UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2007
Commission file number 1-10585
CHURCH & DWIGHT CO., INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: (609) 683-5900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of May 3, 2007, there were 65,790,230 shares of Common Stock outstanding.
TABLE OF CONTENTS
Item
1.
2.
3.
4.
1A.
6.
2
PART I—FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Net Sales
Cost of sales
Gross Profit
Marketing expense
Selling, general and administrative expenses
Income from Operations
Equity in earnings of affiliates
Investment earnings
Other income (expense), net
Interest expense
Income before minority interest and income taxes
Minority interest
Income before income taxes
Income taxes
Net Income
Weighted average shares outstanding—Basic
Weighted average shares outstanding—Diluted
Net income per share—Basic
Net income per share—Diluted
Dividends Per Share
See Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowances of $3,106 and $2,258
Inventories
Deferred income taxes
Note receivable – current
Net assets held for sale
Prepaid expenses
Total Current Assets
Property, Plant and Equipment (Net)
Note Receivable
Equity Investment in Affiliates
Long-term Supply Contracts
Tradenames and Other Intangibles
Goodwill
Other Assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Short-term borrowings
Accounts payable and accrued expenses
Current portion of long-term debt
Income taxes payable
Total Current Liabilities
Long-term Debt
Deferred Income Taxes
Other Long Term Liabilities
Pension, Postretirement and Postemployment Benefits
Minority Interest
Total Liabilities
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 150,000,000 shares, issued 69,991,482 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock in treasury, at cost:
4,222,251 shares in 2007 and 4,630,388 shares in 2006
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
Cash Flow From Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Distributions from unconsolidated affiliates
Asset impairment charges and other asset write-offs
Non cash compensation expense
Unrealized foreign exchange (gain) loss
Other
Change in assets and liabilities:
Accounts receivable
Excess tax benefit on stock options exercised
Other liabilities
Net Cash Provided By Operating Activities
Cash Flow From Investing Activities
Additions to property, plant and equipment
Acquisitions (net of cash acquired)
Return of capital from equity affiliates
Proceeds from note receivable
Contingent acquisition payments
Net Cash Used In Investing Activities
Cash Flow From Financing Activities
Long-term debt repayment
Short-term debt borrowings—net
Bank overdrafts
Proceeds from stock options exercised
Payment of cash dividends
Deferred financing costs
Net Cash Used In Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning Of Period
Cash and Cash Equivalents at End Of Period
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW-CONTINUED
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the three months for:
Interest (net of amounts capitalized)
Supplemental disclosure of non-cash investing activities:
Property, plant and equipment expenditures included in Accounts Payable
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 30, 2007
(in thousands)
December 31, 2006
Net income
Translation adjustments
Defined pension and postretirement benefits
Interest rate agreements
Comprehensive income
FIN No. 48 adoption adjustment
Cash dividends
Stock based compensation expense and stock option plan transactions
Other stock issuances
March 30, 2007
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated balance sheet as of March 30, 2007, the condensed consolidated statements of income and cash flow for the three months ended March 30, 2007 and March 31, 2006, and the stockholders’ equity statement for the three months ended March 30, 2007 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 30, 2007 and results of operations and cash flow for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006. The results of operations for the periods ended March 30, 2007 are not necessarily indicative of the operating results for the full year.
The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4 weeks—4 weeks—5 weeks methodology. As a result, the first quarter can include a partial or expanded week in the first four week period of the quarter. Similarly, the last five week period in the fourth quarter could include a partial or expanded week. Certain subsidiaries operating outside of North America are included for periods beginning and ending one month prior to the period presented.
The Company incurred research & development expenses in the first quarter of 2007 and 2006 of $10.3 million and $9.4 million, respectively. These expenses are included in selling, general and administrative expenses.
2. Recently Adopted Accounting Pronouncement
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, declassification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company has adopted the provisions of FIN 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $18.4 million, which is recorded in other long-term liabilities. As a result of the implementation of FIN 48, the Company recognized an $8.3 million increase in the liability for unrecognized tax benefits which was accounted for as follows:
(In millions)
Increase in net deferred tax assets
Increase in noncurrent receivables
Increase in retained earnings (cumulative effect)
Increase in noncurrent accrued interest payables
Increase in liability for unrecongnized tax benefits
Included in the balance of unrecognized tax benefits at January 1, 2007, is $6.9 million of tax benefits that, if recognized, would affect the effective tax rate. The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations prior to March 31, 2008.
The Company is subject to U.S. federal income tax as well as the income tax in multiple state and foreign jurisdictions. All U.S. federal income tax examinations of the Company for the years through 2003 have been effectively concluded. Presently, the Company has not been contacted by the Internal Revenue Service for an examination of its income tax returns subsequent to this date. Substantially all material state, local and foreign income tax matters have been effectively concluded for years through 2000.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company changed its policy for recording interest on certain unrecognized tax benefits from tax expense to interest expense. During the three months ended March 30, 2007, the Company recognized approximately $0.5 million in interest and tax expenses associated with uncertain tax positions.
3. Inventories consist of the following:
(In thousands)
December 31,
2006
Raw materials and supplies
Work in process
Finished goods
4. Property, Plant and Equipment consist of the following:
Land
Buildings and improvements
Machinery and equipment
Office equipment and other assets
Software
Mineral rights
Construction in progress
Less accumulated depreciation and amortization
Net Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment amounted to $9.4 million and $9.0 million for the three months ended March 30, 2007 and March 31, 2006, respectively. Interest charges in the amount of $0.2 million and $0.1 million were capitalized in connection with construction projects for the three months ended March 30, 2007 and March 31, 2006, respectively. See Note 14 for changes to property, plant and equipment due to net assets held for sale in Canada.
5. Earnings Per Share
Basic EPS is calculated based on income available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock issuable pursuant to the exercise of stock options outstanding and the dilutive effect of convertible debentures. The weighted average number of common shares outstanding used to calculate Basic EPS is reconciled to those shares used in calculating Diluted EPS as follows:
Basic
Dilutive effect of stock options
Dilutive effect of convertible debentures
Diluted
Anti-dilutive stock options outstanding
9
6. Stock-Based Compensation
A summary of option activity during the three months ended March 30, 2007 is as follows:
Outstanding at January 1, 2007
Granted
Exercised
Cancelled
Outstanding at March 30, 2007
Exercisable at March 30, 2007
The total intrinsic value of options exercised during the first quarter of 2007 and 2006 was $12.3 million and $5.2 million, respectively. During the first quarter of 2007, there were no modifications made to any options outstanding. Stock compensation expense in the first quarter of 2007 was $2.8 million as compared to $2.1 million in the same period of 2006.
7. Acquisitions
Orange Glo International, Inc.
On August 7, 2006, the Company acquired substantially all of the net assets of Orange Glo International, Inc. (“OGI”), including laundry and cleaning products such as OXICLEAN, a premium-priced laundry pre-wash additive, KABOOM bathroom cleaner and ORANGE GLO household cleaner. The purchase price was $325.4 million, plus fees of approximately $4.4 million, which was financed through a $250.0 million addition to the Company’s existing bank credit facility and available cash. Assets acquired at the purchase date include intellectual property, permits, contracts, equipment, and books and records. The Company allocated a significant portion of the purchase price to intangibles based upon a preliminary valuation. The Company expects to finalize the valuation in the second quarter of 2007. The Company has completed the order processing, logistics and accounting phases of integrating the business and will transfer the manufacturing of certain products to its existing plants during the second half of 2007.
10
8. Goodwill and Other Intangible Assets
The following table provides information related to the carrying value of all intangible assets:
Amortized intangible assets:
Tradenames
Customer Relationships
Patents/Formulas
Non Compete Agreement
Total
Unamortized intangible assets-carrying value
Intangible amortization expense amounted to $4.5 million for the first three months of 2007 and $2.9 million for the same period of 2006. The Company’s estimated intangible amortization will be approximately $18.2 million in each of 2008 and 2009, approximately $17.0 million in 2010 and 2011, and approximately $16.5 in 2012.
As a result of an impairment test performed during the fourth quarter of 2006, the Company reassessed the estimated lives of certain Consumer Domestic personal care tradenames and determined that they should be re-characterized from indefinite lived to finite lived assets. The carrying values of these tradenames as of December 31, 2006 was approximately $20.1 million and are being amortized over lives ranging from 3-15 years starting January 1, 2007.
The changes in the carrying amount of goodwill for the three months ended March 30, 2007 are as follows:
Balance December 31, 2006
Goodwill associated with the OGI acquisition (1)
Additional Unilever contingent consideration
Balance March 30, 2007
11
9. Short-term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt consist of the following:
Securitization of accounts receivable due in April 2007
Various debt due to Brazilian banks
Bank overdraft debt
Total short-term borrowings
Long-term debt
Tranche A term loan facility
Incremental tranche A term loan facility
Amount due 2007 $ 26,779
Amount due 2008 $ 35,705
Amount due 2009 $ 60,592
Amount due 2010 $ 158,898
Amount due 2011 $ 70,314
Amount due 2012 $ 89,245
Convertible debentures due on August 15, 2033
Senior subordinated notes (6%) due December 22, 2012
Total long-term debt
Less: current maturities
Net long-term debt
Due by March 31, 2008
Due by March 31, 2009
Due by March 31, 2010
Due by March 31, 2011
Due by March 31, 2012
Due April 1, 2013 and subsequent
During the first quarter of 2007, the Company paid approximately $39.5 million of its Tranche A term loan, of which $30.0 million were voluntary payments. Additionally, the securitization of accounts receivable was increased by $15.0 million due to the accounts receivable activity generated from the OGI acquisition. The proceeds from this transaction were used to pay down the Company’s long term debt as the interest rates under this loan agreement are favorable.
In April 2007, the accounts receivable securitization facility was renewed with similar terms to the facility previously in place and with a new maturity date of April 2008.
12
10. Comprehensive Income
The following table provides information relating to the Company’s comprehensive income for the three months ended March 30, 2007 and March 31, 2006:
Other Comprehensive Income, Net of Tax:
Foreign Exchange Translation Adjustments
Interest Rate Hedge Agreements
Defined Pension and Postretirement Benefits
Comprehensive Income
11. Pension and Postretirement Plans
The following table discloses the net periodic benefit cost for the Company’s pension and postretirement plans for the three months ended March 30, 2007 and March 31, 2006.
Pension Costs
Three Months Ended
March 30,
2007
Components of Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Recognized actuarial loss
Net periodic benefit cost
Amortization of prior service cost
Recognized actuarial (gain) or loss
The Company made cash contributions of approximately $2.1 million to its pension plans during the first quarter of 2007. The Company estimates it will be required to make total cash contributions to its pension plans of approximately $9.2 million in 2007.
12. Commitments, contingencies and guarantees
13
14
13. Related Party Transactions
The Company divested the USA Detergents non-laundry business and other non-core assets to former USA Detergents executives in connection with its acquisition of USA Detergents in 2001. The Company has a $0.6 million ownership interest in the business operated by the former USA Detergents’ executives, known as USA Detergents (“USAD)”. The Company has been supplying USAD with certain laundry and cleaning products at cost plus a mark-up, and USAD had the exclusive rights to sell these products in Canada. In addition, the Company leases office and laboratory space to USAD under a separate agreement.
During the three months ended March 30, 2007 and March 31, 2006, the Company sold $1.6 and $4.4 million, respectively, of laundry and cleaning products to USAD. Furthermore, the Company billed USAD $0.1 million for leased space. As of March 30, 2007 and March 31, 2006, the Company had outstanding accounts receivable from USAD of $2.4 and $3.3 million, respectively.
For the three months ended March 30, 2007 and March 31, 2006, the Company invoiced Armand Products Company (“Armand)”, which is 50% owned by the Company, $0.4 and $0.4 million, respectively, for administration and management oversight services (which was recorded as a reduction of selling, general and administrative expenses). Sales of Armand products to the Company over the same periods were $1.9 and $2.4 million, respectively. As of March 30, 2007 and March 31, 2006, the Company had outstanding accounts receivable from Armand of $0.7 and $1.1 million, respectively. Also, the Company had outstanding accounts payable to Armand of $0.6 and $0.8 million as of March 30, 2007 and March 31, 2006, respectively.
For the three months ended March 30, 2007 and March 31, 2006, the Company invoiced the ArmaKleen Company, (“ArmaKleen”), which is 50% owned by the Company, $0.7 and $0.7 million, respectively, for administration and management oversight services (which was recorded as a reduction of selling, general and administrative expenses). Sales of inventory to ArmaKleen over the same periods were $1.4 and $1.4 million, respectively. As of March 30, 2007 and March 31, 2006, the Company had outstanding accounts receivable from ArmaKleen of $1.0 and $1.1 million, respectively.
14. Net Assets Held for Sale
On March 2, 2007, the Company signed an agreement to sell certain property owned by its Canadian subsidiary that has a net book value of $3.4 million. The value expected to be received for the property, net of costs to sell, is approximately $6.4 million, which will be allocated to the Consumer International segment. The Company anticipates closing on the sale of this property in the third quarter of 2007.
15. Segment Information
The Company maintains three reportable segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”). The Company also has a Corporate segment.
Segment revenues are derived from the sale of the following products:
Segment
Products
Consumer Domestic
Consumer International
SPD
The Company had 50 percent ownership interests in Armand, ArmaKleen and Esseco U.K. LLP (“Esseco”) as of March 30, 2007. Since the Company did not control these entities as of March 30, 2007, they were accounted for under the equity method in the consolidated financial statements of the Company. The equity earnings of Armand, ArmaKleen and Esseco are included in Corporate.
Some of the subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results.
The domestic results of operations for OGI are included in the Consumer Domestic segment. The results of operations for OGI’s foreign operations are included in the Consumer International segment.
15
Segment sales and income before taxes and minority interest for the first quarter of 2007 and 2006 are as follows:
First Quarter 2007
First Quarter 2006
Income before Minority Interest and Income Taxes(1)
The following table discloses product line revenues from external customers for the three months ended March 30, 2007 and March 31, 2006.
Household Products
Personal Care Products
Total Consumer Domestic
Total Consumer International
Total SPD
Total Consolidated Net Sales
Household Products include deodorizing and cleaning products and laundry products. Personal Care Products include condoms, pregnancy kits, oral care and skin care products.
16
Supplemental Financial Information of Guarantor and Non-Guarantor Operations
The Company’s 6% senior subordinated notes are fully and unconditionally guaranteed by Church & Dwight Co., Inc. and certain domestic subsidiaries of the Company on a joint and several basis. The following information is presented in response to Item 3-10 of Regulation S-X, promulgated by the Securities and Exchange Commission.
Supplemental information for the condensed consolidated balance sheets at March 30, 2007 and December 31, 2006, and the condensed consolidated income statements and condensed consolidated statements of cash flows for the three months ended March 30, 2007 and March 31, 2006 are summarized as follows (amounts in thousands):
Statements of Income
Company
And GuarantorSubsidiaries
Net sales
Gross profit
17
Consolidated Balance Sheet
Other Liabilities
18
Statements of Cash Flows
Net Cash Provided by (Used in) Operating Activities
Net Cash Used in Investing Activities
Net Cash Provided by (Used in) Financing Activities
Net Change In Cash & Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Period
Net Cash (Used in) Provided by Financing Activities
19
Results of Operations
Consolidated Results
Net Sales for the quarter ended March 30, 2007 were $514.3 million, $71.9 million or 16.3% above last year’s first quarter. Included in the 2007 results are $57.1 million associated with the business acquired by the Company from Orange Glo International, Inc. during the third quarter of 2006 (the “OGI Business”), and $3.9 million resulting from favorable foreign exchange rates. The quarterly results were also higher compared to the first quarter of 2006 because SPINBRUSH business revenues were not included in net sales during the first quarter of 2006. Following the acquisition of the SPINBRUSH business and during the transition period prior to April 1, 2006, the seller of the SPINBRUSH business maintained responsibility for sales and other functions in the U.S., Canada and the U.K; therefore, the Company accounted for the net cash received as other revenue. The Company assumed responsibility for all SPINBRUSH functions in the U.S., Canada and the U.K. on April 1, 2006, and has recognized the gross amount of sales and expenses from the SPINBRUSH business for the U.S. and foreign locations since that date. Increases in net sales for the quarter ended March 30, 2007 were partially offset by higher slotting and consumer promotion costs.
Operating Costs
The Company’s gross profit was $199.9 million during the quarter ended March 30, 2007, a $30.9 million increase as compared to the same period in 2006. The Company’s gross margin increased 70 basis points to 38.9%. The increase in gross margin reflects the benefits of price increases taken in the first half of 2006, the higher margins of the acquired OGI business, and cost reduction programs which serve to offset continuing price increases for resins, corrugated paper, and certain other raw materials.
Marketing expenses in the first quarter of 2007 were $45.9 million, an increase of $12.5 million as compared to the same period last year. Contributing to the increase were expenses in support of the OGI business product lines and an increase in expenses for certain personal care products. The Company anticipates increasing its second quarter 2007 marketing expense as compared to the first quarter of 2007 in support of new product launches and continued support of its existing products.
Selling, general and administrative expenses (“SG&A”) of $71.9 million in the first quarter of 2007 increased $8.5 million or 13.5% as compared to last year. The increase is primarily due to costs associated with the OGI business, higher stock-based compensation expense, the effect of foreign exchange rates and an increase in legal expenses. SG&A in the first quarter of 2006 included the impact of a $1.8 million intangible asset impairment charge.
Other Income and Expenses
Equity in earnings of affiliates increased by $0.6 million in the first quarter of 2007 as compared to the same period in 2006 as a result of the inclusion of the Esseco joint venture, which was formed during the second quarter of 2006, and improved profitability of Armand Products due to higher sales and lower manufacturing costs.
Other income/expense in the first quarter of 2007 consists primarily of foreign exchange losses. Other income/expense in the first quarter of 2006 primarily includes the fair market value of common stock the Company received in connection with the demutualization of an insurance company in which the Company was the policyholder of a guaranteed annuity contract associated with a defined benefit plan, and foreign exchange gains related to intercompany loans between the Company’s subsidiaries.
Interest expense in the first quarter of 2007 increased $3.9 million as compared to the same period in 2006 as a result of the increase in debt to fund the OGI acquisition and higher interest rates. Investment earnings increased $0.3 million as a result of higher interest rates and higher cash available for investment.
Taxation
The effective tax rate for the first quarter of 2007 was 36.0% as compared to 39.7% for the same period last year. Last year’s tax rate was negatively impacted by approximately $1.8 million as a result of the expiration of the research and development tax credit on December 31, 2005, which was reinstated in the fourth quarter of 2006.
20
Segment results
The Company maintains three reportable segments. These segments are based on differences in the nature of products and organizational and ownership structures. Specifically, the Company has identified the following segments: Consumer Domestic, Consumer International and Specialty Products Division (“SPD”). Segment revenues are derived from the sale of the following products:
The Company had 50 percent ownership interests in Armand Products Company (“Armand”), The ArmaKleen Company (“Armakleen”), and Esseco U.K. LLP (“Esseco”) as of December 31, 2006. Since the Company did not control these entities as of December 31, 2006, they were accounted for under the equity method in the consolidated financial statements of the Company. The equity earnings of Armand, ArmaKleen and Esseco are included in Corporate.
Some of the subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results. The domestic results of operations for OGI are included in the Consumer Domestic segment. The results of operations for OGI’s foreign operations are included in the Consumer International segment.
Product line revenues for external customers for the three months ended March 30, 2007 and March 31, 2006 were as follows:
21
Consumer Domestic net sales in the first quarter were $372.4 million, a $58.3 million or 19% increase over the first quarter of 2006 net sales of $314.0 million, primarily due to the addition of the OGI business. Sales of XTRA liquid laundry detergent, ARM & HAMMER SUPER SCOOP cat litter, and ARM & HAMMER baking soda were all higher than last year. These increases were offset by lower ARM & HAMMER laundry detergent, toothpaste and antiperspirant sales.
Consumer Domestic Income before Minority Interest and Income Taxes for the first quarter decreased by $0.2 million to $53.1 million. Profits resulting from the acquisition of the OGI business were offset by higher marketing costs on pre-existing products, higher SG&A expenses, and higher interest expenses resulting from the acquisition of the OGI business.
Consumer International net sales were $84.2 million in the first quarter of 2007, an increase of $11.4 million or 15.7% as compared to the first quarter of 2006. Of the 15.7% increase, approximately 10% is associated with the OGI and SPINBRUSH acquisitions, 5% is associated with favorable foreign exchange rates and the balance is associated with higher sales of oral care products in the UK, skin care products in Australia, and personal care products in Canada.
Consumer International Income before Minority Interest and Income Taxes was $10.5 million in the first quarter of 2007, a $3.3 million increase as compared to the first quarter of 2006. The increase is a result of higher profits associated with the sales in the UK and Australia, and a favorable product mix in Canada (including more personal care product sales and less laundry sales), and the contribution from the acquired OGI business. Also contributing to the higher income in 2007 was an intangible asset impairment charge in the first quarter of 2006.
Specialty Products (SPD)
Specialty Products net sales were $57.8 million in the first quarter of 2007, an increase of $2.2 million or 4.0% as compared to the first quarter of 2006. The increase is primarily due to higher sales in Brazil, higher sales of specialty chemical products and favorable foreign exchange rates, partially offset by lower animal nutrition product sales.
Specialty Products Income before Minority Interest and Income Taxes was $4.5 million in the first quarter of 2007, an increase of $0.5 million as compared to the first quarter of 2006, principally due to the profits on higher net sales, partially offset by higher raw material costs for certain animal nutrition products.
Liquidity and Capital Resources
Net Debt
The Company had outstanding total debt of $906.9 million and cash of $107.7 million (of which approximately $47.6 million resides in foreign subsidiaries) at March 30, 2007. Total debt less cash (“net debt”) was $799.2 million at March 30, 2007. This compares to total debt of $933.3 million and cash of $110.5 million, resulting in net debt of $822.8 million at December 31, 2006.
The Company entered into two cash flow hedge agreements, one effective as of September 29, 2006, and the other effective as of December 29, 2006, to reduce the impact of interest rate fluctuations on its Tranche A term loan debt. Each hedge covers $100.0 million of zero-cost collars for 5 and 3 years, respectively, with a cap of 6.50% and a floor of 3.57%. There was no income statement impact as a result of these agreements as all changes in the hedging options’ fair value are recorded in Accumulated Other Comprehensive Income on the balance sheet.
Cash Flow Analysis (In thousands)
Net Cash Provided by Operating Activities
Net Cash Used in Financing Activities
22
Net Cash Provided by Operating Activities – The Company’s net cash provided by operations in the first three months of 2007 increased $16.0 million to $29.6 million as compared to the same period in 2006. The increase was primarily due to higher net income, an increase in non cash expenses and an increase in income taxes payable. Operating cash flows are expected to be sufficient to meet the anticipated operating cash requirements for the remainder of the year.
For the three months ending March 30, 2007, the components of working capital that significantly impacted operating cash flow are as follows:
Inventories increased by $20.2 million primarily due to the transitioning of OGI product manufacturing to the Company’s manufacturing plants and an increase in liquid laundry detergent to support the Company’s concentration initiative as well as promotional activities.
Accounts payable and other accrued expenses decreased $30.6 million primarily due to payments associated with incentive compensation and profit sharing plans and the timing of payments related to the increased payables at December 31, 2006.
Net cash Used in Investing Activities – Net cash used in investing activities during the first three months of 2007 was $11.5 million, reflecting $11.2 million of additions for property, plant and equipment.
Net cash Used in Financing Activities – Net cash used in financing activities during the first three months of 2007 was $20.8 million. This represents an increase of $15.0 million in short-term borrowings related to the Company’s accounts receivable securitization, and proceeds of and tax benefits from stock option exercises of $10.3 million. Offsetting these transactions were payments on the Tranche A term loan of $39.5 million and the payment of cash dividends of $4.6 million.
Adjusted EBITDA is a required component of the financial covenants contained in the Company’s primary credit facility. Management believes that the presentation of Adjusted EBITDA is useful to investors as a financial indicator of the Company’s ability to service its indebtedness. Adjusted EBITDA may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to cash flows from operating activities, which is determined in accordance with accounting principles generally accepted in the United States. Financial covenants include a total debt to Adjusted EBITDA leverage ratio and an interest coverage ratio, which if not met, could result in an event of default and trigger the early termination of the credit facility, if not remedied within a certain period of time. Adjusted EBITDA was $100.7 million for the first three months of 2007. The leverage ratio (total debt to Adjusted EBITDA) for the 12 months ended March 30, 2007 was 2.57 which is below the maximum of 4.00 permitted under the agreement, and the interest coverage ratio (Adjusted EBITDA to total interest expense) for the twelve months ended March 30, 2007 was 6.08 which is above the minimum of 3.0 permitted under the agreement. This credit facility is secured by the assets of Church & Dwight Co., Inc. and one of its domestic subsidiaries. The reconciliation of Net Cash Provided by Operating Activities (the most directly comparable GAAP financial measure) to Adjusted EBITDA for the three months ended March 30, 2007 is as follows (in millions):
Interest Expense
Current Portion Of Income Tax Provision
Tax Benefit On Stock Options Exercised
Change in Working Capital and Other Liabilities
Investment Income
Adjusted EBITDA (per loan agreement)
Recent Accounting Pronouncements
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The Company changed its policy for recording interest on certain unrecognized tax benefits from tax expense to interest expense.
During the three months ended March 30, 2007, the Company recognized approximately $0.5 million in interest expense and tax associated with uncertain tax positions.
Interest Rate Risk
The Company has short and long-term debt that are floating rate obligations. If the floating rate were to change by 10% from the March 30, 2007 level, additional annual interest expense associated with the floating rate debt would be approximately $3.1 million.
Foreign Currency
The Company is subject to exposure from fluctuations in foreign currency exchange rates, primarily U.S. Dollar/Euro, U.S. Dollar/British Pound, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, U.S. Dollar/Australian Dollar and U.S. Dollar/Brazilian Real.
The Company is also subject to foreign exchange translation exposure as a result of its foreign operations. A 10% change in the exchange rates for the U.S. Dollar to the currencies noted above at March 30, 2007 would result in a first quarter 2007 currency gain or loss of approximately $0.9 million in 2007.
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 the Company’s 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 (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
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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, among others, to short- and long-term financial objectives, sales and earnings growth, margin improvement, marketing and advertising spending, and the effect of the SPINBRUSH and Orange Glo International, Inc. (“OGI”) net asset acquisitions and the operational transition of these businesses with the Company. These statements represent the intentions, plans, expectations and beliefs of the Company, and are subject to risks, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. The uncertainties include assumptions as to market growth and consumer demand (including the effect of political and economic events and price increases on consumer demand), raw material and energy prices, the financial condition of major customers, the integration of the OGI business and the effect on marketing spending of product introduction timelines. Other factors, which could materially affect the results, include the outcome of contingencies, including litigation, pending regulatory proceedings, environmental remediation and the divestiture of assets. For a description of additional factors that could cause actual results to differ materially from the forward looking statements, see the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006, including the information in Item 1A, “Risk Factors.”
The Company undertakes no obligation to publicly update any forward-looking statements. You are advised, however, to consult any further disclosures the Company makes on related subjects in our filings with the U.S. Securities and Exchange Commission.
PART II—OTHER INFORMATION
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results.
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The Company’s Annual Meeting of Stockholders was held May 3, 2007. The following nominees were elected to serve on the Company’s Board of Directors for a term of three years:
Nominees
Bradley C. Irwin
J. Richard Leaman, Jr.
John O. Whitney
The Company’s other directors whose term of office continued after the meeting are: James R. Craigie, Robert A. Davies, III, Rosina B. Dixon, Robert D. LeBlanc, T. Rosie Albright, Robert A. McCabe, Lionel L. Nowell, III, and Ravichandra K. Salegram.
The voting results on the other matters submitted to a stockholder vote at the Annual Meeting were as follows:
Approval of the Church & Dwight, Co., Inc. annual incentive plan:
For
Against
Abstain
47,224,752
Ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for 2007:
56,247,812
(3.1) Restated Certificate of Incorporation of the Company, as amended through May 9, 2005 – incorporated by reference to Exhibit 3.2 to the Company’s quarterly report on Form 10-Q for the quarter ended April 1, 2005.
(3.2) By-laws of the Company as amended – incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated September 19, 2003.
(11) Computation of earnings per share.
(31.1) Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act.
(31.2) Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act.
(32.1) Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
(32.2) Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Matthew T. Farrell
/s/ Gary P. Halker
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EXHIBIT INDEX
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