired .............................. -- 1,987 -- 54
Actuarial (gain) loss ........................ 2,284 (79) 1,803 (22)
Benefits paid ................................ (1,644) (2,405) (514) (319)
-------- -------- -------- --------
Benefit obligation at end of year ................. $ 21,643 $ 19,514 $ 13,711 $ 11,100
======== ======== ======== ========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 16,678 $ 18,930 $ -- $ --
Actual return on plan assets (net of expenses) (159) (1,571) -- --
Employer contributions ....................... 66 65 514 319
Plan participants contributions .............. 11 -- -- --
Amount acquired .............................. -- 1,659 -- --
Benefits paid ................................ (1,644) (2,405) (514) (319)
-------- -------- -------- --------
Fair value of plan assets at end of year .......... $ 14,952 $ 16,678 $ -- $ --
======== ======== ======== ========
Reconciliation of the Funded Status:
Funded status ................................ $ (6,691) $ (2,836) $(13,711) $(11,100)
Unrecognized prior service cost (benefit) .... 26 29 (540) (619)
Unrecognized actuarial (gain) loss ........... 4,571 726 (1,195) (3,073)
Loss due to currency fluctuations ............ 71 76 -- --
-------- -------- -------- --------
Net amount recognized at end of year .............. $ (2,023) $ (2,005) $(15,446) $(14,792)
======== ======== ======== ========
Amounts recognized in the statement of financial position consist of:
34
2002 2001 2002 2001
-------- -------- -------- --------
Prepaid benefit cost ......................... $ -- $ 1,120 $ -- $ --
Accrued benefit liability .................... (5,986) (3,125) (15,446) (14,792)
Accumulated other comprehensive income ....... 3,963 -- -- --
-------- -------- -------- --------
Net amount recognized at end of year .............. $ (2,023) $ (2,005) $(15,446) $(14,792)
======== ======== ======== ========
Weighted-average assumptions as of December 31:
Discount rate ..................................... 6.75% 7.25% 6.75% 7.25%
Rate of compensation increase ..................... 5.00% 5.00% -- --
Expected return on plan assets .................... 8.75% 9.25% -- --
Net Pension and Net Postretirement Benefit Costs consisted of the
following components:
PENSION COSTS POSTRETIREMENT COSTS
------------- --------------------
(In thousands) 2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
Components of Net Periodic Benefit Cost:
Service cost .......................... $ 140 $ 426 $ 433 $ 446 $ 436 $ 397
Interest cost ......................... 1,338 1,268 1,090 876 734 682
Expected return on plan assets ........ (1,442) (1,713) (1,843) -- -- --
Amortization of transition obligation . -- -- 3 -- -- --
Amortization of prior service cost .... 3 29 30 (79) (105) (105)
Recognized actuarial (gain) or loss ... 46 (130) (334) (40) (158) (212)
FAS 88 expense ........................ -- -- -- -- (226) --
------- ------- ------- ------- ------- -------
Net periodic benefit cost (income) ... $ 85 $ (120) $ (621)(1) $ 1,203 $ 681 $ 762
======= ======= ======= ======= ======= =======
- ----------
(1) In 2000, the Company offered to Syracuse plant employees a cash balance
benefit in connection with the Syracuse plant shutdown. Accordingly, the
related expense of $2,172 thousand is included in plant shutdown and other
items in the accompanying statement of income. See note 14.
On December 31, 2002 the accumulated benefit obligation related to the
pension plans exceeded the fair value of the pension plan assets (such excess is
referred to as an un-funded accumulated benefit obligation). This difference is
attributed to (1) an increase in the accumulated benefit obligation that
resulted from the decrease in the interest rate used to discount the projected
benefit obligation to its present settlement amount from 7.25% to 6.75% and (2)
a decline in the market value of the plan assets at December 31, 2002. As a
result, in accordance with SFAS No. 87, the Company recognized an additional
minimum pension liability of $3.9 million included in benefit obligations, and
recorded a charge, net of tax, to accummulated other comprehensive loss of $2.4
million which decreased stockholders' equity. The charge to stockholders' equity
for the excess of additional pension liability represents a net loss not yet
recognized as pension expense.
The pension plan assets primarily consist of equity mutual funds, fixed
income funds and a guaranteed investment contract fund. The accumulated
postretirement benefit obligation has been determined by application of the
provisions of the Company's medical plans including established maximums and
sharing of costs, relevant actuarial assumptions and health-care cost trend
rates projected at 10% for 2002 and decreasing to an ultimate rate of 5% in
2012. The Company has a maximum annual benefit based on years of service for
those over 65 years of age.
35
(In thousands) 2002 2001
----- -----
Effect of 1% increase in health-care cost trend rates on:
Postretirement benefit obligation ....................... $ 892 $ 739
Total of service cost and interest cost component ....... 99 93
Effect of 1% decrease in health-care cost trend rates on:
Postretirement benefit obligation ....................... (796) (657)
Total of service cost and interest cost component ....... (88) (82)
Deferred Compensation Plan
The Company maintains a deferred compensation plan in which certain
management and highly compensated employees are eligible to defer a maximum of
100% of their regular compensation and bonuses and non-employee Board members
are eligible to defer up to 100% of their directors compensation. The
compensation deferred under this plan is credited with earnings or losses based
upon changes in values of investments elected by the plan participant. Each plan
participant is fully vested in all deferred compensation and earnings credited
to his or her account. The deferrals are invested by the Company through a
trust. The trust invests these deferrals based upon the elections made by the
participants, with the exception of Church & Dwight stock. These amounts are
invested in either equity mutual funds or money market accounts. The Company
uses hedging instruments to minimize the cost related to the volatility of
Church & Dwight stock. At December 31, 2002 and 2001, the liability under these
plans amounted to $16.7 million and $13.5 million, respectively and the funded
balances amounted to $11.4 million and $9.7 million, respectively. The amounts
charged (credited) to earnings, including the effect of the hedges, totaled
$2.1million, $2.5 million, and $(1.0) million in 2002, 2001 and 2000,
respectively.
The Company also maintains a defined contribution profit-sharing plan for
salaried and certain hourly employees. Amounts charged to earnings were
$7,058,000, $3,099,000 and $3,628,000 in 2002, 2001 and 2000, respectively.
The Company also has an employee savings plan. The Company matches 50% of
each employee's contribution up to a maximum of 6% of the employee's earnings.
The Company's matching contributions to the savings plan were $2,330,000,
$1,675,000 and $1,342,000 in 2002, 2001 and 2000, respectively.
12. STOCK OPTION PLANS
The Company has options outstanding under three plans. Under the 1983
Stock Option Plan and the 1994 Incentive Stock Option Plan, the Company may
grant options to key management employees. The Stock Option Plan for Directors
authorizes the granting of options to non-employee directors. Options
outstanding under the plans are issued at market value, vest and are exercisable
on the third anniversary of the date of grant, and must be exercised within ten
years of the date of grant. A total of 7,000,000 shares of the Company's common
stock is authorized for issuance for the exercise of stock options.
Stock option transactions for the three years ended December 31, 2002 were
as follows:
NUMBER WEIGHTED AVG.
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at January 1, 2000 .......... 4,882,794 $12.78
Grants .............................. 783,850 17.23
Exercised ........................... 701,847 10.64
Cancelled ........................... 24,900 16.95
--------- ------
Outstanding at December 31, 2000 ........ 4,939,897 13.69
Grants .............................. 835,576 24.15
Exercised ........................... 756,591 12.11
Cancelled ........................... 112,825 21.98
--------- ------
OUTSTANDING AT DECEMBER 31, 2001 ........ 4,906,057 15.55
GRANTS .............................. 672,330 33.20
EXERCISED ........................... 749,950 14.48
CANCELLED ........................... 26,576 23.76
--------- ------
OUTSTANDING AT DECEMBER 31, 2002 ........ 4,801,861 $18.14
36
At December 31, 2002, 2001 and 2000, 2,784,930 options, 3,001,131 options
and 2,985,147 options were exercisable, respectively.
The table below summarizes information relating to options outstanding and
exercisable at December 31, 2002.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE OPTIONS REMAINING EXERCISE AS OF EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE 12/31/2002 PRICE
------------- ----------- ---------------- -------- ----------- ------
$7.51-$10.00 292,185 2.1 $8.79 292,185 $8.79
$10.01-$12.50 1,162,521 3.0 $10.76 1,162,521 $10.76
$12.51-$15.00 746,150 4.8 $13.68 746,150 $13.68
$15.01-$17.50 756,300 5.8 $16.94 125,000 $16.05
$17.51-$25.00 1,107,224 7.2 $22.59 439,074 $20.73
$25.01-$35.00 737,481 9.3 $32.50 20,000 $27.81
--------- ----- ------ --------- ------
4,801,861 5.6 $18.14 2,784,930 $13.27
The fair-value of options granted in 2002, 2001 and 2000 is $8,866,000,
$6,540,000, and $5,626,000, respectively and the weighted average fair-value per
share of options granted in 2002, 2001 and 2000 is $13.19, $7.83 and $7.18,
respectively.
The fair-value of options granted in 2002, 2001 and 2000 is estimated on
the date the options are granted based on the Black Scholes option-pricing model
with the following weighted-average assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.6% 5.1% 6.6%
Expected life ......... 6.5 years 6.5 years 6.0 years
Expected volatility ... 34.8% 25.0% 38.8%
Dividend yield ........ 0.9% 1.2% 1.6%
13. COMPREHENSIVE INCOME
Comprehensive income is defined as net income and other changes in
stockholder's equity from transactions and other events from sources other than
stockholders. The components of changes in other comprehensive income (expense)
are as follows:
ACCUMULATED
OTHER
FOREIGN MINIMUM AVAILABLE INTEREST COMPREHENSIVE
CURRENCY PENSION FOR SALE RATE SWAP INCOME
ADJUSTMENTS LIABILITY SECURITIES AGREEMENTS (LOSS)
----------- --------- ---------- ---------- ------
Balance January 1,2000 .............. $ (4,599) $ -- $ -- $ -- $ (4,599)
Comprehensive Income changes during
the year (net of tax of $1,923) ... (1,599) -- (3,191) -- (4,790)
-------- -------- -------- -------- --------
Balance December 31, 2000 ........... (6,198) -- (3,191) -- (9,389)
Comprehensive Income changes during
the year (net of tax of $1,100) ... (2,163) -- 3,191 (1,367) (339)
-------- -------- -------- -------- --------
BALANCE DECEMBER 31, 2001 ........... (8,361) -- -- (1,367) (9,728)
COMPREHENSIVE INCOME CHANGES DURING
THE YEAR (NET OF TAX OF $2,142) ... (3,732) (2,417) -- (1,042) (7,191)
-------- -------- -------- -------- --------
BALANCE DECEMBER 31, 2002 ........... $(12,093) $ (2,417) $ -- $ (2,409) $(16,919)
======== ======== ======== ======== ========
14. PLANT SHUTDOWN AND OTHER ITEMS
During 2000, the Company recorded a pre-tax charge of $21.9 million
relating to three major elements: a $14.3 million write-down of the Company's
Syracuse N.Y. manufacturing facility, a $2.1 million charge for potential
carrying and site clearance costs, and a $5.5 million severance charge
(including $2.2 million pension
37
plan amendment) related to both the Syracuse shutdown and the sales force
reorganization. The Company also incurred depreciation and other charges of $1.8
million in 2000 and $1.4 million in 2001 relating to a plant and warehouses that
were shutdown. This brings the total one-time cost to approximately $25 million.
The cash portion of this one-time cost, however, was less than $5 million after
tax.
In 2001, the Company recorded pre-tax income of $.7 million primarily
related to the sale of fixed assets located in the Syracuse plant.
15. COMMON STOCK VOTING RIGHTS AND RIGHTS AGREEMENT
Effective February 19, 1986, the Company's Restated Certificate of
Incorporation was amended to provide that every share of Company common stock is
entitled to four votes per share if it has been beneficially owned continuously
by the same holder (1) for a period of 48 consecutive months preceding the
record date for the Stockholders' Meeting; or (2) since February 19, 1986. All
other shares carry one vote. (Specific provisions for the determination of
beneficial ownership and the voting of rights of the Company's common stock are
contained in the Company's Notice of Annual Meeting of Stockholders and Proxy
Statement-unaudited).
On August 27, 1999, the Board of Directors adopted a Shareholder Rights
Plan (the Plan) that essentially reinstates a Shareholder Rights Plan originally
enacted in 1989, which had terminated. In connection with the adoption of the
Plan, the Board declared a dividend of one preferred share purchase right for
each outstanding share of Company Common Stock. Each right, which is not
presently exerciseable, entitles the holder to purchase one one-hundredth of a
share of Junior Participating Preferred Stock at an exercise price of $200.000.
In the event that any person acquires 20% or more of the outstanding shares of
Common Stock, each holder of a right (other than the acquiring person or group)
will be entitled to receive, upon payment of the exercise price, that number of
shares of Common Stock having a market value equal to two times the exercise
price. In order to retain flexibility and the ability to maximize shareholder
value in the event of unknown future transactions, the Board of Directors
retains the power to redeem the rights for a set amount.
The rights were issued on September 13, 1999, payable to shareholders of
record at the close of business on that date. The rights will expire on
September 13, 2009.
16. COMMITMENTS, CONTINGENCIES AND GUARANTEES
a. Rent expense amounted to $8,901,000 in 2002, $5,048,000 in 2001
and $2,794,000 in 2000. The Company is obligated for minimum annual rentals
under non-cancelable long-term operating leases as follows:
(In thousands)
2003 ......................................... $ 9,503
2004 ......................................... 6,787
2005 ......................................... 5,972
2006 ......................................... 5,832
2007 ......................................... 5,183
2008 and thereafter .......................... 18,968
-------
Total future minimum lease commitments ............ $52,245
=======
b. In December 1981, the Company formed a partnership with a
supplier of raw materials which mines and processes sodium mineral deposits
owned by each of the two companies in Wyoming. The partnership supplies the
Company with the majority of its sodium raw material requirements. This
agreement terminates upon two years' written notice by either company.
c. Certain former shareholders of Carter-Wallace have brought legal
action against the company that purchased the pharmaceutical business of
Carter-Wallace regarding the fairness of the consideration these shareholders
received. Pursuant to various indemnification agreements, Armkel could be liable
for damages up to $12 million, and the Company could be liable directly to
Armkel for an amount up to approximately $2.1 million.
The Company believes that the consideration offered was fair to the former
Carter-Wallace shareholders, and it cannot predict with certainty the outcome of
this litigation.
38
d. The Company has commitments to acquire approximately $17 million
of raw material and packaging supplies from its vendors. The packaging supplies
are in either a converted or non-converted status. This enables the Company to
respond quickly to changes in customer orders/requirements.
e. In connection with the purchase of Biovance Technologies,Inc, the
Company is obligated for a guaranteed minimum payment of approximately $3.0
million based upon operating performance. The Company met this obligation by
making a $3.4 million payment in February 2003 based upon 2002 results and was
charged to Goodwill. The Company had a recorded liability of $3.0 million at
December 31, 2002.
f. The Company has letters of credit of approximately $5.7 million
with several banks which guarantee payment for such things as insurance claims
in the event of the Company's insolvency, a year's worth of lease payments on a
warehouse, and 200 days of interest on the Industrial Revenue Bond borrowing.
g. Surety/performance bonds were established for construction of the
Company's headquarters addition in Princeton, NJ and for construction activities
at the Company's North Brunswick, NJ plant for approximately $.8 million.
h. On February 28, 2003 a class action suit was filed against the
Company and Armkel, and two unrelated condom manufacturers, in the Superior
Court of New Jersey alleging injuries sustained due to the use of condoms with
N-9. The Company continues to believe that condoms with N-9 provide an
acceptable added means of contraceptive protection, however, the Company cannot
predict the outcome of this litigation.
i. The Company, in the ordinary course of its business, is the
subject of, or a party to, various pending or threatened legal actions. The
Company believes that any ultimate liability arising from these actions will not
have a material adverse effect on its consolidated financial statements.
17. SEGMENTS
Segment Information
The Company has two operating segments: Consumer Products and Specialty
Products. The Consumer Products segment comprises packaged goods primarily sold
to retailers. The Specialty Products segment includes chemicals sold primarily
to industrial and agricultural markets.
Measurement of Segment Results and Assets
The accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies with the exception
of:
a. 100% of Armkel LLC's operating results are consolidated into the
Consumer Products segment results and 100% of Armand Products and ArmaKleen
joint ventures are consolidated into the Specialty Products segment results. In
previous years, 50% of Armand and ArmaKleen was consolidated. Accordingly, all
are not accounted for by the equity method.
b. The corporate segment includes the following:
1. Elimination of the operating results of the Company's
equity investments.
2. The administrative costs of the production planning and
logistics functions which are included in segment SG&A
expenses but are elements of cost of goods sold in the
Company's Consolidated Statement of Income.
3. Corporate assets include excess cash, investments, note
receivable, deferred financing costs and deferred income taxes
not used for segment operating needs.
4. 2001 and 2000 operating profits include the Syracuse
shutdown charge.
5. Corporate depreciation, depletion and amortization relate
to amortization of deferred financing costs.
c. The Specialty Products segment's identifiable assets include
equity of investments in affiliates in the amounts of $15,611,000, $16,880,000
and $19,416,000 for 2002, 2001 and 2000, respectively. The Consumer Products
segment's identifiable assets include equity of investment in affiliate of
$116,348,000 and $98,241,000 in 2002 and 2001, respectively.
39
The Company evaluates performance based on operating profit. There are no
intersegment sales.
Factors used to Identify Segments
The Company's segments are strategic business units with distinct
differences in product application and customer base. They are managed by
separate sales and marketing organizations.
CONSUMER SPECIALTY
PRODUCTS PRODUCTS SUBTOTAL CORPORATE TOTAL
---------- -------- ---------- --------- ----------
NET SALES
2002 $1,246,547 $223,375 $1,469,922 $(422,773) $1,047,149
2001 864,457 219,223 1,083,680 (123,973) 959,707
2000 529,585 211,668 741,253 (50,062) 691,191
GROSS PROFIT
2002 480,370 65,647 546,017 (234,796) 311,221
2001 264,635 65,145 329,780 (50,284) 279,496
2000 198,021 63,714 261,735 (20,865) 240,870
MARKETING
2002 135,730 3,930 139,660 (53,465) 86,195
2001 81,631 3,341 84,972 (10,169) 74,803
2000 71,295 3,431 74,726 (646) 74,080
SG&A
2002 191,785 33,067 224,852 (104,340) 120,512
2001 116,680 32,470 149,150 (37,318) 111,832
2000 73,974 32,367 106,341 (13,623) 92,718
OPERATING PROFIT
2002 152,855 28,628 181,483 (76,969) 104,514
2001 66,323 29,285 95,608 (2,087) 93,521
2000 52,753 26,981 79,734 (27,573) 52,161
IDENTIFIABLE ASSETS
2002 705,020 162,684 867,704 120,537 988,241
2001 720,066 142,565 862,631 86,454 949,085
2000 282,678 143,112 425,790 29,842 455,632
CAPITAL EXPENDITURES
2002 27,841 10,898 38,739 -- 38,739
2001 21,955 12,131 34,086 -- 34,086
2000 13,744 8,081 21,825 -- 21,825
DEPRECIATION, DEPLETION AND AMORTIZATION
2002 18,406 7,537 25,943 1,947 27,890
2001 19,757 6,768 26,525 1,318 27,843
2000 16,371 7,083 23,454 -- 23,454
Product line net sales data is as follows:
2002 2001 2000
----------- ----------- -----------
Deodorizing and Cleaning Products . $ 255,756 $ 236,549 $ 203,999
Laundry Products .................. 400,476 386,619 176,953
Personal Care Products ............ 385,347 159,966 112,930
International ..................... 204,968 81,323 35,703
----------- ----------- -----------
TOTAL CONSUMER PRODUCTS ........... 1,246,547 864,457 529,585
Specialty Products Division ....... 223,375 219,223 211,668
----------- ----------- -----------
40
TOTAL INTERNAL NET SALES .......... 1,469,922 1,083,680 741,253
Less: Unconsolidated Affiliates ... (422,773) (123,973) (50,062)
----------- ----------- -----------
TOTAL EXTERNAL NET SALES .......... $ 1,047,149 $ 959,707 $ 691,191
=========== =========== ===========
GEOGRAPHIC INFORMATION
Approximately 92% of the net sales reported in the accompanying financial
statements in 2002, 90% in 2001 and 88% in 2000 were to customers in the United
States, and approximately 95% of long-lived assets in 2002, 92% in 2001 and 88%
in 2000 were located in the U.S.
CUSTOMERS
A group of three Consumer Product customers accounted for approximately
23% of consolidated net sales in 2002, including a single customer Walmart,
which accounted for approximately 16%. A group of three customers accounted for
approximately 23% of consolidated net sales in 2001 adjusted for EITF issue
01-9, including Walmart, which accounted for approximately 14%. This group
accounted for 21% in 2000 and is adjusted for the aforementioned EITF.
Although it is not included in the top three customers noted above, Kmart
Corporation historically has represented approximately 3% of our consolidated
net sales. Kmart's bankruptcy followed by its announcement to close an
additional 329 stores in the first half of 2003 could cause a reduction in sales
to Kmart of approximately 15% to 20%. It is not clear, and to what extent, these
lost sales may be made to other retailers.
18. SUBSEQUENT EVENT
On January 16, 2003, the Company entered into a receivables purchase
agreement with an issuer of receivables-backed commercial paper in order to
refinance a portion, $60,000,000, of its primary credit facility. Under this
arrangement, the Company sold, and will sell from time to time, throughout the 3
year term of the agreements, its trade accounts receivable to a wholly-owned
special purpose finance subsidiary, Harrison Street Funding LLC, a Delaware
limited liability company ("Harrison"). Harrison in turn sold, and will sell on
an ongoing basis, to the commercial paper issuer an undivided interest in the
pool of accounts receivable. The transactions were entered into to reduce
certain expenses associated with the credit facility in addition to lowering the
Company's financing costs by accessing the commercial paper market. These
transactions will be reflected as borrowings on the consolidated financial
statements of the Company. Consequently, the receivables assets of Harrison will
be included in the consolidated assets of the Company shown on such financial
statements. However, under these agreements, as was the case under the credit
facility, such assets will not be available to satisfy claims of creditors other
than the commercial paper issuer.
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The unaudited quarterly results of operations are prepared in conformity
with generally accepted accounting principles and reflect all adjustments that
are, in the opinion of management, necessary for a fair presentation of the
results of operations for the periods presented. Adjustments are of a normal,
recurring nature, except as discussed in the accompanying notes.
FIRST SECOND THIRD FOURTH FULL
(in thousands, except for per share data) QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ----------- -----------
2002
Net sales ....................................... $ 256,802 $ 258,463 $ 263,786 $ 268,098 $ 1,047,149
Gross profit .................................... 73,250 75,938 81,200 80,833 311,221
Income from operations .......................... 27,227 24,293 28,149 24,845 104,514
Equity in earnings of affiliates ................ 917 11,364 5,453 3,786 21,520
Net income ...................................... 14,923 18,652 17,575 15,540 66,690
Net income per share--basic ..................... $ 0.38 $ 0.47 $ 0.44 $ 0.39 $ 1.68
Net income per share--diluted ................... $ 0.36 $ 0.45 $ 0.42 $ 0.37 $ 1.60
2001
Net sales ....................................... $ 226,780 $ 229,636 $ 238,372 $ 264,919 $ 959,707
Gross profit .................................... 64,351 69,540 71,848 73,757 279,496
Income from operations .......................... 20,952 22,505 25,835 24,229 93,521
Equity in earnings (loss) of affiliates ......... 1,032 1,151 886 (9,264) (6,195)
Net income ...................................... 12,147 13,478 15,246 6,113 46,984
Net income per share--basic ..................... $ 0.32 $ 0.35 $ 0.39 $ 0.16 $ 1.21
Net income per share--diluted ................... $ 0.30 $ 0.33 $ 0.37 $ 0.15 $ 1.15
2000
Net sales ....................................... $ 165,297 $ 175,486 $ 174,302 $ 176,106 $ 691,191
Gross profit .................................... 55,835 62,913 61,995 60,127 240,870
Income (loss) from operations ................... 18,664 19,341 (1,694) 15,850 52,161
Equity in earnings of affiliates ................ 854 324 855 978 3,011
Net income (loss) ............................... 11,732 12,375 (1,236) 10,688 33,559
Net income (loss) per share--basic .............. $ 0.30 $ 0.32 $ (0.03) $ 0.28 $ 0.88
Net income (loss) per share--diluted ............ $ 0.29 $ 0.31 $ (0.03) $ 0.27 $ 0.84
41
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Church & Dwight Co., Inc.
Princeton, New Jersey
We have audited the accompanying consolidated balance sheets of Church &
Dwight Co., Inc., and subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in notes 1 and 7 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142.
Deloitte & Touche LLP
Parsippany, New Jersey
March 10, 2003
42
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
OPERATING RESULTS
Net sales:
Consumer Products ....... $ 864.1 786.9 529.6 482.3 453.2 369.3 331.4 313.6 314.4 328.3 327.4
Specialty Products ...... 183.0 172.8 161.6 153.3 132.5 124.6 119.0 114.4 106.4 104.9 94.7
Total ................... 1,047.1 959.7 691.2 635.6 585.7 493.9 450.4 428.0 420.8 433.2 422.1
Marketing ............... $ 86.2 74.8 74.1 71.4 75.2 58.6 50.1 53.0 52.7 44.2 41.1
Research &
development ........... $ 26.9 21.8 19.4 17.9 16.4 15.8 17.8 18.5 20.6 21.2 17.8
Income from operations .. $ 104.5 93.5 52.2 67.7 42.5 30.6 27.3 8.4 1.5 35.6 37.7
% of sales .............. 10.0% 8.7% 6.6% 9.1% 6.1% 5.2% 5.1% 1.7% .3% 6.9% 7.5%
Net income .............. $ 66.7 47.0 33.6 45.4 30.3 24.5 21.2 10.2 6.1 26.3 29.5
Net income per
share--basic .......... $ 1.68 1.21 .88 1.17 .78 .63 .55 .26 .16 .65 .73
Net income per
share--diluted ........ $ 1.60 1.15 .84 1.11 .76 .61 .54 .26 .16 .64 .71
FINANCIAL POSITION
Total assets ............ $ 988.2 949.1 455.6 476.3 391.4 351.0 308.0 293.2 294.5 281.7 261.0
Total debt .............. 368.4 418.1 34.0 84.4 48.8 39.5 7.5 12.5 32.5 9.6 7.7
Stockholders' equity .... 347.6 282.3 234.7 226.7 194.8 179.3 165.3 153.7 153.9 169.4 159.1
Total debt as a % of
total capitalization .. 52% 60% 13% 27% 20% 18% 4% 8% 17% 5% 5%
OTHER DATA
Average common shares
outstanding-basic
(In thousands) ........ 39,630 38,879 38,321 38,792 38,734 38,922 39,068 39,134 39,412 40,446 40,676
Return on average
stockholders' equity .. 21.2% 18.2% 14.5% 21.5% 16.2% 14.2% 13.3% 6.6% 3.8% 16.0% 19.8%
Return on average
capital ............... 11.5% 11.2% 12.7% 17.0% 13.8% 12.8% 12.7% 6.2% 3.6% 15.3% 19.0%
Cash dividends paid ..... $ 11.9 11.3 10.7 10.1 9.3 9.0 8.6 8.6 8.7 8.5 7.7
Cash dividends paid
per common share ...... $ .30 .29 .28 .26 .24 .23 .22 .22 .22 .21 .19
Stockholders' equity per
common share .......... $ 8.77 7.26 6.12 5.84 5.05 4.62 4.25 3.94 3.94 4.22 3.91
Additions to property,
plant and equipment ... $ 38.7 34.1 21.8 33.1 27.1 9.9 7.1 19.7 28.4 28.8 12.5
Depreciation and
amortization .......... $ 27.9 27.8 23.5 19.3 16.5 14.2 13.6 13.1 11.7 10.6 9.8
Employees at year-end ... 2,256 2,099 1,439 1,324 1,127 1,137 937 941 1,028 1,096 1,092
Statistics per employee:*
(In thousands)
Sales ................. $ 513 568 650 643 615 513 573 526 486 470 462
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* 2002, 2001, 2000 and 1999 results reflect sales for U.S. operations only.
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