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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2003
Commission file Number 333-73160
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ARMKEL, LLC
(Exact name of registrant as specified in its certificate of formation)
Delaware 13-4181336
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
469 North Harrison Street, Princeton, N.J. 08543-5297
(Address of principal executive office) (Zip Code)
Registrant's telephone Number, including area code: (609) 683-5900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
As of November 10, 2003, all of the 10,000 outstanding membership interests in
Armkel, LLC were held by affiliates.
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TABLE OF CONTENTS
PART I
ITEM PAGE
1. Financial Statements 3
2. Management's Discussion and Analysis 17
3. Quantitative and Qualitative Disclosure About Market Risk 20
4. Controls and Procedures 20
PART II
6. Exhibits and Reports on Form 8-K 22
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN MEMBERS' EQUITY
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -------------------------
(Dollars in thousands)
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales................................................. $ 103,351 $ 101,003 $ 316,481 $ 292,806
Cost of goods sold........................................ 45,749 42,463 135,868 133,248
---------- --------- ---------- ---------
Gross Profit.............................................. 57,602 58,540 180,613 159,558
Marketing expenses........................................ 16,655 16,475 48,409 40,856
Selling, general and administrative expenses.............. 22,254 22,728 69,107 64,033
Patent infringement...................................... -- -- (12,717) --
---------- --------- ---------- ---------
Income from Operations.................................... 18,693 19,337 75,814 54,669
Interest expense.......................................... (8,278) (9,088) (25,884) (27,355)
Interest income........................................... 234 240 754 793
Other income (expense).................................... (59) (546) 1,061 584
----------- ---------- ---------- ---------
Income before taxes....................................... 10,590 9,943 51,745 28,691
Income taxes.............................................. 1,632 944 7,163 5,297
---------- --------- ---------- ---------
Income from continuing operations ........................ 8,958 8,999 44,582 23,394
Income from discontinued operations....................... -- 317 254 1,815
Gain on disposition of discontinued operations............ -- -- 1,862 --
---------- --------- ---------- ---------
Net Income................................................ 8,958 9,316 46,698 25,209
Other comprehensive income (loss) ........................ (2,762) 2,162 (186) 1,008
----------- --------- ----------- ---------
Total comprehensive income ............................... 6,196 11,478 46,512 26,217
Members' Equity at Beginning of Period.................... 269,996 218,325 229,680 203,586
---------- --------- ---------- ---------
Members' Equity at End of Period.......................... $ 276,192 $ 229,803 $ 276,192 $ 229,803
========== ========= ========== =========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) Sept. 26, 2003 Dec. 31, 2002
--------------- -------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents....................................................... $ 52,410 $ 54,780
Accounts receivable, less allowances of $1,913 and $2,177....................... 93,253 75,864
Inventories..................................................................... 56,389 53,427
Prepaid expenses................................................................ 3,711 5,557
Assets of discontinued operations............................................... -- 42,079
Net assets held for sale........................................................ 11,500 14,600
----------- -----------
Total Current Assets............................................................ 217,263 246,307
Property, Plant and Equipment (Net)............................................. 74,847 72,867
Tradenames and Patents.......................................................... 257,900 261,275
Goodwill........................................................................ 205,844 205,467
Deferred Financing Costs........................................................ 14,815 17,380
Other Assets.................................................................... 9,531 5,218
----------- -----------
Total Assets.................................................................... $ 780,200 $ 808,514
=========== ===========
Liabilities and Members' Equity
Current Liabilities
Short-term borrowings........................................................... $ -- $ 55
Accounts payable and accrued expenses........................................... 78,592 85,036
Liabilities of discontinued operations.......................................... -- 23,582
Current portion of long-term debt............................................... 4,734 28,501
Taxes payable................................................................... 5,474 1,606
----------- -----------
Total Current Liabilities....................................................... 88,800 138,780
Long-term Debt.................................................................. 382,122 411,634
Deferred Income Taxes........................................................... 11,590 8,500
Deferred and Other Long-term Liabilities........................................ 21,496 19,920
Commitments and Contingencies
Members' Equity
Net contributed capital......................................................... 220,500 220,500
Retained earnings............................................................... 62,264 15,566
Accumulated other comprehensive loss............................................ (6,572) (6,386)
----------- -----------
Total Members' Equity........................................................... 276,192 229,680
----------- -----------
Total Liabilities and Members' Equity........................................... $ 780,200 $ 808,514
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------
Sept. 26, Sept. 27,
(Dollars in thousands) 2003 2002
---- ----
Cash Flow From Operating Activities:
Net Income...................................................................... $ 46,698 $ 25,209
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................... 12,686 12,028
Unrealized gain on foreign exchange transactions............................. (1,208) (514)
Fair market value adjustment of assets held for sale......................... 3,100 --
Net income from discontinued operations...................................... (254) (1,815)
Net gain on sale of discontinued operations.................................. (1,862) --
Change in assets and liabilities:
(Increase) in accounts receivable............................................ (13,635) (13,465)
(Increase) Decrease in inventories........................................... (985) 11,295
Decrease (Increase) in prepaid expenses and other current assets............. 1,147 (48)
(Decrease) in accounts payable and other accrued expenses.................... (6,725) (27,421)
(Increase) in other.......................................................... (3,428) (644)
------------ ------------
Net Cash Provided by Operating Activities....................................... 35,534 4,625
----------- -----------
Cash Flow From Investing Activities:
Additions to property, plant and equipment...................................... (6,665) (6,526)
Proceeds from divestiture....................................................... 22,573 --
Payment for purchase price adjustments and costs related to the acquisition of the
Carter-Wallace Consumer Business ............................................. -- (8,266)
----------- -----------
Net Cash Provided by (Used in) Investing Activities............................. 15,908 (14,792)
----------- ------------
Cash Flow From Financing Activities:
Repayment of syndicated bank credit facility.................................... (55,797) (750)
Payment of deferred financing costs............................................. -- (459)
----------- ------------
Net Cash Used in Financing Activities........................................... (55,797) (1,209)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents.................... 1,985 856
----------- -----------
Net Change in Cash and Cash Equivalents......................................... (2,370) (10,520)
Cash and Cash Equivalents at Beginning of Period................................ 54,780 55,617
----------- -----------
Cash and Cash Equivalents at End of Period...................................... $ 52,410 $ 45,097
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The condensed consolidated balance sheet as of September 26, 2003, the condensed
consolidated statements of income and changes in members' equity for the three
and nine months ended September 26, 2003 and September 27, 2002, and the
condensed consolidated statement of cash flows for the nine months ended
September 26, 2003 and September 27, 2002 have been prepared by Armkel, LLC and
subsidiaries (the "Company") and are unaudited. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flow at
September 26, 2003 and for all periods presented have been made.
Fifty-percent (50%) of the membership interests in the Company is owned by each
of Church & Dwight Co., Inc. ("C&D") and certain affiliates of Kelso & Company,
L.P. ("Kelso").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2002
required Form 10-K filing. Certain items previously reported in specific
captions in the accompanying financial statements have been reclassed to conform
with current period classification. The financial statement effect of the
recently divested Italian operations is recognized as discontinued operations in
all periods. The results of operations for the period ended September 26, 2003
are not necessarily indicative of the operating results for the full year.
2. Inventories consist of the following:
Sept. 26, 2003 Dec. 31, 2002
-------------- -------------
(In thousands)
Raw materials and supplies............................................. $ 12,648 $ 10,561
Work in process........................................................ 5,935 5,983
Finished goods......................................................... 37,806 36,883
---------- ---------
$ 56,389 $ 53,427
========== =========
3. Property, Plant and Equipment consist of the following:
Sept. 26, 2003 Dec. 31, 2002
-------------- -------------
(In thousands)
Land................................................................... $ 7,180 $ 7,067
Buildings and improvements............................................. 22,502 21,620
Machinery and equipment................................................ 47,120 44,946
Office equipment and other assets...................................... 5,387 3,800
Construction in progress............................................... 7,972 4,716
---------- ---------
90,161 82,149
Less accumulated depreciation and amortization......................... 15,314 9,282
---------- ---------
Net Property, Plant and Equipment...................................... $ 74,847 $ 72,867
========== =========
4. Goodwill and Intangible Assets
The following tables disclose the carrying value of all intangible assets:
September 26, 2003 December 31, 2002
-------------------- -----------------
Gross Carrying Accum. Gross Carrying Accum.
(In thousands) Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets:
- ---------------------------
Patents $ 27,500 $ 9,000 $ 18,500 $ 27,500 $ 5,625 $ 21,875
========= ======== ========== ========== ======= =========
Unamortized intangible assets - Carrying value
- -----------------------------
Tradenames $ 239,400 $ 239,400
========= ==========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible amortization expense amounted to $3.4 million for the nine months
ended September 26, 2003 and September 27, 2002. The estimated intangible
amortization is approximately $4.5 million per year over the remaining
amortization period. The weighted average amortization period for patents is 6.4
years.
The changes in the carrying amount of goodwill for the nine months ended
September 26, 2003 is as follows:
(In thousands) Domestic International Total
-------- ------------- -------
Balance December 31, 2002..................................... $173,006 $ 32,461 $ 205,467
Foreign exchange/other........................................ -- 377 377
-------- ---------- -----------
Balance September 26, 2003.................................... $173,006 $ 32,838 $ 205,844
======== ========== ===========
5. Related Party Transactions
Arrangements with Church & Dwight
- ---------------------------------
C&D charged the Company $5.0 million and $19.0 million for primarily
administrative and management oversight services for the three and nine months
ended September 26, 2003. C&D charged the Company $5.6 million and $15.7 million
for primarily administrative and management services for the three and nine
months ended September 27, 2002. The Company sold $0.3 and $1.4 million of
deodorant/antiperspirant inventory to C&D at its cost during the three and nine
months ended September 26, 2003, compared with $0.0 and $5.4 million of
deodorant/antiperspirant during the three and nine months ended September 27,
2002. The Company purchased $0.6 million and $1.9 million of Arm & Hammer
products to be sold in international markets during the three and nine months
ended September 26, 2003, compared with $1.0 million and $1.1 million during
the three and nine months ended September 27, 2002. During the three and nine
months ended September 27, 2002, the Company charged C&D $0.5 and $1.6 million
of transition administrative services. The Company had a net payable to C&D at
September 26, 2003 and December 31, 2002 of approximately $2.3 million and $4.8
million, respectively, that primarily related to administration fees and
invoices paid by C&D on behalf of Armkel, offset by amounts owed for inventory.
Arrangements with Kelso
- -----------------------
Kelso provides the Company with financial advisory services for which the
Company pays an annual fee of $1.0 million. The Company indemnifies Kelso
against certain liabilities and reimburses expenses in connection with its
engagement. The Company prepaid Kelso's 2003 annual fee at the end of December
2002. For the three and nine months ended September 27, 2002, the Company paid
Kelso $0.3 and $0.8 million.
6. Contingencies
On January 17, 2002, a petition for appraisal, Cede & Co., Inc. and GAMCO
Investors, Inc. v. Medpointe Healthcare Inc., Civil Action No. 19354, was filed
in the Court of Chancery of the State of Delaware demanding a determination of
the fair value of shares of Medpointe. The action was brought by purported
former shareholders of Carter-Wallace in connection with the merger on September
28, 2001 of MCC Acquisition Sub Corporation with and into Carter-Wallace. The
merged entity subsequently changed its name to Medpointe. The petitioners seek
an appraisal of the fair value of their shares in accordance with Section 262 of
the Delaware General Corporation Law. The matter was heard on March 10 and 11,
2003, at which time the petitioners purportedly held approximately 2.3 million
shares of Medpointe. No decision has yet been rendered by the court.
Medpointe and certain former Carter-Wallace shareholders are party to an
indemnification agreement pursuant to which such shareholders will be required
to indemnify Medpointe from a portion of the damages, if any, suffered by
Medpointe in relation to the exercise of appraisal rights by other former
Carter-Wallace shareholders in the merger. Pursuant to the agreement, the
shareholders have agreed to indemnify Medpointe for 40% of any Appraisal Damages
(defined as the recovery greater than the per share merger price times the
number of shares in the appraisal class) suffered by Medpointe in relation to
the merger; provided that if the total amount of Appraisal Damages exceeds $33.3
million, then the indemnifying stockholders will indemnify Medpointe for 100% of
any damages suffered in excess of that amount. The Company, in turn, is party to
an agreement with Medpointe pursuant to which it has agreed to indemnify
Medpointe and certain related parties against 60% of any Appraisal Damages for
which Medpointe remains liable. The maximum liability to the Company pursuant to
the indemnification agreement and prior to any indemnification from C&D, as
described in the following sentence is $12 million. C&D is party to an agreement
with the Company pursuant to which it has agreed to indemnify the Company for
17.4% of any Appraisal Damages, or up to a maximum of $2.1 million for which the
Company becomes liable.
The Company, Medpointe and the indemnifying shareholders believe that the
consideration offered in the merger was fair to the former Carter-Wallace
shareholders and have vigorously defended the petitioner's claim. However, the
Company cannot predict the outcome of the proceedings.
On March 27, 2003, GAMCO Investors, Inc. filed another complaint in the New York
Supreme Court seeking damages from MedPointe Healthcare Inc., the former
directors of Carter-Wallace, and one of the former shareholders of
Carter-Wallace. The complaint alleges breaches of fiduciary duty in connection
with certain employment agreements with former Carter-Wallace executives, the
sale of Carter Wallace's consumer products business to the Company (some of the
products acquired by the Company were subsequently sold by the Company to C&D)
and the merger of MCC Acquisition Sub Corporation with and into Carter-Wallace.
The complaint seeks monetary damages and equitable relief, including among other
things, invalidation of the transactions. The defendants have moved to dismiss
the complaint. The Company has not been named as a defendant in this action and
believes it has no liability.
In 2002, a purported class action suit, Sandra J. Wagner v. Church & Dwight Co.,
Inc., et al, was filed against the Company and C&D in the Superior Court of New
Jersey. The lawsuit alleged that the Company's ovulation test kits ("OTK") are
being marketed in a misleading manner because they do not advise women with
certain ovarian conditions that test results may be inaccurate. The plaintiffs
seek monetary damages as well as injunctive relief against the OTK's marketing
materials. The products in question have been cleared for marketing as medical
devices under applicable FDA regulations. The Company is vigorously defending
the action but cannot predict the outcome of the proceedings. If the Company is
not successful in defending against a claim, the Company could be liable for
substantial damages or may be prevented from offering some of the Company's
products. These events could harm the Company's financial condition and results
of operations.
The Company's distribution of condoms under the Trojan and other trademarks is
regulated by the U.S. Food and Drug Administration (FDA). Certain of Armkel's
condoms and similar condoms sold by Armkel's major competitors, contain the
spermicide nonoxynol-9 (N-9). The World Health Organization and other interested
groups have issued reports suggesting that N-9 should not be used rectally or
for multiple daily acts of vaginal intercourse, given the ingredient's potential
to cause irritation to human membranes. The Company expects the FDA to issue
non-binding draft guidance concerning the labeling of condoms with N-9, although
the timing of such draft guidance is uncertain. The Company believes that
condoms with N-9 provide an acceptable added means of contraceptive protection
and is cooperating with the FDA concerning the appropriate labeling revisions,
if any. However, the Company cannot predict the outcome of the FDA review. While
awaiting further FDA guidance, the Company has implemented interim labeling
revisions that caution against rectal use and more-than-once-a-day vaginal use
of N-9-containing condoms, and has launched a public information campaign to
communicate these messages to the affected communities. If the FDA or state
governments promulgate rules which prohibit or restrict the use of N-9 in
condoms (such as new labeling requirements), the financial condition and
operating results of the Company could suffer.
In February 2003, two members of the California Assembly introduced a
non-binding resolution calling on FDA to ban condoms containing N-9. The
proposed resolution was not brought to a vote since legally California could not
ban an FDA approved medical device from marketing. Instead, the proposed
resolution was announced at a public press release and retailers were asked
voluntarily not to stock any condom containing N-9. The Company had previously
supplied the Assemblymen and the Assembly Speaker with information explaining
why a ban would be inappropriate and outlining the interim labeling revisions
and public information efforts the Company has implemented. While the resolution
cannot be voted upon and passed and cannot be legally binding, making it public
(as was done here) could impair public perception of the product with resultant
impairment of operating results of the Company.
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company, in the ordinary course of its business, is the subject of, or 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 financial position or results of operation.
7. Reorganization Reserve
As of September 28, 2001, the date of the acquisition of the Carter-Wallace
Consumer Business (the "Predecessor"), the Company started to implement a plan
to reorganize the operation of the acquired consumer business. The main
components of the plan included rationalizing facilities for which the Company
had incurred lease termination costs, environmental remediation costs and work
force rationalization costs. The plan was finalized in 2002 and the Company
expects to complete the plan in 2003 except for certain long-term contractual
obligations related to benefits for certain former executives of Carter-Wallace,
Inc. and certain environmental remediation activities.
The Company established an accrual for severance to reflect the purchase of
various services from C&D in lieu of obtaining such services through continued
employment of certain personnel by the Company. The accrued severance is for
identified employees from various areas including executives, administrative
support and corporate functions (finance, human resources, legal, MIS, R&D,
logistics, marketing, sales and purchasing).
The following table summarizes the activity in the Company's reorganization
accruals:
Reserves at Payments and Reserves at
(In thousands) Dec. 31, 2002 Adjustments Sept. 26, 2003
------------- ----------- --------------
Severance and other charges....................................... $ 6,005 $ (3,103) $ 2,902
Environmental remediation costs................................... 1,828 (220) 1,608
Lease termination costs........................................... 110 (25) 85
--------- ----------- ----------
$ 7,943 $ (3,348) $ 4,595
========= =========== ==========
8. Assets Held for Sale
In the third quarter of 2002, the Company made a commitment to sell its land and
buildings, excluding the research and development building, at its Cranbury, New
Jersey location and, as such, has classified these assets as held for sale. In
the second quarter of 2003, a $3.1 million reduction to fair market value was
recorded based on a recent proposal for sale of the property. This property,
with a current fair market value of $11.5 million, will likely be sold to land
developers who would use it for purposes other than manufacturing.
9. Discontinued Operations
At the end of December 2002, the Company signed a definitive agreement to sell
its Italian operations. On February 20, 2003, the sale was completed with
proceeds of $22.6 million. The Company recorded an after-tax gain on the sale of
these operations of approximately $1.9 million. As part of this transaction, the
Company recorded a $0.5 million guarantee reserve which was the estimated fair
value of the contractual indemnification obligation of the Company to the buyer
of the Italian operations. In June 2003, the Company signed an agreement which
effectively reduced the selling price by requiring the payment of 0.1 million
euros by the Company to the buyer in the third quarter of 2003 in return for a
release from any indemnification obligations that might arise with respect to
certain tax matters under the definitive sales agreement. Upon payment of the
0.1 million euros the guarantee reserve was reduced accordingly. Exposure under
such indemnification obligation is capped at 1.5 million Euros.
For the three and nine months ended September 26, 2003, net sales from the
Italian operations was $0.0 and $10.0 million as compared to $9.3 and $29.8
million for the same period in 2002 and income from discontinued operations was
$0.0 and $0.3 million (net of taxes of $0.0 and $0.3 million) in 2003 as
compared to $0.3 and $1.8 million (net of taxes
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of $0.3 and $1.4 million) for the same period in 2002. The proceeds were used to
pay down the term loan debt and costs associated with the divestiture. The
financial statements of the comparable periods of a year ago in this report have
been reclassified for discontinued operations.
10. Patent Infringement
On August 26, 2002, the Company filed suit against Pfizer in the District Court
of New Jersey to redress infringement of two (2) of the Company's patents
directed to pregnancy diagnostic devices. The suit claimed that Pfizer's "ept"
product infringes these patents. On June 23, 2003 the Company agreed to a
settlement with Pfizer resulting in a gain, after attorney's fees and costs, of
$12.7 million. As part of the settlement the Company granted Pfizer a fully
paid-up non-exclusive worldwide license to practice and use the Company's
pregnancy test kit patents until July 1, 2004. The patent infringement
settlement required Pfizer to pay the Company $18.0 million within 45 days. The
payment was received on August 7, 2003. The Company has incurred approximately
$5.3 million in legal and related settlement expenses.
11. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
The Company adopted the provisions of the statement on its effective date and
does not anticipate a material impact to its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which aims to
eliminate diversity in practice by requiring that the "freestanding" financial
instruments be reported as liabilities by their issuers.
The provisions of SFAS No. 150, which also include a number of new disclosure
requirements, are effective for instruments entered into or modified after May
31, 2003 and for pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. The Company adopted the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
12. Segments and Supplemental Information
Segment Information
- -------------------
The Company has two operating segments: Domestic Consumer Products Division and
International Consumer Products Division.
Measurement of Segment Results and Assets
- -----------------------------------------
The accounting policies of the segments are generally the same as those noted in
Note 1.
Supplemental Financial Information of Domestic and International Operations
- ---------------------------------------------------------------------------
The senior subordinated notes registered by the Company are fully and
unconditionally guaranteed by the domestic subsidiaries of the Company on a
joint and several basis. The following information is being presented to comply
with SEC Regulation SX, Item 3-10 and to provide required segment disclosures.
Supplemental information for condensed consolidated balance sheets at September
26, 2003, condensed consolidated income statements for the three and nine months
ended September 26, 2003 and September 27, 2002, and condensed consolidated cash
flows for the nine month periods ended September 26, 2003 and September 27, 2002
is summarized as follows (amounts in thousands):
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Income
For The Three Months Ended September 26, 2003
---------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales........................................ $ 51,853 $ 52,717 $ (1,219) $ 103,351
Cost of goods sold............................... 20,190 26,778 (1,219) 45,749
----------- ------------- ------------ -----------
Gross profit..................................... 31,663 25,939 -- 57,602
Operating expenses............................... 18,185 20,724 -- 38,909
----------- ------------- ----------- -----------
Income from operations........................... 13,478 5,215 -- 18,693
Interest expense................................. (8,164) (114) -- (8,278)
Interest income.................................. 60 174 -- 234
Intercompany accounts............................ 1,485 (1,485) -- --
Other income (expense)........................... (132) 73 -- (59)
------------ ------------- ----------- ------------
Income before taxes.............................. 6,727 3,863 -- 10,590
Income taxes..................................... -- 1,632 -- 1,632
----------- ------------- ----------- -----------
Income from continuing operations................ 6,727 2,231 -- 8,958
Income from discontinued operations.............. -- -- -- --
Gain on disposition of discontinued operations... -- -- -- --
----------- ------------- ----------- -----------
Net Income.................................. $ 6,727 $ 2,231 $ -- $ 8,958
=========== ============= =========== ===========
For the Three Months Ended September 27, 2002
----------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales......................................... $ 58,120 $ 45,597 $ (2,714) $ 101,003
Cost of goods sold................................ 22,274 22,903 (2,714) 42,463
----------- ------------ ----------- -----------
Gross profit...................................... 35,846 22,694 -- 58,540
Operating expenses................................ 20,320 18,883 -- 39,203
----------- ------------ ---------- -----------
Income from operations............................ 15,526 3,811 -- 19,337
Interest expense.................................. (8,804) (284) -- (9,088)
Interest income................................... 101 139 -- 240
Intercompany accounts............................. 1,404 (1,404) -- --
Other income (expense)............................ (461) (85) -- (546)
------------ ------------- ---------- ------------
Income before taxes............................... 7,766 2,177 -- 9,943
Income taxes...................................... -- 944 -- 944
----------- ------------ ---------- -----------
Income from continuing operations................. 7,766 1,233 -- 8,999
Income from discontinued operations............... -- 317 -- 317
Gain on disposition of discontinued operations.... -- -- -- --
----------- ------------ ---------- -----------
Net Income................................... $ 7,766 $ 1,550 $ -- $ 9,316
=========== ============ ========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Income
For The Nine Months Ended September 26, 2003
--------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales................................... $ 164,823 $ 156,166 $ (4,508) $ 316,481
Cost of goods sold.......................... 64,502 75,874 (4,508) 135,868
----------- ------------ ------------ -----------
Gross profit................................ 100,321 80,292 -- 180,613
Operating expenses.......................... 49,351 55,448 -- 104,799
----------- ------------ ----------- -----------
Income from operations...................... 50,970 24,844 -- 75,814
Interest expense............................ (25,206) (678) -- (25,884)
Interest income............................. 230 524 -- 754
Intercompany accounts....................... 4,295 (4,295) -- --
Other income (expense)...................... 2,572 (1,511) -- 1,061
----------- ------------- ----------- -----------
Income before taxes......................... 32,861 18,884 -- 51,745
Income taxes................................ -- 7,163 -- 7,163
----------- ------------ ----------- -----------
Income from continuing operations........... 32,861 11,721 -- 44,582
Income from discontinued operations......... -- 254 -- 254
Gain on disposition of discontinued operations -- 1,862 -- 1,862
----------- ------------ ----------- -----------
Net Income................................ $ 32,861 $ 13,837 $ -- $ 46,698
=========== ============ =========== ===========
For The Nine Months Ended September 27, 2002
--------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales................................... $ 170,022 $ 130,456 $ (7,672) $ 292,806
Cost of goods sold.......................... 75,941 64,979 (7,672) 133,248
---------- ----------- ------------ -----------
Gross profit................................ 94,081 65,477 -- 159,558
Operating expenses.......................... 57,729 47,160 -- 104,889
--------- ----------- ----------- -----------
Income from operations...................... 36,352 18,317 -- 54,669
Interest expense............................ (26,540) (815) -- (27,355)
Interest income............................. 395 398 -- 793
Intercompany accounts....................... 4,469 (4,469) -- --
Other income (expense)...................... 3,346 (2,762) -- 584
---------- ------------ ----------- -----------
Income before taxes......................... 18,022 10,669 -- 28,691
Income taxes................................ -- 5,297 -- 5,297
---------- ----------- ----------- -----------
Income from continuing operations........... 18,022 5,372 -- 23,394
Income from discontinued operations......... -- 1,815 -- 1,815
Gain on disposition of discontinued operations -- -- -- --
--------- ---------- ----------- -----------
Net Income................................ $ 18,022 $ 7,187 $ -- $ 25,209
========= ========== =========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Balance Sheet
September 26, 2003
-----------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
---------- ------------- ------------ ------------
Cash and cash equivalents.................. $ 25,739 $ 26,671 $ -- $ 52,410
Accounts receivable, less allowances....... 24,982 68,271 -- 93,253
Inventories................................ 24,629 31,760 -- 56,389
Prepaid expenses........................... 959 2,752 -- 3,711
Net assets held for sale................... 11,500 -- -- 11,500
----------- ----------- ----------- ----------
Total current assets..................... 87,809 129,454 -- 217,263
Property, plant and equipment (net)........ 49,247 25,600 -- 74,847
Intercompany notes receivable.............. 63,341 -- (63,341) --
Investment in subsidiaries................. 53,760 -- (53,760) --
Tradenames and patents..................... 219,700 38,200 -- 257,900
Goodwill................................... 173,006 32,838 -- 205,844
Deferred financing costs................... 14,815 -- -- 14,815
Other assets............................... 3,761 5,770 -- 9,531
----------- ----------- ----------- ----------
Total assets............................. $ 665,439 $ 231,862 $ (117,101) $ 780,200
=========== =========== =========== ==========
Accounts payable and accrued expenses...... $ 28,569 $ 50,023 $ -- $ 78,592
Intercompany accounts...................... (1,957) 1,957 -- --
Current portion of long-term debt.......... 2,933 1,801 -- 4,734
Taxes payable.............................. -- 5,474 -- 5,474
----------- ----------- ----------- ----------
Total current liabilities................ 29,545 59,255 -- 88,800
Long-term debt............................. 367,825 14,297 -- 382,122
Deferred income taxes...................... -- 11,590 -- 11,590
Intercompany notes payable................. -- 73,778 (73,778) --
Deferred and other long-term liabilities... 10,950 10,546 -- 21,496
---------- ----------- ----------- ----------
Total liabilities........................ 408,320 169,466 (73,778) 504,008
Members' Equity and Subsidiary Capital
Net contributed capital.................... 220,500 42,264 (42,264) 220,500
Retained earnings.......................... 41,295 20,969 -- 62,264
Accumulated other comprehensive loss....... (4,676) (837) (1,059) (6,572)
------------ ----------- ------------ ----------
Total members' equity and subsidiary capital 257,119 62,396 (43,323) 276,192
------------ ----------- ------------ ----------
Total liabilities and members' equity... $ 665,439 $ 231,862 $ (117,101) $ 780,200
============ =========== ============ ==========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Balance Sheet
December 31, 2002
------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Cash and cash equivalents................... $ 35,093 $ 19,687 $ -- $ 54,780
Accounts receivable, less allowances........ 21,885 53,979 -- 75,864
Inventories................................. 22,948 30,479 -- 53,427
Prepaid expenses............................ 1,428 4,129 -- 5,557
Net assets of discontinued operations....... -- 42,079 -- 42,079
Net assets held for sale ................... 14,600 -- -- 14,600
---------- ----------- ---------- -----------
Total current assets...................... 95,954 150,353 -- 246,307
Property, plant and equipment (net)......... 48,646 24,221 -- 72,867
Investment in subsidiaries.................. 58,591 -- (58,591) --
Notes receivable............................ 63,557 -- (63,557) --
Tradenames and patents...................... 223,075 38,200 -- 261,275
Goodwill.................................... 173,006 32,461 -- 205,467
Deferred financing costs.................... 17,380 -- -- 17,380
Other assets................................ 2,665 2,553 -- 5,218
---------- ----------- ---------- -----------
Total assets.............................. $ 682,874 $ 247,788 $ (122,148) $ 808,514
========== =========== ========== ===========
Short-term borrowings....................... $ -- $ 55 $ -- $ 55
Accounts payable and accrued expenses....... 44,762 40,274 -- 85,036
Intercompany accounts....................... (3,633) 3,633 -- --
Net liabilities of discontinued operations . -- 23,582 -- 23,582
Current portion of long-term debt........... 9,541 18,960 -- 28,501
Taxes payable............................... -- 1,606 -- 1,606
---------- ----------- ---------- -----------
Total current liabilities................. 50,670 88,110 -- 138,780
Long-term debt.............................. 397,838 13,796 -- 411,634
Deferred income taxes....................... -- 8,500 -- 8,500
Notes payable............................... -- 69,138 (69,138) --
Deferred and other long-term liabilities.... 10,705 9,215 -- 19,920
---------- ----------- ---------- -----------
Total liabilities........................ 459,213 188,759 (69,138) 578,834
Members' Equity and Subsidiary Capital
Net contributed capital..................... 220,500 52,061 (52,061) 220,500
Retained earnings........................... 8,434 7,132 -- 15,566
Accumulated other comprehensive loss........ (5,273) (164) (949) (6,386)
----------- ----------- ---------- -----------
Total members' equity and subsidiary capital 223,661 59,029 (53,010) 229,680
----------- ----------- ---------- -----------
Total liabilities and members' equity.... $ 682,874 $ 247,788 $ (122,148) $ 808,514
=========== =========== ========== ===========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Cash Flows
For The Nine Months Ended September 26, 2003
--------------------------------------------
Total
Domestic International Consolidated
-------- ------------- ------------
Cash Flow From Operating Activities:
Net Income........................................................ $ 32,861 $ 13,837 $ 46,698
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................................. 9,608 3,078 12,686
Unrealized (gain) loss on foreign exchange transactions........ (2,871) 1,663 (1,208)
Fair market value adjustment of assets held for sale........... 3,100 -- 3,100
Net income from discontinued operations........................ -- (254) (254)
Net gain on sale of discontinued operations.................... -- (1,862) (1,862)
Change in assets and liabilities:
(Increase) in accounts receivable.............................. (3,537) (10,098) (13,635)
(Increase) Decrease in inventories............................. (1,681) 696 (985)
(Increase) Decrease in prepaid expenses and other current assets (324) 1,471 1,147
(Decrease) Increase in accounts payable and other accrued expenses (15,928) 9,203 (6,725)
(Decrease) in other............................................ (439) (2,989) (3,428)
------- -------- --------
Net Cash Provided by Operating Activities......................... 20,789 14,745 35,534
------- -------- --------
Cash Flow From Investing Activities:
Additions to property, plant & equipment....................... (3,256) (3,409) (6,665)
Proceeds from divestiture...................................... -- 22,573 22,573
------- -------- --------
Net Cash (Used in) Provided by Investing Activities............... (3,256) 19,164 15,908
-------- -------- --------
Cash Flow from Financing Activities:
Repayment of syndicated bank credit facility................... (36,740) (19,057) (55,797)
Intercompany capital contribution.............................. 9,797 (9,797) --
Intercompany debt transactions................................. 56 (56) --
-------- -------- --------
Net Cash Used in Financing Activities............................. (26,887) (28,910) (55,797)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents...... -- 1,985 1,985
-------- -------- --------
NET CHANGE IN CASH & CASH EQUIVALENTS............................. (9,354) 6,984 (2,370)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 35,093 19,687 54,780
-------- -------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD.......................... $ 25,739 $ 26,671 $ 52,410
========= ========= ========
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Cash Flows
For The Nine Months Ended September 27, 2002
---------------------------------------------
Total
Domestic International Consolidated
-------- ------------- ------------
Cash Flow From Operating Activities:
Net Income ....................................................... $ 18,022 $ 7,187 $ 25,209
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................................. 9,580 2,448 12,028
Unrealized (gain) loss on foreign exchange transactions........ (3,522) 3,008 (514)
Net income from discontinued operations........................ -- (1,815) (1,815)
Change in assets and liabilities:
(Increase) in accounts receivable.............................. (4,677) (8,788) (13,465)
Decrease (Increase) in inventories............................. 13,184 (1,889) 11,295
(Increase) Decrease in prepaid expenses and other current assets 414 (462) (48)
(Decrease) Increase in accounts payable and other accrued expenses (33,128) 5,707 (27,421)
(Decrease) Increase in other................................... (1,036) 392 (644)
---------- ----------- ----------
Net Cash (Used in) Provided by Operating Activities............... (1,163) 5,788 4,625
----------- ----------- -----------
Cash Flow From Investing Activities:
Additions to property, plant & equipment....................... (5,231) (1,295) (6,526)
Payment for purchase price adjustments and costs related to the
acquisition of the Carter-Wallace Consumer Business........... (8,266) -- (8,266)
---------- ----------- ----------
Net Cash Used in Investing Activities............................. (13,497) (1,295) (14,792)
---------- ----------- ----------
Cash Flow from Financing Activities:
Repayment of syndicated bank credit facility................... (750) -- (750)
Payment of deferred financing costs (459) -- (459)
---------- ----------- ---------
Net Cash Used in Financing Activities............................. (1,209) -- (1,209)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents...... -- 856 856
----------- ----------- -----------
NET CHANGE IN CASH & CASH EQUIVALENTS............................. (15,869) 5,349 (10,520)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 40,444 15,173 55,617
----------- ----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD.......................... $ 24,575 $ 20,522 $ 45,097
=========== =========== ===========
The following table sets forth the Company's principal product lines and related
data for the three and nine month periods ended September 26, 2003 and September
27, 2002.
Three Months Ended Nine Months Ended
Net Sales (In thousands) Sept. 26, 2003 Sept. 27, 2002 Sept. 26, 2003 Sept. 27, 2002
-------------- -------------- -------------- --------------
Products
Family Planning(1).......................... $ 46,722 $ 48,943 $ 141,538 $ 139,916
Depilatories and waxes; face and skincare... 22,251 22,603 75,464 68,491
Oral care................................... 9,918 7,708 27,764 21,934
OTC Products................................ 11,581 10,798 36,557 33,511
Other consumer products..................... 12,879 10,951 35,158 28,954
----------- ----------- ----------- -------------
Total net sales............................. $ 103,351 $ 101,003 $ 316,481 $ 292,806
========== ========== =========== =============
- ----------------
(1) Family Planning includes condom product sales and pregnancy and ovulation
kits.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Armkel, LLC (the "Company") is an equally owned joint venture formed by
Church & Dwight Co., Inc. ("C&D") and affiliates of Kelso & Company, L.P.
("Kelso"). On September 28, 2001, the Company acquired certain of the domestic
consumer product assets of Carter-Wallace (the "Acquisition"), primarily Trojan
condoms, Nair depilatories, and First Response and Answer test kits, and the
international subsidiaries of Carter-Wallace. Initial financing was obtained on
August 28, 2001, however operations did not commence until the Acquisition was
consummated on September 28, 2001. The remainder of Carter-Wallace, comprised of
its healthcare and pharmaceuticals businesses, was merged with MedPointe, Inc.
("MedPointe") after the completion of the Acquisition. Simultaneously with the
consummation of the Acquisition, the Company sold the remainder of the consumer
products businesses, Arrid antiperspirant in the U.S and Canada and the
Lambert-Kay line of pet care products, to C&D (the "Disposed Businesses").
In December 2002, the Company entered into an agreement to sell its Italian
subsidiary to a group, comprising local management and private equity investors.
The sale closed in February 2003 for a purchase price of $22.6 million including
the repayment of $12.8 million of intercompany debt. The Company retained
ownership of certain Italian pregnancy kit and oral care product lines with
annual sales of approximately $3.0 million. The remainder of the Italian
subsidiary's business included a high percentage of distributor sales as well as
hospital diagnostic and other products not related to the Company's core
business. The Company reported a $1.9 million gain on the sale and $0.3 million
income (net of tax) from discontinued operations in the first quarter of 2003.
The financial statements have been reclassified to reflect the Italian business
as a discontinued operation in 2003 and prior financial statements.
The following section discusses comparisons to the three-month and
nine-month period ended September 26, 2003 compared to the same period in the
prior year. This section does not include the income from discontinued
operations.
Results of Continuing Operations
- --------------------------------
Three and Nine Month Comparison
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
2003 2002 2003 2002
--------- --------- --------- ---------
(in millions)
Net sales............................................ $ 103.4 $ 101.0 $ 316.5 $ 292.8
Cost of goods sold................................... 45.8 42.5 135.9 133.2
----------- ----------- ---------- -----------
Gross Profit......................................... 57.6 58.5 180.6 159.6
Marketing expenses.................................. 16.7 16.5 48.4 40.9
Selling, general & administrative expenses (1)....... 22.2 22.7 56.4 64.0
Interest expense & other income...................... 8.1 9.4 24.1 26.0
----------- ----------- ---------- -----------
Income before taxes from continuing operations....... $ 10.6 $ 9.9 $ 51.7 $ 28.7
========== ========== ========= ==========
(1) In 2003, selling, general and administrative expenses were reduced by
the net gain from the Pfizer patent infringement settlement and increased
by the writedown of the Cranbury facility, which are discussed further in
this section.
The results of operations for the period from January 1, 2003 to September
26, 2003 are affected by moderate acquisition related expenses amounting to $2.8
million primarily for the cost to carry the Cranbury facility. The prior year
results are affected by $6.3 million in transition expenses and an $8.1 million
inventory step-up charge.
Net Sales
---------
Net sales for the quarter increased $2.4 million, or 2.4%, to $103.4
million in the period ended September 26, 2003 from $101.0 million in the three
months ended September 27, 2002. Domestic net sales (net of intercompany
eliminations) decreased $4.7 million, or 8.5%, to $50.7 million from $55.4
million. This decrease in Domestic net sales is due to decreased sales of Nair
depilatories primarily related to poor weather conditions during the peak
depilatory season, lower Trojan condom sales due to promotional timing and lower
diagnostic kit sales due to competitive activity. International net sales
increased $7.1 million, or 15.6%, to $52.7 million from $45.6 million. The
increase in International net sales reflects strong sales of oral and skin care
products in Europe and condoms in Canada and Mexico, as well as foreign exchange
gains which accounted for $4.2 million of the increase.
Net sales for the nine months ended September 26, 2003 increased $23.7
million, or 8.1%, to $316.5 million from $292.8 million in the same period last
year. Domestic net sales decreased $2.0 million, or 1.2%, to $160.3 million from
$162.3 million for the nine months ended September 26, 2003. This decrease in
Domestic net sales (net of intercompany eliminations) is primarily due to the
lower sales for Nair depilatories and lower sales pregnancy test kits.
International net sales increased $25.7 million, or 19.7%, to $156.2 million
from $130.5 million primarily due to the continuation of strong depilatory sales
across all markets, stronger oral care sales in Europe, condom sales in Canada
and Mexico, higher export sales from the UK, as well as a favorable exchange
translation gain of $13.6 million.
Cost of Goods Sold
------------------
Cost of goods sold for the quarter increased $3.3 million, or 7.8%, to $45.8
million for the quarter from $42.5 million in the same period last year. As a
percentage of net sales, cost of goods sold increased to 44.2% from 42.1% in
2002. The 2.1 percentage point increase over the 2002 results is primarily due
to an inventory reserve for slow moving and obsolete depilatory products in the
United States.
Cost of goods sold for the nine months ended September 26, 2003 increased
$2.7 million or 2.0% to $135.9 million from $133.2 million in the same period
last year. Cost of goods sold in the first quarter 2002 includes an $8.1 million
charge relating to inventory step-up adjustments incurred at the Acquisition.
Excluding this adjustment in 2002, cost of goods sold, as a percentage of net
sales, would be reduced to 42.7% of net sales for 2002. As a percentage of net
sales, cost of goods sold year to date in 2003 increased slightly to 42.9%. The
0.2 percentage point decline over the adjusted 2002 results is primarily related
to the domestic inventory reserve for slow moving and obsolete depilatory
products.
Operating Costs excluding Interest Expense and Other Income
-----------------------------------------------------------
Total operating expenses for the quarter excluding interest expense and
other income decreased $0.2 million, or 0.1%, to $39.0 million from $39.2
million in the same period last year. Total operating expenses for the nine
months ended September 26, 2003, excluding interest expense and other income,
decreased $0.1 million, to $104.8 million from $104.9 million in the nine months
ended September 27, 2002. The operating expense changes are addressed below.
Marketing expenses for the quarter increased by $0.2 million, or 1.2%, to
$16.7 million from $16.5 million in 2002. Marketing expenses in the nine months
ended September 26, 2003 increased by $7.5 million, or 18.3%, to $48.4 million
from $40.9 million in the same period last year. The increase in marketing
expenses for the nine months ended September 26, 2003, consists of $5.4 million
in the International division primarily behind advertising for Arm & Hammer
Dental Care in the UK, Lineance skin care in France and other initiatives and
$2.1 million in the Domestic division primarily behind introductory marketing
spending behind the launch of Lineance as a depilatory in the United States.
Selling, general and administrative expenses for the quarter decreased $0.5
million, or 2.2%, to $22.2 million in the quarter from $22.7 million in 2002.
Selling, general and administrative expenses in the nine months ended September
26, 2003 decreased $7.6 million, or 11.9%, to $56.4 million from $64.0 million
in the same period last year. The decrease in expenses, for the nine months
ended September 26, 2003, is related to a net gain from the settlement of patent
infringement with Pfizer of $12.7 million net of legal expenses and costs
partially offset by the $3.1 million write-down for the Cranbury facility.
Adjusting for these items selling, general and administrative expense would
increase to $66.0 million for the nine months ended September 26, 2003. The year
to date increase over prior year is primarily related to an increase in R&D
spending to support current and future initiatives partially offset by lower
transition costs.
Interest Expense and Other Income
---------------------------------
Interest expense was $8.3 million in the quarter compared to $9.1 million
for the prior year. Interest expense for the nine months ended September 26,
2003 was $25.9 million compared to $27.4 million for the same period last year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
This reduction in interest expense is related to the lower debt position from
prior year and lower interest rates on the Company's term loans.
Interest income of $0.2 million and $0.8 million for the quarter and nine
months ended September 26, 2003 remains unchanged from last year.
Other expense was $0.1 million for the quarter compared to $0.5 million last
year, and other income was $1.1 million for the nine months ended September 26,
2003 compared to $0.6 million last year and primarily relates to foreign
exchange remeasurement on intercompany loans with certain of its subsidiaries.
Liquidity and Capital Resources
- -------------------------------
The Company had outstanding total debt of $386.9 million, and cash of $52.4
million, for a net debt position of $334.5 million at September 26, 2003. This
compares to the net debt position of $385.4 at December 31, 2002. The decrease
in net debt is attributable to the use of proceeds from the divestiture of the
Italian operation and from the Pfizer settlement.
Interest payments on the notes and on borrowings under the senior credit
facilities affect the Company's liquidity requirements. Borrowings under the
term loans and the revolving credit facility bear interest at variable rates
plus any applicable margin. The interest rates on the term loans are dependent
on the attainment of certain covenants depending on the ratio of total debt to
EBITDA as defined in the Company's term loan agreement ("adjusted EBITDA").
Adjusted EBITDA is a required component of the financial covenants contained in
the Company's primary credit facility, a material agreement to the Company, and
management believes that the presentation of adjusted EBITDA is useful to
investors as a financial indicator of the Company's ability to service its
indebtedness. Adjusted EBITDA may not be comparable to similarly titled measures
used by other entities and should not be considered as an alternative to cash
flows from operating activities, which is determined in accordance with
accounting principles generally accepted in the United States. Financial
covenants include a leverage ratio and an interest coverage ratio, which if not
met, could result in an event of default and trigger the early termination of
the credit facility, if not remedied within a certain period of time. Adjusted
EBITDA was approximately $88.0 million for the nine months ended September 26,
2003. The leverage ratio as defined in the term loan agreement was 3.10 versus
the agreement's maximum 4.75, and the interest coverage ratio was 3.55 versus
the agreement's minimum of 2.25. The reconciliation of Net Cash Provided by
Operating Activities to the Company's key liquidity measure, "adjusted EBITDA",
per the term loan agreement, is as follows (in millions) for the nine months
ended September 26, 2003:
Net Cash Provided by Operating Activities................... $ 35.5
Interest Expense (1)................................... 23.2
Interest Income........................................ (0.8)
Current Income Tax Provision........................... 7.2
Increase in Working Capital(2)......................... 20.2
Other.................................................. 2.7
---------
Adjusted EBITDA(3).......................................... $ 88.0
=========
Net Cash Provided by Investing Activities $ 15.9
=========
Net Cost Used In Financing Activities $ (55.8)
=========
(1) Interest expense excludes the amortization of deferred financing costs.
(2) The increase in working capital is primarily due to an increase in accounts
receivable and inventories along with a decrease in accounts payable and
other accrued expenses.
(3) Bank adjusted EBITDA includes the net gain of $12.7 million from the patent
infringement settlement. Without this gain, adjusted EBITDA would be $75.3
million.
Cash flow from operating activities was $35.5 million for the nine months
ended September 26, 2003 which includes $10.7 million in interest payments, $3.1
million in severance payments, and an increase in working capital primarily due
to seasonality, more than offset by net income.
Cash flow from investing activities was $15.9 million for the nine months
ended September 26, 2003. The net cash flows provided by investing activities
includes the proceeds from the Italian divestiture of $22.6 million partially
offset by $6.7 million in capital expenditures.
Cash flow used in financing activities was $55.8 million which includes a
$21.6 million payment of debt from proceeds of the Italian sale, $12.5 million
from the proceeds of the Pfizer settlement and $21.7 million in voluntary debt
repayments generated from income from operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company incurred severance and other change in control related
liabilities to certain employees. Since the Acquisition the Company paid $45.1
million in severance payments, including $3.1 million paid in the nine months
ended September 26, 2003. The Company estimates that the total severance
payments will be approximately $48.0 million. The Company anticipates the
remaining $2.9 million in severance and related costs to be partially paid out
in 2003 and 2004 for the remaining transition employees, with the majority of
the balance being carried into future years for medical and life insurance
payments for two former Carter-Wallace executives.
The Company expects that the total capital expenditures will be
approximately $12 million in 2003.
The Company expects that funds provided from operations and available
borrowing of $85 million under its six-year revolving credit facility, none of
which was drawn on September 26, 2003, will provide sufficient funds to operate
its businesses, to make expected capital expenditures, to make expected
severance payments, and to meet foreseeable liquidity requirements.
Recent Accounting Pronouncements
- --------------------------------
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
The Company adopted the provisions of the statement on its effective date and
does not anticipate a material impact to its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which aims to eliminate diversity in practice by requiring that the
"freestanding" financial instruments be reported as liabilities by their
issuers.
The provisions of SFAS No. 150, which also include a number of new
disclosure requirements, are effective for instruments entered into or modified
after May 31, 2003 and for pre-existing instruments as of the beginning of the
first interim period that commences after June 15, 2003. The Company adopted the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have not been any material changes during the three month period
ended September 26, 2003. For further information, please refer to the Company's
December 31, 2002 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of
the end of the period covered by this report are functioning effectively to
provide reasonable assurance that the information required to be disclosed by
the Company in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Cautionary Note on Forward-Looking Statements
- ---------------------------------------------
This report contains forward-looking statements relating to, among other
things, short- and long-term financial objectives, sales growth, cash flow and
cost improvement programs. These statements represent the intentions, plans,
expectations and beliefs of the Company, and are subject to risk, 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 and the financial condition of major customers. 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.
PART II - Other Information
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
(31.1) Certifications of the Chief Executive Officer of the
Company required by Rule 13a-14(a) under the Securities
Exchange Act of 1934.
(31.2) Certifications of the Chief Financial Officer of the
Company required by Rule 13a-14(a) under the Securities
Exchange Act of 1934
(32.1) Certifications of the Chief Executive Officer of the
Company required by Rule 13a-14(b) under the Securities
Exchange Act of 1934.
(32.2) Certifications of the Chief Financial Officer of the
Company required by Rule 13a-14(b) under the Securities
Exchange Act of 1934.
b. No reports on Form 8-K were filed for the three months ended
September 26, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARMKEL, LLC.
------------------------------------------------
(REGISTRANT)
DATE: November 10, 2003 /s/ Maureen K. Usifer
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MAUREEN K. USIFER
CHIEF FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
DATE: November 10, 2003 /s/ Zvi Eiref
------------------------------ ------------------------------------------------
ZVI EIREF
DIRECTOR
INDEX TO EXHIBITS
Exhibit
Number Title
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31.1 Certifications of the Chief Executive Officer of the Company required by
Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certifications of the Chief Financial Officer of the Company required by
Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1 Certifications of the Chief Executive Officer of the Company required by
Rule 13a-14(b) under the Securities Exchange Act of 1934.
32.2 Certifications of the Chief Financial Officer of the Company required by
Rule 13a-14(b) under the Securities Exchange Act of 1934.