form10q3q2008.htm
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 September 26, 2008
Commission
file number 1-10585
CHURCH
& DWIGHT CO., INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
13-4996950
|
(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)
|
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer |
x |
|
Accelerated
filer |
o |
|
Non-accelerated
filer |
o |
|
Smaller
reporting company |
o |
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes o No x
As of
October 31, 2008, there were 70,031,059 shares of Common Stock
outstanding.
PART
I
Item
|
|
Page
|
1.
|
|
3
|
2.
|
|
20
|
3.
|
|
28
|
4.
|
|
28
|
PART
II
PART I - FINANCIAL
INFORMATION
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(Dollars
in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Sales
|
|
$ |
630,672 |
|
|
$ |
580,438 |
|
|
$ |
1,777,498 |
|
|
$ |
1,641,245 |
|
Cost
of sales
|
|
|
379,578 |
|
|
|
351,031 |
|
|
|
1,059,818 |
|
|
|
995,269 |
|
Gross
Profit
|
|
|
251,094 |
|
|
|
229,407 |
|
|
|
717,680 |
|
|
|
645,976 |
|
Marketing
expense
|
|
|
79,740 |
|
|
|
69,700 |
|
|
|
212,395 |
|
|
|
181,654 |
|
Selling,
general and administrative expenses
|
|
|
85,806 |
|
|
|
71,092 |
|
|
|
245,092 |
|
|
|
217,014 |
|
Income
from Operations
|
|
|
85,548 |
|
|
|
88,615 |
|
|
|
260,193 |
|
|
|
247,308 |
|
Equity
in earnings of affiliates
|
|
|
2,443 |
|
|
|
1,797 |
|
|
|
6,975 |
|
|
|
5,817 |
|
Investment
earnings
|
|
|
1,110 |
|
|
|
1,964 |
|
|
|
5,636 |
|
|
|
5,117 |
|
Other
income (expense), net
|
|
|
(2,884 |
) |
|
|
1,332 |
|
|
|
(586 |
) |
|
|
1,441 |
|
Interest
expense
|
|
|
(11,577 |
) |
|
|
(14,489 |
) |
|
|
(34,720 |
) |
|
|
(43,906 |
) |
Income
before minority interest and income taxes
|
|
|
74,640 |
|
|
|
79,219 |
|
|
|
237,498 |
|
|
|
215,777 |
|
Income
taxes
|
|
|
25,651 |
|
|
|
27,512 |
|
|
|
86,546 |
|
|
|
78,450 |
|
Minority
interest
|
|
|
- |
|
|
|
(9 |
) |
|
|
7 |
|
|
|
(21 |
) |
Net
Income
|
|
$ |
48,989 |
|
|
$ |
51,716 |
|
|
$ |
150,945 |
|
|
$ |
137,348 |
|
Weighted
average shares outstanding - Basic
|
|
|
68,400 |
|
|
|
65,913 |
|
|
|
67,106 |
|
|
|
65,762 |
|
Weighted
average shares outstanding - Diluted
|
|
|
71,271 |
|
|
|
70,341 |
|
|
|
71,045 |
|
|
|
70,225 |
|
Net
income per share - Basic
|
|
$ |
0.72 |
|
|
$ |
0.78 |
|
|
$ |
2.25 |
|
|
$ |
2.09 |
|
Net
income per share - Diluted
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
|
$ |
2.16 |
|
|
$ |
2.00 |
|
Dividends
Per Share
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.25 |
|
|
$ |
0.22 |
|
See Notes to Condensed Consolidated Financial Statements.
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September
26,
|
|
|
December
31,
|
|
(Dollars
in thousands, except share and per share data)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
175,689 |
|
|
$ |
249,809 |
|
Accounts
receivable, less allowances of $5,443 and $4,548
|
|
|
263,680 |
|
|
|
247,898 |
|
Inventories
|
|
|
221,867 |
|
|
|
213,651 |
|
Deferred
income taxes
|
|
|
13,280 |
|
|
|
13,508 |
|
Note
receivable – current
|
|
|
1,324 |
|
|
|
1,263 |
|
Prepaid
expenses and other current assets
|
|
|
19,552 |
|
|
|
9,224 |
|
Total
Current Assets
|
|
|
695,392 |
|
|
|
735,353 |
|
Property,
Plant and Equipment (Net)
|
|
|
349,634 |
|
|
|
350,853 |
|
Note
Receivable
|
|
|
2,342 |
|
|
|
3,670 |
|
Equity
Investment in Affiliates
|
|
|
10,035 |
|
|
|
10,324 |
|
Long-term
Supply Contracts
|
|
|
1,929 |
|
|
|
2,519 |
|
Tradenames
and Other Intangibles
|
|
|
826,817 |
|
|
|
665,168 |
|
Goodwill
|
|
|
870,986 |
|
|
|
688,842 |
|
Other
Assets
|
|
|
85,541 |
|
|
|
75,761 |
|
Total
Assets
|
|
$ |
2,842,676 |
|
|
$ |
2,532,490 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
17,700 |
|
|
$ |
115,000 |
|
Accounts
payable and accrued expenses
|
|
|
325,313 |
|
|
|
303,071 |
|
Current
portion of long-term debt
|
|
|
62,042 |
|
|
|
33,706 |
|
Income
taxes payable
|
|
|
8,622 |
|
|
|
6,012 |
|
Total
Current Liabilities
|
|
|
413,677 |
|
|
|
457,789 |
|
Long-term
Debt
|
|
|
801,954 |
|
|
|
707,311 |
|
Deferred
Income Taxes
|
|
|
172,413 |
|
|
|
162,746 |
|
Other
Long Term Liabilities
|
|
|
86,688 |
|
|
|
87,769 |
|
Pension,
Postretirement and Postemployment Benefits
|
|
|
32,674 |
|
|
|
36,416 |
|
Minority
Interest
|
|
|
199 |
|
|
|
194 |
|
Total
Liabilities
|
|
|
1,507,605 |
|
|
|
1,452,225 |
|
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
300,000,000 shares, issued 73,213,775
|
|
|
73,214 |
|
|
|
69,991 |
|
Additional
paid-in capital
|
|
|
247,118 |
|
|
|
121,902 |
|
Retained
earnings
|
|
|
1,026,002 |
|
|
|
891,868 |
|
Accumulated
other comprehensive income
|
|
|
26,605 |
|
|
|
39,128 |
|
|
|
|
1,372,939 |
|
|
|
1,122,889 |
|
Common
stock in treasury, at cost:
|
|
|
|
|
|
|
|
|
3,232,542
shares in 2008 and 3,747,719 shares in 2007
|
|
|
(37,868 |
) |
|
|
(42,624 |
) |
Total
Stockholders’ Equity
|
|
|
1,335,071 |
|
|
|
1,080,265 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
2,842,676 |
|
|
$ |
2,532,490 |
|
See Notes
to Condensed Consolidated Financial Statements.
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Cash
Flow From Operating Activities
|
|
|
|
|
|
|
Net
Income
|
|
$ |
150,945 |
|
|
$ |
137,348 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
52,018 |
|
|
|
43,097 |
|
Equity
in earnings of affiliates
|
|
|
(6,975 |
) |
|
|
(5,817 |
) |
Distributions
from unconsolidated affiliates
|
|
|
6,686 |
|
|
|
5,371 |
|
Deferred
income taxes
|
|
|
9,405 |
|
|
|
21,284 |
|
Gain
on sale of subsidiaries and property
|
|
|
(4,184 |
) |
|
|
(3,325 |
) |
Asset
impairment charges and other asset write-offs
|
|
|
7,498 |
|
|
|
2,123 |
|
Non
cash compensation expense
|
|
|
9,331 |
|
|
|
8,991 |
|
Unrealized
loss on diesel hedge contract
|
|
|
795 |
|
|
|
- |
|
Unrealized
foreign exchange gain and other
|
|
|
(213 |
) |
|
|
(2,110 |
) |
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(12,294 |
) |
|
|
(34,573 |
) |
Inventories
|
|
|
(7,617 |
) |
|
|
(21,760 |
) |
Prepaid
expenses and other current assets
|
|
|
(8,950 |
) |
|
|
(525 |
) |
Accounts
payable and accrued expenses
|
|
|
16,606 |
|
|
|
2,811 |
|
Income
taxes payable
|
|
|
8,436 |
|
|
|
11,620 |
|
Excess
tax benefit on stock options exercised
|
|
|
(5,547 |
) |
|
|
(5,509 |
) |
Other
liabilities
|
|
|
6,189 |
|
|
|
233 |
|
Net
Cash Provided By Operating Activities
|
|
|
222,129 |
|
|
|
159,259 |
|
Cash
Flow From Investing Activities
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(43,621 |
) |
|
|
(36,235 |
) |
Proceeds
from sale of subsidiaries
|
|
|
15,617 |
|
|
|
- |
|
Proceeds
from sale of assets
|
|
|
- |
|
|
|
7,213 |
|
Acquisitions
|
|
|
(383,241 |
) |
|
|
(211 |
) |
Return
of capital from equity affiliates
|
|
|
- |
|
|
|
900 |
|
Proceeds
from note receivable
|
|
|
1,263 |
|
|
|
- |
|
Contingent
acquisition payments
|
|
|
(768 |
) |
|
|
(1,002 |
) |
Other
|
|
|
(170 |
) |
|
|
(334 |
) |
Net
Cash Used In Investing Activities
|
|
|
(410,920 |
) |
|
|
(29,669 |
) |
Cash
Flow From Financing Activities
|
|
|
|
|
|
|
|
|
Long-term
debt borrowings
|
|
|
250,000 |
|
|
|
- |
|
Long-term
debt repayments
|
|
|
(27,073 |
) |
|
|
(81,575 |
) |
Short-term
debt (repayments) borrowings - net
|
|
|
(97,300 |
) |
|
|
16,673 |
|
Bank
overdrafts
|
|
|
- |
|
|
|
(1,979 |
) |
Proceeds
from stock options exercised
|
|
|
10,503 |
|
|
|
10,367 |
|
Excess
tax benefit on stock options exercised
|
|
|
5,547 |
|
|
|
5,509 |
|
Purchase
of Treasury Stock
|
|
|
- |
|
|
|
(246 |
) |
Payment
of cash dividends
|
|
|
(16,811 |
) |
|
|
(14,464 |
) |
Deferred
financing costs
|
|
|
(8,356 |
) |
|
|
- |
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
116,510 |
|
|
|
(65,715 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,839 |
) |
|
|
4,135 |
|
Net
Change in Cash and Cash Equivalents
|
|
|
(74,120 |
) |
|
|
68,010 |
|
Cash
and Cash Equivalents at Beginning Of Period
|
|
|
249,809 |
|
|
|
110,476 |
|
Cash
and Cash Equivalents at End Of Period
|
|
$ |
175,689 |
|
|
$ |
178,486 |
|
See Notes
to Condensed Consolidated Financial Statements.
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW-CONTINUED
(Unaudited)
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Cash
paid for:
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$ |
29,462 |
|
|
$ |
39,541 |
|
Income
taxes (net of refunds)
|
|
$ |
65,617 |
|
|
$ |
46,000 |
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment expenditures included in Accounts
Payable
|
|
$ |
1,517 |
|
|
$ |
1,233 |
|
Acquisitions
in which liabilities were assumed are as follows:
|
|
|
|
|
|
|
|
|
Fair
value of assets
|
|
$ |
391,550 |
|
|
$ |
- |
|
Purchase
price
|
|
|
(383,241 |
) |
|
|
- |
|
Liabilities
assumed
|
|
$ |
8,309 |
|
|
$ |
- |
|
During
the third quarter of 2008, 3.2 million shares of the Company’s common stock were
issued upon the conversion of $99.9 million of convertible
debentures.
See Notes
to Condensed Consolidated Financial Statements.
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Nine Months Ended September 26, 2008
(Unaudited)
|
|
Number
of Shares
|
|
|
Amounts
|
|
(In
thousands)
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Comprehensive
Income
|
|
December
31, 2007
|
|
|
69,991 |
|
|
|
(3,748 |
) |
|
$ |
69,991 |
|
|
$ |
(42,624 |
) |
|
$ |
121,902 |
|
|
$ |
891,868 |
|
|
$ |
39,128 |
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
150,945 |
|
|
|
- |
|
|
$ |
150,945 |
|
Translation
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,580 |
) |
|
|
(12,580 |
) |
Interest
rate agreements (net of taxes)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57 |
|
|
|
57 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
138,422 |
|
Cash
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16,811 |
) |
|
|
- |
|
|
|
|
|
Stock
based compensation expense and stock option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan transactions
(including tax benefit)
|
|
|
- |
|
|
|
503 |
|
|
|
- |
|
|
|
4,647 |
|
|
|
21,239 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Convertible
bond redemption
|
|
|
3,223 |
|
|
|
|
|
|
|
3,223 |
|
|
|
|
|
|
|
96,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors'
deferred compensation plan (See Note 6)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,605 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Other
stock issuances
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
|
|
109 |
|
|
|
710 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
September
26, 2008
|
|
|
73,214 |
|
|
|
(3,233 |
) |
|
$ |
73,214 |
|
|
$ |
(37,868 |
) |
|
$ |
247,118 |
|
|
$ |
1,026,002 |
|
|
$ |
26,605 |
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
CHURCH
& DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
condensed consolidated balance sheets as of September 26, 2008 and December 31,
2007, the condensed consolidated statements of income for the three months and
nine months ended September 26, 2008 and September 28, 2007, the condensed
consolidated statement of cash flow for the nine months ended September 26, 2008
and September 28, 2007 and the condensed consolidated statement of stockholders’
equity for September 26, 2008 have been prepared by the Company. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at September 26, 2008 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. These condensed consolidated financial
statements should 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, 2007. The results of operations for the periods ended
September 26, 2008 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, which enables timely processing of
consolidating results. There were no material intervening events that
occurred with respect to these subsidiaries in the one month period prior to the
period presented.
The
Company incurred research & development expenses in the third quarter of
2008 and 2007 of $12.7 million and $11.8 million, respectively. The Company
incurred research & development expenses in the first nine months of 2008
and 2007 of $37.4 million and $33.4 million, respectively. These expenses are
included in selling, general and administrative expenses.
2.
|
Recently
Adopted Accounting Pronouncements
|
Statement
of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”,
was issued in September 2006 and, except as noted below, is effective for fiscal
years beginning after November 15, 2007. SFAS No. 157 provides a single
definition of fair value to be utilized under other accounting pronouncements
that require fair value measurements, establishes a framework for measuring fair
value in Generally Accepted Accounting Principles (“GAAP”), and expands
disclosures about fair value measurements. Under Financial Accounting Standards
Board (“FASB”) Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB
Statement No. 157,” the FASB deferred for one year, the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). To increase consistency and comparability
in fair value measurements and related disclosure, SFAS No. 157 establishes a
hierarchy that prioritizes the inputs (generally, assumptions that market
participants would use in pricing an asset or liability) used to
measure fair value based on the quality and reliability of the information
provided by the inputs, as follows:
Level 1:
Quoted market prices in active markets for identical assets or
liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3:
Unobservable inputs that are not corroborated by market data.
The
following table summarizes the carrying amounts and fair values of certain
assets and liabilities:
|
|
September
26, 2008
|
|
(In
thousands)
|
|
Carrying
Amount
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
hedge contract
|
|
$ |
700 |
|
|
$ |
- |
|
|
$ |
700 |
|
|
$ |
- |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate collars
|
|
$ |
1,933 |
|
|
$ |
- |
|
|
$ |
1,933 |
|
|
$ |
- |
|
Diesel
hedge contract
|
|
$ |
1,495 |
|
|
$ |
- |
|
|
$ |
1,495 |
|
|
$ |
- |
|
|
|
$ |
3,428 |
|
|
$ |
- |
|
|
$ |
3,428 |
|
|
$ |
- |
|
The fair
value of the diesel hedge contracts is based on home heating oil future prices
for the duration of the contract.
The fair
value for the interest rate collars was derived using the forward three month
LIBOR curve for the duration of the respective collars and a credit valuation
adjustment.
3.
|
Inventories
consist of the following:
|
|
|
September
26,
|
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Raw
materials and supplies
|
|
$ |
57,105 |
|
|
$ |
53,516 |
|
Work
in process
|
|
|
9,731 |
|
|
|
9,169 |
|
Finished
goods
|
|
|
155,031 |
|
|
|
150,966 |
|
|
|
$ |
221,867 |
|
|
$ |
213,651 |
|
4.
|
Property,
Plant and Equipment consist of the
following:
|
|
|
September
26
|
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Land
|
|
$ |
26,095 |
|
|
$ |
11,343 |
|
Buildings
and improvements
|
|
|
144,610 |
|
|
|
147,114 |
|
Machinery
and equipment
|
|
|
415,355 |
|
|
|
436,104 |
|
Office
equipment and other assets
|
|
|
39,790 |
|
|
|
40,380 |
|
Software
|
|
|
31,306 |
|
|
|
33,336 |
|
Mineral
rights
|
|
|
1,428 |
|
|
|
1,490 |
|
Construction
in progress
|
|
|
34,024 |
|
|
|
15,915 |
|
|
|
|
692,608 |
|
|
|
685,682 |
|
Less
accumulated depreciation and amortization
|
|
|
342,974 |
|
|
|
334,829 |
|
Net
Property, Plant and Equipment
|
|
$ |
349,634 |
|
|
$ |
350,853 |
|
Depreciation
and amortization of property, plant and equipment amounted to $13.0 million and
$8.8 million for the three months ended September 26, 2008 and September 28,
2007, respectively. Depreciation and amortization of property, plant and
equipment amounted to $33.4 million and $27.4 million for the nine months ended
September 26, 2008 and September 28, 2007, respectively. Interest charges
capitalized in connection with construction projects were $0.2 million and $0.2
million for the three months ended September 26, 2008 and September 28, 2007,
respectively, and $0.5 million and $0.6 million for the nine months ended
September 26, 2008 and September 28, 2007, respectively. During the first
quarter the Company determined that the carrying value of certain property,
plant and equipment assets should be written down to zero in accordance with the
guidelines of SFAS No. 144. The write down resulted in a charge of
$1.5 million that was principally reflected as selling, general and
administration (“SG&A”) expense for the Consumer International
segment.
During
the second quarter, the Company announced it will be closing its North
Brunswick, New Jersey facility in 2009. As a result, the Company recorded an
accelerated depreciation charge of $1.1 million in the second quarter and $3.5
million in the third quarter (see Note 15).
5.
|
Earnings
Per Share (“EPS”)
|
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:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
|
|
|
68,400 |
|
|
|
65,913 |
|
|
|
67,106 |
|
|
|
65,762 |
|
Dilutive
effect of stock options
|
|
|
1,274 |
|
|
|
1,194 |
|
|
|
1,259 |
|
|
|
1,233 |
|
Dilutive
effect of convertible debentures(1)
|
|
|
1,597 |
|
|
|
3,234 |
|
|
|
2,680 |
|
|
|
3,230 |
|
Diluted
|
|
|
71,271 |
|
|
|
70,341 |
|
|
|
71,045 |
|
|
|
70,225 |
|
Anti-dilutive
stock options outstanding - not included in the calculation of earnings
per share
|
|
|
532 |
|
|
|
715 |
|
|
|
897 |
|
|
|
630 |
|
(1)
|
See
Note 9 for information regarding the conversion into common stock of all
but a nominal portion of the Company’s outstanding convertible debentures
in the third quarter of 2008.
|
6.
|
Stock-Based
Compensation
|
A summary
of option activity during the nine months ended September 26, 2008 is as
follows:
|
|
Options
(000)
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value ($000)
|
|
Outstanding
at January 1, 2008
|
|
|
4,231 |
|
|
$ |
30.24 |
|
|
|
|
|
|
|
Granted
|
|
|
667 |
|
|
|
55.69 |
|
|
|
|
|
|
|
Exercised
|
|
|
(503 |
) |
|
|
20.88 |
|
|
|
|
|
|
|
Cancelled
|
|
|
(42 |
) |
|
|
36.41 |
|
|
|
|
|
|
|
Outstanding
at September 26, 2008
|
|
|
4,353 |
|
|
$ |
35.16 |
|
|
|
6.4 |
|
|
$ |
113,485 |
|
Exercisable
at September 26, 2008
|
|
|
2,198 |
|
|
$ |
25.21 |
|
|
|
4.5 |
|
|
$ |
79,146 |
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Intrinsic
Value of Stock Options Exercised (in millions)
|
|
$ |
7.0 |
|
|
$ |
2.0 |
|
|
$ |
18.2 |
|
|
$ |
17.5 |
|
Stock
Compensation Expense Related To Stock Option Awards (in
millions)
|
|
$ |
2.5 |
|
|
$ |
2.3 |
|
|
$ |
8.9 |
|
|
$ |
8.3 |
|
Issued
Stock Options (in thousands)
|
|
|
2 |
|
|
|
12 |
|
|
|
667 |
|
|
|
615 |
|
Average
Fair Value of Stock Options Issued
|
|
$ |
18.75 |
|
|
$ |
14.53 |
|
|
$ |
16.59 |
|
|
$ |
16.87 |
|
Assumptions
Used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.8
|
% |
|
|
4.1
|
% |
|
|
3.7
|
% |
|
|
5.0
|
% |
Expected
life in years
|
|
|
6.8 |
|
|
|
6.5 |
|
|
|
6.6 |
|
|
|
6.3 |
|
Expected
volatility
|
|
|
22.9
|
% |
|
|
23.9
|
% |
|
|
22.5
|
% |
|
|
25.0
|
% |
Dividend
yield
|
|
|
0.6
|
% |
|
|
0.7
|
% |
|
|
0.6
|
% |
|
|
0.6
|
% |
The
average fair value is based upon the Black Scholes option pricing model. The
Company determined the options’ life based on historical exercise behavior
and determined the options’ expected volatility and dividend yield based on
the historical changes in stock price and dividend payments. The risk free
interest rate is based on the yield of an applicable term Treasury
instrument. Stock
compensation expense related to restricted stock awards was $0.1 million in the
third quarter of 2008. This expense amounted to $0.2 million for the same period
of 2007. Stock compensation expense related to restricted stock awards was $0.4
million in the nine months ending September 26, 2008. This expense amounted to
$0.7 million for the same period of 2007.
The
Company amended the Directors’ deferred compensation plan during the second
quarter of 2008 to provide that compensation deferrals credited to a director’s
account will be settled in the Company’s stock. Previously, compensation
deferrals consisted of notional investments in Company stock that settled in
cash. This change required a $6.6 million reclassification of the
value of the underlying stock from long term liabilities to equity.
Subsequent changes in the fair value of the Company’s stock are not
recognized. Subsequent deferred compensation will increase
stockholders’ equity. The stock settlement obligation is reflected in
the weighted average number of basic and diluted shares used for the EPS
calculations.
On July
7, 2008, the Company purchased substantially all of the assets and certain
liabilities of Del Pharmaceuticals, Inc. (the “Orajel Acquisition”) for cash
consideration of $383.2 million including fees. Products acquired from Del
Pharmaceuticals, Inc. include the Orajel brand of oral analgesics and various
other over-the-counter brands. The Company paid for the acquisition
with additional bank debt of $250.0 million and available cash. The
following table summarizes the preliminary purchase price allocation relating to
this acquisition:
(In
thousands)
|
|
|
|
Current
assets
|
|
$ |
24,619 |
|
Property,
plant and equipment
|
|
|
550 |
|
Tradenames
and other intangibles
|
|
|
184,000 |
|
Goodwill
|
|
|
182,381 |
|
Total
assets
|
|
|
391,550 |
|
Current
liabilities
|
|
|
(8,309 |
) |
Net
assets
|
|
$ |
383,241 |
|
8.
|
Goodwill
and Other Intangible Assets
|
The
following table provides information related to the carrying value of all
intangible assets excluding goodwill:
|
|
September
26, 2008
|
|
|
December
31, 2007
|
|
(In
thousands)
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$ |
118,990 |
|
|
$ |
(34,966 |
) |
|
$ |
84,024 |
|
|
$ |
107,066 |
|
|
$ |
(31,154 |
) |
|
$ |
75,912 |
|
Customer
Relationships
|
|
|
241,640 |
|
|
|
(20,754 |
) |
|
|
220,886 |
|
|
|
131,366 |
|
|
|
(13,758 |
) |
|
|
117,608 |
|
Patents/Formulas
|
|
|
27,220 |
|
|
|
(14,187 |
) |
|
|
13,033 |
|
|
|
27,220 |
|
|
|
(11,816 |
) |
|
|
15,404 |
|
Non
Compete Agreement
|
|
|
1,143 |
|
|
|
(779 |
) |
|
|
364 |
|
|
|
1,143 |
|
|
|
(695 |
) |
|
|
448 |
|
Total
|
|
$ |
388,993 |
|
|
$ |
(70,686 |
) |
|
$ |
318,307 |
|
|
$ |
266,795 |
|
|
$ |
(57,423 |
) |
|
$ |
209,372 |
|
Unamortizable
intangible assets - carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$ |
508,510 |
|
|
|
|
|
|
|
|
|
|
$ |
455,796 |
|
|
|
|
|
|
|
|
|
Intangible
amortization expense amounted to $6.1 million for the third quarter of 2008 and
$4.5 million for the same period of 2007. Intangible amortization
expense amounted to $15.7 million for the first nine months of 2008 and $13.5
million for the same period of 2007. The Company estimates that intangible
amortization expense will be approximately $24.2 million in 2009, $23.6 million
in 2010, $23.1 million in 2011, $22.6 million in 2012, and $21.7 million in
2013.
Unamortized
tradenames and customer relationships increased in the third quarter of 2008 due
to the Orajel Acquisition. The acquired tradenames and customer
relationships reflect their preliminary allocable purchase price as of July 7,
2008.
During
the first quarter of 2008, the Company recorded tradename impairment charges of
$3.4 million related to Consumer International brands. These charges
are included in selling, general and administrative expenses in this segment and
were the result of reduced forecasted sales and profitability. The
amount of the impairment charges was determined by comparing the fair value of
the asset to its carrying amount. In addition, the carrying amount of
amortizable tradenames declined during the third quarter due to the sale of the
Company’s subsidiary in Spain.
Effective
January 1, 2008, approximately $19.5 million of tradenames previously considered
indefinite lived assets were recharacterized as finite lived due to increased
competition in their respective categories and are now being amortized over
lives ranging from 5 to 15 years. The lives were determined based upon the
estimated future cash flows of these brands.
The
changes in the carrying amount of goodwill for the nine months ended September
26, 2008 are as follows:
(In
thousands)
|
|
Consumer
Domestic
|
|
|
Consumer
International
|
|
|
SPD
|
|
|
Total
|
|
Balance
December 31, 2007
|
|
$ |
633,030 |
|
|
$ |
33,224 |
|
|
$ |
22,588 |
|
|
$ |
688,842 |
|
Subsidiary
Divestiture (see Note 14)
|
|
|
- |
|
|
|
- |
|
|
|
(971 |
) |
|
|
(971 |
) |
Orajel
Acquisition (see Note 7)(1)
|
|
|
182,381 |
|
|
|
- |
|
|
|
- |
|
|
|
182,381 |
|
Additional
Unilever contingent consideration (see Note 12e)
|
|
|
734 |
|
|
|
- |
|
|
|
- |
|
|
|
734 |
|
Balance
September 26, 2008
|
|
$ |
816,145 |
|
|
$ |
33,224 |
|
|
$ |
21,617 |
|
|
$ |
870,986 |
|
(1)
|
Reflects
preliminary purchase price valuation. (See Note 7 to the condensed
consolidated financial statements included in this report for additional
information regarding the Orajel
Acquisition.)
|
9.
|
Short-term
Borrowings and Long-Term Debt
|
Short-term
borrowings and long-term debt consist of the following:
|
|
September
26,
|
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Short-term
borrowings
|
|
|
|
|
|
|
Securitization
of accounts receivable
|
|
$ |
15,000 |
|
|
$ |
115,000 |
|
International
debt
|
|
|
2,700 |
|
|
|
- |
|
Total
short-term borrowings
|
|
$ |
17,700 |
|
|
$ |
115,000 |
|
Long-term
debt
|
|
|
|
|
|
|
|
|
Term
Loan facility
|
|
$ |
613,996 |
|
|
$ |
391,069 |
|
Convertible
debentures
|
|
|
- |
|
|
|
99,948 |
|
Senior
subordinated notes (6%) due December 22, 2012
|
|
|
250,000 |
|
|
|
250,000 |
|
Total
long-term debt
|
|
|
863,996 |
|
|
|
741,017 |
|
Less:
current maturities
|
|
|
62,042 |
|
|
|
33,706 |
|
Net
long-term debt
|
|
$ |
801,954 |
|
|
$ |
707,311 |
|
The
long-term debt principal payments required to be made are as
follows:
(In
thousands)
|
|
|
|
Due
by Sept 30, 2009
|
|
$ |
62,042 |
|
Due
by Sept 30, 2010
|
|
|
143,911 |
|
Due
by Sept 30, 2011
|
|
|
145,827 |
|
Due
by Sept 30, 2012
|
|
|
262,216 |
|
Due
by Sept 30, 2013
|
|
|
250,000 |
|
|
|
$ |
863,996 |
|
During
the first quarter of 2008, the Company repaid $100.0 million of its accounts
receivable securitization facility. In April 2008, the accounts receivable
securitization facility of $115.0 million was renewed with similar terms to the
facility previously in place and with a new maturity date of April 2009. In the
first nine months of 2008, the Company repaid approximately $27.1 million of its
Term Loan.
On
July 7, 2008, the Company purchased substantially all of the assets and
certain liabilities of Del Laboratories, Inc. (the “Orajel Acquisition”) for
$383.2 million. In connection with the acquisition, the Company
increased its bank debt by $250.0 million. The balance of the acquisition
cost ($133.2 million including fees) was funded with available cash. The terms
and conditions of the new debt are consistent with those of the Company’s
existing bank debt.
The
Company called for redemption on August 15, 2008 (the “Redemption Date”) all of
its outstanding 5.25% Senior Convertible Debentures due 2033 (the “Debentures”)
at 101.50% of the principal amount of the Debentures plus accrued and unpaid
interest to the Redemption Date. In lieu of surrendering the
Debentures for redemption for cash, holders could elect to convert their
Debentures into shares of the Company’s common stock at the conversion rate of
32.26 shares of the Company’s common stock per $1,000 principal amount of
Debentures (equivalent to a conversion price of $31.00 per share). Holders of
$99.9 million principal amount of the Debentures that were outstanding when the
Debentures were called for redemption converted their Debentures into 3,222,293
shares of Company common stock, and on the Redemption Date, the Company redeemed
the remaining nominal principal amount of Debentures for cash.
The
following table provides information relating to the Company’s comprehensive
income for the three and nine months ended
September
26, 2008 and September 28, 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Income
|
|
$ |
48,989 |
|
|
$ |
51,716 |
|
|
$ |
150,945 |
|
|
$ |
137,348 |
|
Other
Comprehensive Income, Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange Translation Adjustments (Net of Divestiture)
|
|
|
(17,711 |
) |
|
|
5,048 |
|
|
|
(12,580 |
) |
|
|
14,094 |
|
Interest
Rate Hedge Agreements
|
|
|
170 |
|
|
|
(313 |
) |
|
|
57 |
|
|
|
(231 |
) |
Comprehensive
Income
|
|
$ |
31,448 |
|
|
$ |
56,451 |
|
|
$ |
138,422 |
|
|
$ |
151,211 |
|
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 and nine months ended September
26, 2008 and September 28, 2007.
|
|
Pension
Costs
|
|
|
Pension
Costs
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
570 |
|
|
$ |
713 |
|
|
$ |
2,003 |
|
|
$ |
2,061 |
|
Interest
cost
|
|
|
1,694 |
|
|
|
1,863 |
|
|
|
5,539 |
|
|
|
5,429 |
|
Expected
return on plan assets
|
|
|
(1,922 |
) |
|
|
(2,040 |
) |
|
|
(6,249 |
) |
|
|
(5,917 |
) |
Amortization
of prior service cost
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
11 |
|
Recognized
actuarial loss
|
|
|
(7 |
) |
|
|
52 |
|
|
|
(25 |
) |
|
|
155 |
|
Net
periodic benefit cost
|
|
$ |
339 |
|
|
$ |
592 |
|
|
$ |
1,279 |
|
|
$ |
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Costs
|
|
|
Postretirement
Costs
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
184 |
|
|
$ |
65 |
|
|
$ |
554 |
|
|
$ |
444 |
|
Interest
cost
|
|
|
365 |
|
|
|
245 |
|
|
|
1,094 |
|
|
|
966 |
|
Amortization
of prior service cost
|
|
|
11 |
|
|
|
10 |
|
|
|
34 |
|
|
|
29 |
|
Recognized
actuarial loss
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
16 |
|
Net
periodic benefit cost
|
|
$ |
560 |
|
|
$ |
325 |
|
|
$ |
1,682 |
|
|
$ |
1,455 |
|
The
Company made cash contributions of approximately $4.6 million to its pension
plans during the first nine months of 2008. The Company estimates it will be
required to make total cash contributions to its pension plans during the
remainder of the year of approximately $0.9 million.
12.
|
Commitments,
contingencies and guarantees
|
a.
|
The
Company has a partnership with a supplier of raw materials which mines and
processes sodium mineral deposits. This agreement
terminates upon two years’ written notice by either
company. The Company has an annual commitment to purchase
240,000 tons at the prevailing market price and purchases the majority of
its sodium raw material requirements from the partnership. The
Company is not engaged in any other material transactions with the
partnership or the Company’s
partner.
|
b.
|
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 the
Company’s condoms and similar condoms sold by its 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. In 2005,
the FDA issued non-binding draft guidance concerning the labeling of
condoms in general and those with N-9 in particular. The Company filed a
response recommending alternative labeling to the FDA and has engaged in
further discussions with the FDA since that time. While awaiting further
FDA guidance, the Company implemented an interim label statement change
cautioning against rectal use and more-than-once-a-day vaginal use of
condoms with N-9 and launched a public information campaign to communicate
these messages to the affected communities. The Company believes that its
present labeling for condoms with N-9 is compliant with the overall
objectives of the FDA’s draft guidance and that condoms with N-9 will
remain a viable contraceptive choice for those couples who wish to use
them. The Company cannot predict the nature of the labeling
that ultimately will be required by the FDA. If the FDA or state
governments promulgate rules that prohibit or restrict the use of N-9 in
condoms (such as new labeling requirements), the Company could incur costs
from obsolete products, packaging or raw materials, and sales of condoms
could decline, which, in turn, could decrease the Company’s operating
income.
|
c.
|
As
of September 26, 2008, the Company has commitments to acquire
approximately $106.9 million of raw material, packaging supplies and
services from its vendors at market
prices.
|
d.
|
The
Company has $4.5 million of outstanding letters of credit drawn on several
banks which guarantee payment for such things as insurance claims and one
year of rent on a warehouse in the event of the Company’s
insolvency.
|
e.
|
In
connection with the Company’s October 2003 acquisition of Unilever’s oral
care brands in the United States and Canada in October 2003, the Company
is required to make additional performance-based payments of a minimum of
$5.0 million and a maximum of $12.0 million over the eight year period
following the acquisition. The Company made cash payments of
$0.8 million, and accrued a payment of $0.2 million in the first nine
months of 2008. The payment and accrual were accounted for as
additional purchase price. The Company has paid approximately
$8.8 million, exclusive of the $0.2 million accrual, in additional
performance-based payments since the
acquisition.
|
f.
|
The
Company filed suit against Abbott Laboratories, Inc (“Abbott”) in April
2005 claiming infringement of certain patents resulting from Abbott’s
manufacture and sale of its Fact Plus pregnancy diagnostic test
kits. Following a trial in February 2008, the jury found that
the Company’s patents were valid and willfully infringed by Abbott during
the period from April 1999 through September 2003 and awarded damages to
the Company in the amount of $14.6 million. On June 23, 2008, the District
Court issued an opinion finding that Abbott’s conduct had been willful and
doubled the damages awarded to the Company to $29.2 million before
prejudgment interest. There remains a post-trial motion pending with the
District Court with respect to the damages awarded at trial. The Company
is vigorously contesting the motion. In June 2007, Abbott filed suit
against the Company claiming infringement of certain patents that are
licensed to Abbott, also in relation to pregnancy diagnostic test
kits. The Company intends to continue its vigorous defense of
this action.
|
g.
|
The
Company, in the ordinary course of its business, is the subject of, or a
party to, various pending or threatened legal actions. The
Company believes that any ultimate liability arising from these actions
will not have a material adverse effect on its financial
position.
|
13.
|
Related
Party Transactions
|
For the
nine months ended September 26, 2008 and September 28, 2007, the Company
invoiced Armand Products Company (“Armand”), which is 50% owned by the Company,
$1.2 and $1.2 million, respectively, for administration and management oversight
services (which were recorded as a reduction of selling, general and
administrative expenses). Sales of Armand products to the Company over the same
periods were $9.8 and $6.6 million, respectively. As of September 26, 2008 and
September 28, 2007, the Company had outstanding accounts receivable from Armand
of $0.0 and $1.1 million, respectively. Also, the Company had outstanding
accounts payable to Armand of $0.1 and $1.1 million as of September 26, 2008 and
September 28, 2007, respectively.
For the
nine months ended September 26, 2008 and September 28, 2007, the Company
invoiced The ArmaKleen Company, (“ArmaKleen”), which is 50% owned by the
Company, $2.0 and $2.2 million, respectively, for administration and management
oversight services (which were recorded as a reduction of selling, general and
administrative expenses). Sales of inventory to ArmaKleen over the same periods
were $3.9 and $3.9 million, respectively. As of September 26, 2008 and September
28, 2007, the Company had outstanding accounts receivable from ArmaKleen of $0.7
and $0.8 million, respectively.
In
February 2008, the Company sold its wholly-owned British subsidiary, Brotherton
Specialty Products Ltd. (“Brotherton”) for a total of $11.2 million, net of
fees. The sale resulted in a pretax gain of $3.0 million (after a
working capital adjustment), which was included as a reduction of selling,
general and administrative (“SG&A”) expenses in the Specialty Products
Division.
During
the third quarter of 2008, the Company sold its Consumer International
subsidiary in Spain for a total of $6.0 million, after a working capital
adjustment not yet received. The transaction resulted in a pre tax
charge of $3.5 million, which has been recorded in SG&A expense for the
Consumer International segment. As a result of the sale, a $4.0 million tax
benefit was also recorded as a reduction to tax expense.
On June
5, 2008, the Company announced plans to construct a new integrated laundry
detergent manufacturing plant and distribution center in York County,
Pennsylvania. Construction began in September 2008, and the facility is
scheduled to be operational by the end of 2009. In conjunction with the opening
of the new facility, the Company will close its existing laundry detergent
manufacturing plant and distribution facility in North Brunswick, New
Jersey.
The
Company's existing North Brunswick complex is comprised of five separate
buildings which has resulted in significant inefficiencies and does not enable
expansion to address expected future growth. The Company plans to provide
severance and transition benefits to approximately 300 affected employees at the
North Brunswick complex, as well as consideration for employment opportunities
at other Company operations.
The
Company expects to invest approximately $150.0 million in capital expenditures
to build the facility and incur the following cash and non–cash costs relating
to the closing of the North Brunswick complex, which are included in Cost of
Sales for the Consumer Domestic segment:
Cash
Costs
Severance
- $4.8 million
Exit and
disposal costs - $6.0 million
Non Cash
Costs
Accelerated
Depreciation - $21.0 million
The
severance costs are being recognized ratably over the employees’ respective
service requirement. As of the end of the third quarter of 2008, the Company
accrued $1.1 million for severance costs. The exit and disposal
costs, which include asset disposition and lease related costs, will not be
incurred until late in 2009 and early 2010. As a result, no expense has yet been
recognized for these costs. The Company anticipates it will incur approximately
$3.0 million in exit and disposal costs in 2009 and the balance of the exit and
disposal costs in 2010.
The
accelerated depreciation charge is being recognized ratably over the remaining
life of the North Brunswick complex. The Company recorded a charge of
$1.1 million and $3.5 million related to the accelerated depreciation in the
second and third quarters of 2008, respectively.
The
Company operates three reportable segments: Consumer Domestic, Consumer
International and Specialty Products Division (“SPD”). These segments
are determined based on differences in the nature of products and organizational
and ownership structures. The Company also has a Corporate
segment.
Segment
revenues are derived from the sale of the following products:
Segment
|
Products
|
Consumer
Domestic
|
Household
and personal care products
|
Consumer
International
|
Primarily
personal care products
|
SPD
|
Specialty
chemical products
|
The
Company had 50% ownership interests in Armand Products Company (“Armand”) and
The ArmaKleen Company (“ArmaKleen”) as of September 26, 2008. The
Company’s 50% ownership interest in Esseco U.K. LLP (“Esseco”) was divested in
the first quarter of 2008 as part of the sale of its wholly-owned British
subsidiary, Brotherton Specialty Products Ltd. The equity in earnings of Armand
and ArmaKleen for the nine months ended September 26, 2008 and Esseco for the
two months ended February 29, 2008, prior to its sale, is included in the
Corporate segment.
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 set forth below.
Segment
sales and income before taxes and minority interest for the three and nine month
periods ended September 26, 2008 and September 28, 2007, and identifiable assets
for September 26, 2008 and December 31, 2007 were as follows:
(In
thousands)
|
|
Consumer Domestic
(3)
|
|
|
Consumer International
(3)
|
|
|
SPD
|
|
|
Corporate
|
|
|
Total
|
|
Net
Sales (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
$ |
444,750 |
|
|
$ |
112,566 |
|
|
$ |
73,356 |
|
|
$ |
- |
|
|
$ |
630,672 |
|
Third
Quarter 2007
|
|
$ |
405,369 |
|
|
$ |
107,992 |
|
|
$ |
67,077 |
|
|
$ |
- |
|
|
$ |
580,438 |
|
First
Nine Months of 2008
|
|
$ |
1,239,086 |
|
|
$ |
325,069 |
|
|
$ |
213,343 |
|
|
$ |
- |
|
|
$ |
1,777,498 |
|
First
Nine Months of 2007
|
|
$ |
1,158,540 |
|
|
$ |
296,525 |
|
|
$ |
186,180 |
|
|
$ |
- |
|
|
$ |
1,641,245 |
|
Income
before Minority Interest and Income Taxes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
$ |
59,109 |
|
|
$ |
7,713 |
|
|
$ |
5,375 |
|
|
$ |
2,443 |
|
|
$ |
74,640 |
|
Third
Quarter 2007
|
|
$ |
57,755 |
|
|
$ |
15,404 |
|
|
$ |
4,263 |
|
|
$ |
1,797 |
|
|
$ |
79,219 |
|
First
Nine Months of 2008
|
|
$ |
183,035 |
|
|
$ |
26,455 |
|
|
$ |
21,033 |
|
|
$ |
6,975 |
|
|
$ |
237,498 |
|
First
Nine Months of 2007
|
|
$ |
158,250 |
|
|
$ |
37,799 |
|
|
$ |
13,911 |
|
|
$ |
5,817 |
|
|
$ |
215,777 |
|
Identifiable
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
26, 2008
|
|
$ |
2,229,725 |
|
|
$ |
353,248 |
|
|
$ |
170,549 |
|
|
$ |
89,154 |
|
|
$ |
2,842,676 |
|
December
31, 2007
|
|
$ |
1,877,924 |
|
|
$ |
384,674 |
|
|
$ |
185,768 |
|
|
$ |
84,124 |
|
|
$ |
2,532,490 |
|
(1)
|
Intersegment
sales from Consumer International to Consumer Domestic were $1.0 million
and $0.9 million for the third quarter ended September 26, 2008 and
September 28, 2007, respectively. Intersegment sales from Consumer
International to Consumer Domestic were $4.5 million and $3.8 million for
the nine months ended September 26, 2008 and September 26, 2007,
respectively.
|
(2)
|
In
determining Income Before Minority Interest and Income Taxes, interest
expense, investment earnings, and other income (expense) were allocated to
the segments based upon each segment’s relative operating profit. The
Corporate segment income consists of equity in earnings of
affiliates.
|
(3)
|
As
of January 1, 2008, the Company modified its organizational structure,
resulting in a change in classification of certain Consumer Domestic
export sales to Consumer International. Therefore, 2007 results
have been restated to reflect a reclassification in sales of $2.4 million
and $7.8 million for the three and nine months ended September 28, 2007,
respectively, from the Consumer Domestic segment to the Consumer
International segment. In addition, Income Before Minority
Interest and Income Taxes of $0.2 million and $1.1 million for the three
and nine months ended September 26, 2007, respectively, has been
reclassified from the Consumer Domestic segment to the Consumer
International segment.
|
The
following table sets forth product line revenues from external customers for the
three and nine months ended September 26, 2008 and September 28,
2007.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Household
Products
|
|
$ |
278,585 |
|
|
$ |
260,244 |
|
|
$ |
787,933 |
|
|
$ |
741,426 |
|
Personal
Care Products
|
|
|
166,165 |
|
|
|
145,125 |
|
|
|
451,153 |
|
|
|
417,114 |
|
Total
Consumer Domestic
|
|
|
444,750 |
|
|
|
405,369 |
|
|
|
1,239,086 |
|
|
|
1,158,540 |
|
Total
Consumer International
|
|
|
112,566 |
|
|
|
107,992 |
|
|
|
325,069 |
|
|
|
296,525 |
|
Total
SPD
|
|
|
73,356 |
|
|
|
67,077 |
|
|
|
213,343 |
|
|
|
186,180 |
|
Total
Consolidated Net Sales
|
|
$ |
630,672 |
|
|
$ |
580,438 |
|
|
$ |
1,777,498 |
|
|
$ |
1,641,245 |
|
Household
Products include deodorizing and cleaning products and laundry products.
Personal Care Products include condoms, pregnancy kits, oral care and skin care
products.
Supplemental Financial
Information of Guarantor and Non-Guarantor Operations
Effective
in the third quarter of 2008, the Company merged the remaining guarantor
subsidiary with respect to its 6% senior subordinated notes into the
Company. As a result, the Company no longer is providing
consolidating information responsive to the disclosure requirement of Rule 3-10
of Regulation S-X.
Results of
Operations
Consolidated
Results
Net
Sales
Net Sales
for the quarter ended September 26, 2008 were $630.7 million, $50.2 million or
approximately 9% above the third quarter of 2007. Of that increase,
approximately 4% is due to sales of products acquired from the Orajel
Acquisition, partially offset by the loss of sales due to the divestiture in the
first quarter of 2008 of Brotherton Specialty Products, Ltd. (“Brotherton”), a
small United Kingdom Specialty Products subsidiary. In addition,
approximately 1% of the increase in net sales is a result of foreign exchange
rate changes, and the balance is primarily due to higher prices, sales mix, and,
to a lesser extent, higher unit volumes.
Net Sales
for the nine months ended September 26, 2008 were $1,777.5 million, $136.3
million or approximately 8% above the comparable nine month period of 2007. Of
that increase, approximately 1% is due to sales of products acquired from the
Orajel Acquisition, partially offset by the loss of sales due to the divestiture
of Brotherton in the first quarter of 2008, approximately 1% is a result of
foreign exchange rate changes, approximately 4% is due to higher prices and
sales mix and 2% is due to higher unit volume.
Operating
Costs
The
Company’s gross profit was $251.1 million for the quarter ended September 26,
2008, a $21.7 million increase as compared to the same period in
2007. Gross margin increased 30 basis points to 39.8% in the third
quarter as compared to 39.5% in the same quarter last year. The increase
in gross margin includes price increases, cost reduction programs, liquid
laundry detergent concentration, the higher margins associated with the sales of
products relating to the Orajel Acquisition, and the completion of the
manufacturing synergies relating to the businesses acquired from Orange Glo
International, Inc. (“OGI”) in 2006. These factors were partially
offset by higher commodity costs and hedging losses due to declining diesel
prices. The gross profit increase was partially offset by $4.3
million related to the closing of an existing manufacturing facility (see Note
15 to the condensed consolidated financial statements included in this report).
For the nine month period ended September 26, 2008, gross profit increased $71.7
million to $717.7 million. Gross margin increased 100 basis points to 40.4% in
the nine months of 2008 as compared to 39.4% in the same period last year. The
reasons for the increase in the gross margin percentage are consistent with
those in the third quarter.
Marketing
expenses were $79.7 million in the third quarter, an increase of $10.0 million
as compared to the same period in 2007. The increased marketing spending
included expenses for products acquired in the Orajel
Acquisition. Expenses for the Company’s existing products were higher
in support of ARM & HAMMER ESSENTIALS Cleaners, ARM & HAMMER liquid
laundry detergent, OXICLEAN powder and ARM & HAMMER SUPER SCOOP cat
litter. Marketing
expense as a percentage of net sales increased 60 basis points to 12.6% in the
third quarter as compared to 12.0% in last year’s third
quarter. Marketing expenses for the first nine months of 2008 was
$212.4 million, an increase of $30.7 million as compared to the same period in
2007. The reason for the increase is consistent with that of the third quarter,
as well as increased expenses in support of TROJAN condoms.
Selling,
general and administrative expenses (“SG&A”) were $85.8 million in the third
quarter of 2008, an increase of $14.7 million as compared to the same period in
2007. The primary reasons for the increase in SG&A were operating
expenses related to the Orajel Acquisition, foreign exchange rate changes, costs
associated with selling the Company’s small subsidiary in Spain, higher legal
costs primarily relating to litigation against Abbott Laboratories (see
paragraph f in Note 12 of the notes to condensed consolidated financial
statements included in this report), higher research and development costs in
support of new products, and higher stock option expenses. In addition, the third
quarter of 2007 included a $3.3 million gain on the sale of certain property
owned by the
Company’s Canadian subsidiary. SG&A for the first nine months of
2008 was $245.1 million, an increase of $28.1 million over the same period in
2007 due to the items noted above for the third quarter as well as a $5.6
million asset impairment charge recorded at one of the Company’s foreign
subsidiaries in the first quarter of 2008, of which $5.4 million is included in
SG&A, additional legal costs due to the ongoing lawsuit with Abbott
Laboratories and higher selling expenses in support of higher sales. These
increases were partially offset by the $3.0 million gain recorded in the first
quarter of 2008 for the divestiture of Brotherton.
Other
expense was approximately $2.9 million in the third quarter of 2008 as compared
to other income of $1.3 million in the same period of 2007. Other expense was
approximately $0.6 million in the first nine months of 2008 as compared to other
income of $1.4 million in the same period of 2007. The expense in the third
quarter of 2008 is primarily due to foreign exchange losses, which offsets
foreign exchange gains recorded during the first half of 2008, as a result of a
strengthening US dollar.
Interest
expense in the three and nine month periods ended September 26, 2008 decreased
$2.9 million and $9.2 million respectively, compared to the same periods in
2007. The decline was due to lower interest rates and lower average debt
outstanding compared to the prior year. In July 2008, the Company incurred
additional indebtedness as a result of the Orajel Acquisition; however, this
indebtedness was offset by reductions in indebtedness resulting from the
conversion of all but a nominal amount of the Company’s convertible debt into
common stock in the third quarter of 2008, the reduction of most of the
outstanding amounts under of the Company’s accounts receivable securitization
facility and mandatory repayments under the Company’s term loan.
Investment
income in the three month period ended September 26, 2008 decreased $0.9 million
due to lower interest rates and lower average cash for investment as compared to
the same period in 2007, reflecting cash used to fund the Orajel
Acquisition. Investment income in the nine month period ended
September 26, 2008 increased $0.5 million compared to the same period in 2007.
This change was due to higher average available cash for investment during the
period partially offset by lower interest rates.
Taxation
The
effective tax rate in the third quarter of 2008 was 34.4% compared to 34.7% in
the prior year’s third quarter. This year’s tax rate reflected a tax
benefit of $4.0 million related to the divestiture of the subsidiary in
Spain. Last year’s tax rate reflected a $1.3 million benefit due to
the reduction of tax liabilities. In October 2008, the research
tax credit was extended retroactive to January 1, 2008, and the Company will
recognize the benefit of the credit in the fourth quarter of 2008. The
Company does not believe the amount of unrecognized tax benefits will
significantly change within twelve months of the reporting date.
Segment
Results
The
Company operates three reportable segments: Consumer Domestic, Consumer
International and Specialty Products Division (“SPD”). These segments
are determined based on differences in the nature of products and organizational
and ownership structures. The Company also has a Corporate
segment.
Segment
|
Products
|
Consumer
Domestic
|
Household
and personal care products
|
Consumer
International
|
Primarily
personal care products
|
SPD
|
Specialty
chemical products
|
The
Company had 50% ownership interests in Armand Products Company (“Armand”) and
The ArmaKleen Company (“ArmaKleen”) as of September 26, 2008. The
Company’s 50% ownership interest in Esseco U.K. LLP (“Esseco”) was
divested in the first quarter of 2008 as part of the sale of
Brotherton. The equity in earnings of Armand and ArmaKleen for the nine months
ended September 26, 2008 and Esseco for the two months ended February 29, 2008,
prior to its sale, is included in the Corporate segment.
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 set forth below.
Segment
sales and income before taxes and minority interest for the three and nine month
periods ended September 26, 2008 and September 28, 2007, and identifiable assets
for September 26, 2008 and December 31, 2007 were as follows:
(In
thousands)
|
|
Consumer Domestic
(3)
|
|
|
Consumer International
(3)
|
|
|
SPD
|
|
|
Corporate
|
|
|
Total
|
|
Net
Sales (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
$ |
444,750 |
|
|
$ |
112,566 |
|
|
$ |
73,356 |
|
|
$ |
- |
|
|
$ |
630,672 |
|
Third
Quarter 2007
|
|
$ |
405,369 |
|
|
$ |
107,992 |
|
|
$ |
67,077 |
|
|
$ |
- |
|
|
$ |
580,438 |
|
First
Nine Months of 2008
|
|
$ |
1,239,086 |
|
|
$ |
325,069 |
|
|
$ |
213,343 |
|
|
$ |
- |
|
|
$ |
1,777,498 |
|
First
Nine Months of 2007
|
|
$ |
1,158,540 |
|
|
$ |
296,525 |
|
|
$ |
186,180 |
|
|
$ |
- |
|
|
$ |
1,641,245 |
|
Income
before Minority Interest and Income Taxes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
$ |
59,109 |
|
|
$ |
7,713 |
|
|
$ |
5,375 |
|
|
$ |
2,443 |
|
|
$ |
74,640 |
|
Third
Quarter 2007
|
|
$ |
57,755 |
|
|
$ |
15,404 |
|
|
$ |
4,263 |
|
|
$ |
1,797 |
|
|
$ |
79,219 |
|
First
Nine Months of 2008
|
|
$ |
183,035 |
|
|
$ |
26,455 |
|
|
$ |
21,033 |
|
|
$ |
6,975 |
|
|
$ |
237,498 |
|
First
Nine Months of 2007
|
|
$ |
158,250 |
|
|
$ |
37,799 |
|
|
$ |
13,911 |
|
|
$ |
5,817 |
|
|
$ |
215,777 |
|
Identifiable
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
26, 2008
|
|
$ |
2,229,725 |
|
|
$ |
353,248 |
|
|
$ |
170,549 |
|
|
$ |
89,154 |
|
|
$ |
2,842,676 |
|
December
31, 2007
|
|
$ |
1,877,924 |
|
|
$ |
384,674 |
|
|
$ |
185,768 |
|
|
$ |
84,124 |
|
|
$ |
2,532,490 |
|
(1)
|
Intersegment
sales from Consumer International to Consumer Domestic were $1.0 million
and $ 0.9 million for the third quarter ended September 26, 2008 and
September 28, 2007, respectively. Intersegment sales from Consumer
International to Consumer Domestic were $4.5 million and $3.8 million for
the nine months ended September 26, 2008 and September 26, 2007,
respectively.
|
(2)
|
In
determining Income Before Minority Interest and Income Taxes, interest
expense, investment earnings, and other income (expense) were allocated to
the segments based upon each segment’s relative operating profit. The
Corporate segment income consists of equity in earnings of
affiliates.
|
(3)
|
As
of January 1, 2008, the Company modified its organizational structure,
resulting in a change in classification of certain Consumer Domestic
export sales to Consumer International. Therefore, 2007 results
have been restated to reflect a reclassification in sales of $2.4 million
and $7.8 million for the three and nine months ended September 28, 2007,
respectively, from the Consumer Domestic segment to the Consumer
International segment. In addition, Income Before Minority
Interest and Income Taxes of $0.2 million and $1.1 million for the three
and nine months ended September 26, 2007, respectively, has been
reclassified from the Consumer Domestic segment to the Consumer
International segment.
|
Product
line revenues for external customers for the three and nine months ended
September 26, 2008, and September 28, 2007, were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Household
Products
|
|
$ |
278,585 |
|
|
$ |
260,244 |
|
|
$ |
787,933 |
|
|
$ |
741,426 |
|
Personal
Care Products
|
|
|
166,165 |
|
|
|
145,125 |
|
|
|
451,153 |
|
|
|
417,114 |
|
Total
Consumer Domestic
|
|
|
444,750 |
|
|
|
405,369 |
|
|
|
1,239,086 |
|
|
|
1,158,540 |
|
Total
Consumer International
|
|
|
112,566 |
|
|
|
107,992 |
|
|
|
325,069 |
|
|
|
296,525 |
|
Total
SPD
|
|
|
73,356 |
|
|
|
67,077 |
|
|
|
213,343 |
|
|
|
186,180 |
|
Total
Consolidated Net Sales
|
|
$ |
630,672 |
|
|
$ |
580,438 |
|
|
$ |
1,777,498 |
|
|
$ |
1,641,245 |
|
Consumer
Domestic net sales in the third quarter of 2008 were $444.8 million, an increase
of $39.4 million or a 9.7% increase as compared to 2007 third quarter sales of
$405.4 million. Of the increase,
approximately 5% relates to sales of products acquired in the Orajel
Acquisition, with the remainder split evenly between higher unit volumes and a
combination of higher prices and improved sales mix. At a product line level,
sales of XTRA liquid laundry detergent, ARM & HAMMER liquid laundry
detergent, OXICLEAN, ARM & HAMMER powder laundry detergent and ARM &
HAMMER SUPER SCOOP cat litter were all higher than in the third quarter of 2007.
Consumer Domestic net sales also benefited from February 2008 price increases on
condoms and baking soda and the May 2008 price increases on ARM & HAMMER
powder laundry detergent, NICE’N FLUFFY liquid fabric softener and the launch of
ARM & HAMMER Essentials household cleaners. These increases were partially
offset by lower sales of KABOOM household cleaner and certain toothpaste brands,
and lower antiperspirant sales.
Net Sales
for the nine months ended September 26, 2008 were $1,239.1 million, an increase
of $80.5 or approximately 7.0% compared to net sales of $1,158.5 million during
the first nine months of 2007. The increase is due to sales of products acquired
in the Orajel Acquisition, higher unit volumes, higher prices (resulting, in
part, from lower promotion costs) and a favorable sales mix. At the
product line level, sales of ARM & HAMMER and XTRA liquid laundry detergent
were higher than in the first nine months of 2007. Other brands that contributed
to higher sales were ARM & HAMMER SUPER SCOOP cat litter, OXICLEAN, ARM
& HAMMER powder laundry detergent, FIRST RESPONSE pregnancy kits, and ARM
& HAMMER dental care. These increases were partially offset by
lower sales of other toothpaste brands, and lower antiperspirant
sales.
Consumer
Domestic Income before Minority Interest and Income Taxes for the third quarter
of 2008 was $59.1 million, a $1.4 million increase as compared to the third
quarter of 2007. The impact of higher net sales, synergies related to
the manufacturing integration of the OGI business, the shift to concentrated
liquid laundry detergent, the Orajel Acquisition and lower allocated interest
expense, was partially offset by accelerated depreciation and other expenses
associated with the Company’s planned 2009 shutdown of its North Brunswick New
Jersey facility (see Note 15 to the condensed consolidated financial statements
included in this report), higher commodity costs, a loss reflecting a reduction
in the market value of the Company’s diesel fuel hedge agreements due to
declining diesel fuel prices, and the marketing and SG&A costs addressed
above.
Consumer
Domestic Income before Minority Interest and Income Taxes for the nine month
period ended September 26, 2008 was $183.0 million, a $24.8 million increase as
compared to the first nine months of 2007. Profits from higher net sales,
synergies related to the manufacturing integration of the OGI business, the
shift to concentrated liquid laundry detergent, the Orajel Acquisition and lower
allocated interest expense were partially offset by accelerated depreciation and
other expenses associated with the Company’s planned 2009 shutdown of its North
Brunswick New Jersey facility (see Note 15 to the condensed consolidated
financial statements included in this report), and higher commodity costs,
marketing and SG&A noted earlier.
Consumer
International
Consumer
International net sales were $112.6 million in the third quarter of 2008, an
increase of $4.6 million or approximately 4.2% as compared to the third quarter
of 2007. However, this increase was entirely due to the 5.0% impact of foreign
currency exchange rate charges. In addition, higher selling prices
were offset by lower unit volumes. At a country level, higher sales in England,
Australia and higher U.S. exports were offset by lower sales in
France.
Consumer
International net sales in the first nine months of 2008 were $325.1 million, an
increase of $28.5 million or approximately 10% as compared to the same period in
2007. Of the increase, approximately 8% is associated with favorable foreign
exchange rate changes. The balance of the increase primarily was due to the
higher unit volumes. At a country level, higher sales in Australia, England,
Mexico, China and higher U.S. exports were partially offset by lower sales in
France and Canada.
Consumer
International Income before Minority Interest and Income Taxes was $7.7 million
in the third quarter of 2008, a decrease of $7.7 million as compared to the
third quarter of 2007. The decrease was due to the pre tax loss on the sale of a
subsidiary in Spain in the third quarter of 2008 and higher marketing expenses,
partially offset by a reduction in allocated interest expense. In
addition, third quarter 2007 Income before Minority Interest and Income Taxes
reflected a gain of $3.3 million on the sale of certain property owned by the
Company’s Canadian subsidiary. For the first nine months of 2008,
Income before Minority Interest and Income Taxes was $26.5 million, a $11.3
million decrease as compared to the first nine months of 2007. Offsetting the
favorable net sales performance were asset impairment charges of $5.6 million,
severance costs in one of the Company’s European subsidiaries, increased
tradename amortization expense as a result of the recharacterization of certain
indefinite lived assets to finite lived assets (see Note 8 to the condensed
consolidated financial statements included in this report) and the $3.5 million
pre tax loss on the sale of a foreign subsidiary in 2008.
Specialty
Products (SPD)
Specialty
Products net sales were $73.4 million in the third quarter of 2008, an increase
of $6.3 million or 9.4% as compared to the third quarter of 2007. This increase
is principally due to higher prices. The animal nutrition sales increase also
reflects a pricing surcharge on certain products first applied during the third
quarter of 2007 to recover extraordinary cost increases for a key raw
material.
Specialty
Products net sales were $213.3 million for the first nine months of 2008, an
increase of $27.2 million, or 14.6% as compared to the same period of 2007. This
increase is principally due to higher prices. The animal nutrition sales
increase also reflects a pricing surcharge on certain products first applied
during the third quarter of 2007 to recover extraordinary cost increases for a
key raw material.
Specialty
Products Income before Minority Interest and Income Taxes was $5.4 million in
the third quarter of 2008, an increase of $1.1 million as compared to the third
quarter of 2007, and was $21.0 million for the first nine months of 2008, an
increase of $7.1 million as compared to the same nine month period of 2007. The
increase is principally the result of profits on higher net sales, partially
offset by higher raw material costs for certain animal nutrition and specialty
chemical products and, for the nine month period, higher SG&A.
Liquidity and Capital
Resources
Net
Debt
The
Company had outstanding total debt of $881.7 million and cash of $175.7 million
(of which approximately $49.5 million resides in foreign subsidiaries) at
September 26, 2008. Total debt less cash (“net debt”) was $706.0
million at September 26, 2008. This compares to total debt of $856.0 million and
cash of $249.8 million, resulting in net debt of $606.2 million at December 31,
2007.
On
July 7, 2008, the Company purchased substantially all of the assets and
certain liabilities of Del Laboratories, Inc. (the “Orajel Acquisition”) for
$383.2 million. In connection with the acquisition, the Company
increased its bank debt by $250.0 million. The balance of the acquisition
cost ($133.2 million including fees) was funded with available cash. The terms
and conditions of the new debt are consistent with those of the Company’s
existing bank debt.
The
Company entered into two zero cost collar cash flow hedge agreements covering
$100.0 million of debt, 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 bank debt. The hedge agreements have terms of 5
and 3 years, respectively, each with a cap of 6.50% and a floor of 3.57%. The
Company recorded a charge to expense of $0.3 million in the third quarter of
2008 and $0.8 million in the first nine months of 2008 as a result of these
agreements. All other changes in the hedging options’ fair value are recorded in
Accumulated Other Comprehensive Income on the balance sheet.
The
Company currently has $175.7 million in cash and $115.0 million available
through an accounts receivable securitization facility, of which $100.0 million
is available. The facility renews annually in April 2009 and the
Company is confident that this facility will be available to be drawn-on beyond
that date. The Company also has a $100.0 million revolving credit facility, of
which approximately $95.0 million is undrawn. The Company anticipates that its
cash from operations, along with its current borrowing capacity, will be
sufficient to meet its capital expenditure program costs (including the cash
requirements related to construction of its new laundry detergent and warehouse
facility in York County, Pennsylvania, discussed below), pay its dividend at
current rates and meet its mandatory debt repayment schedule over the next
twelve months.
Sources
and Uses of Cash
|
|
Nine
Months Ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
Cash Flow Analysis (In
millions)
|
|
2008
|
|
|
2007
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
222.1 |
|
|
$ |
159.3 |
|
Net
Cash Used in Investing Activities
|
|
$ |
(410.9 |
) |
|
$ |
(29.7 |
) |
Net
Cash Provided by (Used in) Financing Activities
|
|
$ |
116.5 |
|
|
$ |
(65.7 |
) |
Net Cash
Provided by Operating Activities – The Company’s net cash provided by operating
activities in the first nine months of 2008 increased $62.9 million to $222.1
million as compared to the same period in 2007. The increase was primarily due
to working capital improvements, higher net income, and higher non-cash expenses
such as asset impairments and write-offs partially offset by the gain recorded
on the sale of Brotherton (see Note 14) and a lower benefit from deferred income
taxes.
For the
nine months ending September 26, 2008, the components of working capital that
significantly affected operating cash flow are as follows:
|
Accounts
receivable increased $12.2 million due to increases at certain foreign
subsidiaries as a result of seasonality of certain products and business
growth.
|
|
Inventories
increased $7.6 million primarily to support higher anticipated
sales.
|
|
Prepaid
expenses and other current assets increased due to payments made to
vendors to set prices for certain raw materials through the end of
2008.
|
|
Accounts
payable and other accrued expenses increased $16.6 million primarily due
to the timing of payments and increased marketing spending
accruals.
|
|
Taxes
payable increased $8.4 million due to higher tax expense associated with
higher earnings.
|
Net Cash
Used in Investing Activities – Net cash used in investing activities during the
first nine months of 2008 was $410.9 million, reflecting $383.2 million for the
Orajel Acquisition, $43.6 million of property, plant and equipment expenditures,
partially offset by $11.2 million received from the sale of Brotherton, $4.4
million received from the sale of a foreign subsidiary in Spain and $1.3 million
received in connection with a note receivable.
On June
5, 2008, the Company announced plans to construct a new laundry detergent
manufacturing plant and distribution center in York County, Pennsylvania and to
close its existing laundry detergent manufacturing and distribution facility in
North Brunswick, New Jersey. The Company anticipates that
capital expenditures in connection with construction of the new facility, which
is expected to be operational by the end of 2009, will be approximately
$150 million, and cash expenditures relating to the closing of the
North Brunswick facilities will be approximately $11 million. The
Company anticipates it will spend between $45 to $50 million in 2008 and $100
million in 2009 to build the plant and distribution center and estimates it will
spend approximately $3 million in 2009 and the balance primarily in 2010
associated with closing the facility. The costs will be funded using
the Company’s existing credit facilities and available cash. See Note 15 to
the condensed consolidated financial statements included in this report for
additional information.
Net Cash
Provided by Financing Activities – Net cash provided by financing activities
during the first nine months of 2008 was $116.5 million. This reflects
borrowings of $250.0 million for the Orajel Acquisition offset by a $100.0
million repayment under the Company’s accounts receivable securitization
facility and mandatory payments on the Term Loan of $27.1 million. Payments of
cash dividends of $16.8 million and deferred financing payments of $8.4 million
were offset partially by proceeds of and tax benefits from stock option
exercises of $16.1 million.
Adjusted
EBITDA is a required component of the financial covenants contained in the
Company's primary credit facility. Management believes that 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 (total debt to
Adjusted EBITDA) and an interest coverage ratio (Adjusted EBITDA to total
interest expense), 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
specified period of time. The leverage ratio for the 12 months ended
September 26, 2008 was 2.02, which is below the maximum of 3.5 permitted under
the credit facility, and the interest coverage ratio for the twelve months ended
September 26, 2008 was 8.85, which is above the minimum of 3.0 permitted under
the credit facility. The Company’s obligations under the credit
facility are secured by the assets of the Company.
Recent Accounting
Pronouncements
Statement
of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”,
was issued in September 2006 and, except as noted below, is effective for fiscal
years beginning after November 15, 2007. SFAS No. 157 provides a single
definition of fair value to be utilized under other accounting pronouncements
that require fair value measurements, establishes a framework for measuring fair
value in Generally Accepted Accounting Principles (“GAAP”), and expands
disclosures about fair value measurements. The statement generally is to be
applied prospectively, so that it does not require any new fair value
measurements. Under Financial Accounting Standards Board (“FASB”) Staff Position
(“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” the FASB
deferred for one year, the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). See Note 2 to the condensed consolidated financial statements
included in this report for additional information.
SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51,” was issued in December 2007 and is effective for the
Company for fiscal years beginning on or after December 15,
2008. SFAS No.160 establishes accounting and reporting standards for
the noncontrolling interest (sometimes called minority interest) in a subsidiary
and for the deconsolidation of a subsidiary. The Company is currently
assessing what impact, if any, the adoption of this statement will have on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” to
replace SFAS No. 141, “Business Combinations.” SFAS No. 141(R)
requires use of the acquisition method of accounting, defines the acquirer,
establishes the acquisition date and broadens the scope to all transactions and
other events in which one entity obtains control over one or more other
businesses. This statement is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008 with earlier adoption
prohibited. While the Company does not expect the adoption of SFAS No. 141(R) to
have a material impact on its consolidated financial statements for transactions
completed prior to December 31, 2008, the impact of the accounting change could
be material for business combinations consummated following
adoption.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” The statement is
effective as of January 1, 2009. This statement requires enhanced
disclosures about (i) how and why the Company uses derivative instruments,
(ii) how the Company accounts for derivative instruments and related hedged
items under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” and (iii) how derivative instruments
and related hedged items affect the Company’s financial results. The Company is
currently evaluating the impact of this statement on its consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies and categorizes
the order of priority of the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements.
SFAS No. 162 is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles”. The
implementation of this standard will not have a material impact on our
consolidated financial statements.
In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)," which clarifies the accounting for convertible debt instruments
that may be settled in cash (including partial cash settlement) upon conversion.
FSP APB 14-1 requires issuers to account separately for the liability
and equity components of certain convertible debt instruments in a manner that
reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when
interest cost is recognized. FSP APB 14-1 requires bifurcation of a
component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in our consolidated statement of operations. FSP APB 14-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years. FSP APB 14-1 requires retrospective application to the terms of
instruments as they existed for all periods presented. The Company is currently
evaluating the impact of this statement on its consolidated financial
statements.
In June
2008, the FASB ratified Emerging Issues Task Force Issue No. (“EITF”) 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a
two step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of EITF 07-5 on its consolidated financial
statements.
In June
2008, the FASB ratified EITF 08-3, “Accounting for Lessees for Maintenance
Deposits Under Lease Arrangements.” EITF 08-3 provides guidance for
accounting for nonrefundable maintenance deposits. It also provides revenue
recognition accounting guidance for the lessor. EITF 08-3 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact of EITF 08-3 on its consolidated financial
statements.
Interest
Rate Risk
The
Company has short and long-term floating rate debt. If the floating rate were to
change by 100 basis points from the September 26, 2008 level, annual interest
expense associated with the floating rate debt, as adjusted to
reflect the effect of the Company’s interest rate collars, would be affected by
approximately $6.0 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 September 26, 2008 would affect currency gain or loss for the nine month
period by approximately $4.0 million.
Diesel
Fuel Hedge
In
January 2008, the Company entered into agreements with a financial institution
to hedge approximately half of its notional diesel fuel requirements for 2008,
and in July 2008, the Company entered into an additional hedge for approximately
20% of its 2009 requirements. These agreements were based on the
diesel fuel consumed by independent freight carriers delivering the Company’s
products. These carriers charge the Company a basic rate per mile that is
subject to a mileage surcharge for diesel fuel price increases that they
incur. The hedge agreement is designed to mitigate the volatility of
diesel fuel pricing and the resulting per mile surcharges payable by the Company
by setting a fixed price per gallon for the year. Because the diesel hedge
instruments do not qualify for hedge accounting under SFAS 133 (“Accounting for
Derivative Instruments and Hedging Activities”), the Company has marked the
instruments to market at the end of the third quarter and will do so throughout
the life of the agreements. The change in the market value of the hedge
agreements resulted in a $3.2 million loss for the three months ending September
26, 2008 and a $1.7 million gain for the nine months ended September 26, 2008,
which are reflected in cost of sales.
a.
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Evaluation
of Disclosure Controls and
Procedures
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The
Company’s management, with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company’s disclosure control and procedures at 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 the
disclosure.
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b.
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Change
in Internal Control over Financial
Reporting
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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.
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Cautionary Note on
Forward-Looking Statements
This
report contains forward-looking statements, including, among others, statements
relating to short- and long-term financial objectives, sales and earnings
growth, margin improvement, price increases, marketing spending, the Orajel
Acquisition, the shift to concentrated liquid laundry detergent, the Company’s
diesel fuel hedge program, increases in research and development and product
development spending, effective tax rate, unrecognized tax benefits, the
proposed closing of the Company’s facilities in North Brunswick, New Jersey, the
investment in a new facility in York County, Pennsylvania, available credit
facilities and the redemption of the Company’s $100 million outstanding
principal amount of Convertible Debentures. 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. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include a decline in market growth and consumer demand (including the effect of
political and economic events on consumer demand); unanticipated increases in
raw material and energy prices; adverse developments affecting the financial
condition of major customers; competition; consumer reaction to new product
introductions and features; and the outcome of contingencies, including
litigation, pending regulatory proceedings and environmental
remediation.
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 we make on related
subjects in our filings with the U.S. Securities and Exchange
Commission.
PART
II - OTHER INFORMATION
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.
In addition to the other information set forth and noted
below in this report, you should carefully consider the factors discussed
in Item 1A, “Risk Factors” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007, which could
materially affect our business, financial condition or future
results.
We
face risks related to the current credit crisis.
The
Company currently generates significant operating cash flows, which combined
with access to the credit markets provides us with significant discretionary
funding capacity. However, current uncertainty in the global economic
conditions resulting from the recent disruption in credit markets pose a risk to
the overall economy that could impact consumer and customer demand for our
products, as well as our ability to manage normal commercial relationships with
our customers, suppliers and creditors. If the current situation deteriorates
significantly, our business could be negatively impacted, including such areas
as reduced demand for our products from a slow-down in the general economy, or
supplier or customer disruptions resulting from tighter credit
markets.
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(3.1)
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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.
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|
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(3.2)
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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 November 5,
2007.
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•
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(10.1)
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Asset
Purchase Agreement, dated as of March 28, 2008, by and between Church
& Dwight Co., Inc. and Del Pharmaceuticals, Inc. |
|
|
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•
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(11)
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Computation
of earnings per share.
|
|
|
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•
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(31.1)
|
Certification
of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a)
under the Securities Exchange Act.
|
|
|
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•
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(31.2)
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Certification
of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a)
under the Securities Exchange Act.
|
|
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•
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(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.
|
|
|
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•
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(32.2)
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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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•
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Indicates
documents filed herewith.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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|
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CHURCH & DWIGHT CO.,
INC.
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|
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(REGISTRANT)
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|
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DATE:
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November 4,
2008
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/s/
Matthew T. Farrell
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MATTHEW
T. FARRELL
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CHIEF
FINANCIAL OFFICER
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|
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DATE:
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November 4,
2008
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/s/
Steven J. Katz
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STEVEN
J. KATZ
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VICE
PRESIDENT AND CONTROLLER
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(PRINCIPAL
ACCOUNTING OFFICER)
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EXHIBIT
INDEX
|
(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 November 5,
2007.
|
|
|
|
•
|
(10.1) |
Asset
Purchase Agreement, dated as of March 28, 2008, by and between Church
& Dwight Co., Inc. and Del Pharmaceuticals, Inc. |
|
|
|
•
|
(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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Indicates
documents filed herewith.
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