PRESTIGE CONSUMER HEALTHCARE INC.
10-Ks and 10-Qs
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U.
S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
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[
X ]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended December 31,
2009
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____ to
_____
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Commission
File Number: 001-32433
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PRESTIGE BRANDS HOLDINGS,
INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
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20-1297589
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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90
North Broadway
Irvington,
New York 10533
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(Address
of Principal Executive Offices, including zip code)
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(914)
524-6810
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(Registrant’s
telephone number, including area
code)
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Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
| Large accelerated filer | o | Accelerated filer | x | 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
February 3, 2010, there were 50,029,890 shares of common stock
outstanding.
Prestige
Brands Holdings, Inc.
Form
10-Q
Index
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Consolidated
Financial Statements
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Consolidated
Statements of Operations – three and nine month periods
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2 | |
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ended
December 31, 2009 and 2008 (unaudited)
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Consolidated
Balance Sheets – December 31, 2009 and March 31, 2009
(unaudited)
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3
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Consolidated
Statements of Cash Flows – nine month periods ended
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4
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December
31, 2009 and 2008 (unaudited)
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Notes
to Consolidated Financial Statements
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5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition
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29
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| and Results of Operation | ||
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Item
3.
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Quantitative
and Qualitative Disclosure About Market Risk
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48
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Item
4.
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Controls
and Procedures
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48
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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48
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Item
6.
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Exhibits
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49
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Signatures
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50
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| Trademarks and Trade Names | ||
| Trademarks and trade names used in this Quarterly Report on Form 10-Q are the property of Prestige Brands Holdings, Inc. or its subsidiaries, as the case may be. We have italicized our trademarks or trade names when they appear in this Quarterly Report on Form 10-Q. | ||
-1-
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FINANCIAL
INFORMATION
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Item
1.
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CONSOLIDATED
FINANCIAL STATEMENTS
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Prestige
Brands Holdings, Inc.
(Unaudited)
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Three
Months Ended December 31
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Nine
Months Ended December 31
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|||||||||||||||
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(In
thousands, except share data)
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2009
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2008
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2009
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2008
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Revenues
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Net
sales
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$ | 74,997 | $ | 77,345 | $ | 229,130 | $ | 232,582 | ||||||||
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Other
revenues
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451 | 621 | 1,511 | 1,921 | ||||||||||||
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Total
revenues
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75,448 | 77,966 | 230,641 | 234,503 | ||||||||||||
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Cost
of Sales
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Cost
of sales
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35,641 | 36,480 | 108,670 | 109,789 | ||||||||||||
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Gross
profit
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39,807 | 41,486 | 121,971 | 124,714 | ||||||||||||
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Operating
Expenses
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Advertising
and promotion
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6,099 | 11,349 | 24,645 | 32,129 | ||||||||||||
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General
and administrative
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7,411 | 8,311 | 26,088 | 25,647 | ||||||||||||
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Depreciation
and amortization
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2,596 | 2,311 | 7,781 | 6,926 | ||||||||||||
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Total
operating expenses
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16,106 | 21,971 | 58,514 | 64,702 | ||||||||||||
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Operating
income
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23,701 | 19,515 | 63,457 | 60,012 | ||||||||||||
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Other
(income) expense
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Interest
income
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- | (14 | ) | - | (143 | ) | ||||||||||
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Interest
expense
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5,558 | 7,065 | 16,853 | 22,656 | ||||||||||||
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Total
other expense
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5,558 | 7,051 | 16,853 | 22,513 | ||||||||||||
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Income
from continuing operations before income taxes
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18,143 | 12,464 | 46,604 | 37,499 | ||||||||||||
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Provision
for income taxes
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7,807 | 4,724 | 18,594 | 14,212 | ||||||||||||
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Income
from continuing operations
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10,336 | 7,740 | 28,010 | 23,287 | ||||||||||||
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Discontinued
Operations
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||||||||||||||||
| Income from discontinued operations, net of income tax | 87 | 278 | 661 | 1,034 | ||||||||||||
| Gain on sale of discontinued operations, net of income tax | 157 | - | 157 | - | ||||||||||||
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Net
income
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$ | 10,580 | $ | 8,018 | $ | 28,828 | $ | 24,321 | ||||||||
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Basic
earnings per share:
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Income
from continuing operations
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$ | 0.21 | $ | 0.15 | $ | 0.56 | $ | 0.47 | ||||||||
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Net
income
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$ | 0.21 | $ | 0.16 | $ | 0.58 | $ | 0.49 | ||||||||
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Diluted
earnings per share:
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Income
from continuing operations
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$ | 0.21 | $ | 0.15 | $ | 0.56 | $ | 0.47 | ||||||||
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Net
income
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$ | 0.21 | $ | 0.16 | $ | 0.58 | $ | 0.49 | ||||||||
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Weighted
average shares outstanding:
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Basic
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50,030 | 49,960 | 50,008 | 49,921 | ||||||||||||
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Diluted
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50,074 | 50,040 | 50,078 | 50,038 | ||||||||||||
See
accompanying notes.
-2-
Prestige
Brands Holdings, Inc.
(Unaudited)
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(In
thousands)
Assets
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December
31, 2009
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March
31,
2009
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Current
assets
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Cash
and cash equivalents
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$ | 34,262 | $ | 35,181 | ||||
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Accounts
receivable
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30,618 | 36,025 | ||||||
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Inventories
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34,092 | 25,939 | ||||||
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Deferred
income tax assets
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5,045 | 4,022 | ||||||
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Prepaid
expenses and other current assets
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2,022 | 1,358 | ||||||
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Current
assets of discontinued operations
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- | 1,038 | ||||||
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Total
current assets
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106,039 | 103,563 | ||||||
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Property
and equipment
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1,297 | 1,367 | ||||||
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Goodwill
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114,240 | 114,240 | ||||||
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Intangible
assets
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561,828 | 569,137 | ||||||
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Other
long-term assets
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3,170 | 4,602 | ||||||
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Long-term
assets of discontinued operations
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- | 8,472 | ||||||
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Total
Assets
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$ | 786,574 | $ | 801,381 | ||||
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Liabilities
and Stockholders’ Equity
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Current
liabilities
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Accounts
payable
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$ | 16,904 | $ | 15,898 | ||||
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Accrued
interest payable
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2,446 | 5,371 | ||||||
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Other
accrued liabilities
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13,258 | 9,407 | ||||||
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Current
portion of long-term debt
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3,550 | 3,550 | ||||||
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Total
current liabilities
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36,158 | 34,226 | ||||||
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Long-term
debt
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315,787 | 374,787 | ||||||
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Deferred
income tax liabilities
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109,776 | 97,983 | ||||||
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Total
Liabilities
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461,721 | 506,996 | ||||||
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Commitments
and Contingencies – Note 16
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Stockholders’
Equity
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Preferred
stock - $0.01 par value
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Authorized - 5,000
shares
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Issued and outstanding -
None
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Common
stock - $0.01 par value
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Authorized - 250,000
shares
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Issued - 50,154 shares at December
31, 2009 and 50,060 shares at March 31, 2009
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502 | 501 | ||||||
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Additional
paid-in capital
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383,600 | 382,803 | ||||||
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Treasury
stock, at cost – 124 shares at December 31, 2009
and March 31, 2009
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(63 | ) | (63 | ) | ||||
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Accumulated
other comprehensive loss
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(492 | ) | (1,334 | ) | ||||
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Accumulated
deficit
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(58,694 | ) | (87,522 | ) | ||||
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Total
Stockholders’ Equity
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324,853 | 294,385 | ||||||
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Total
Liabilities and Stockholders’ Equity
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$ | 786,574 | $ | 801,381 | ||||
See
accompanying notes.
-3-
Prestige
Brands Holdings, Inc.
(Unaudited)
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Nine
Months Ended December 31
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(In
thousands)
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2009
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2008
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Operating
Activities
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Net
income
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$ | 28,828 | $ | 24,321 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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8,679 | 8,273 | ||||||
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Gain
on sale of discontinued operations
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(253 | ) | - | |||||
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Deferred
income taxes
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10,254 | 7,393 | ||||||
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Amortization
of deferred financing costs
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1,432 | 1,696 | ||||||
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Stock-based
compensation
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1,658 | 2,248 | ||||||
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Changes
in operating assets and liabilities
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Accounts
receivable
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6,407 | 9,588 | ||||||
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Inventories
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(8,281 | ) | 945 | |||||
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Prepaid
expenses and other current assets
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(664 | ) | (527 | ) | ||||
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Accounts
payable
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1,006 | (2,450 | ) | |||||
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Accrued
liabilities
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1,424 | 1,860 | ||||||
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Net
cash provided by operating activities
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50,490 | 53,347 | ||||||
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Investing
Activities
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Purchases
of equipment
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(402 | ) | (397 | ) | ||||
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Proceeds
from sale of discontinued operations
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7,993 | - | ||||||
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Business
acquisition purchase price adjustments
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- | (4,191 | ) | |||||
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Net
cash provided by (used for) investing activities
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7,591 | (4,588 | ) | |||||
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Financing
Activities
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Repayment
of long-term debt
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(59,000 | ) | (26,887 | ) | ||||
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Purchase
of common stock for treasury
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- | (16 | ) | |||||
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Net
cash used for financing activities
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(59,000 | ) | (26,903 | ) | ||||
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Increase
(Decrease) in cash
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(919 | ) | 21,856 | |||||
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Cash
- beginning of period
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35,181 | 6,078 | ||||||
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Cash
- end of period
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$ | 34,262 | $ | 27,934 | ||||
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Interest
paid
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$ | 18,345 | $ | 24,276 | ||||
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Income
taxes paid
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$ | 9,820 | $ | 7,251 | ||||
See
accompanying notes.
-4-
Prestige
Brands Holdings, Inc.
Notes
to Consolidated Financial Statements
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1.
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Business
and Basis of Presentation
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Nature
of Business
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Prestige
Brands Holdings, Inc. (referred to herein as the “Company” which reference
shall, unless the context requires otherwise, be deemed to refer to Prestige
Brands Holdings, Inc. and all of its direct or indirect wholly-owned
subsidiaries on a consolidated basis) is engaged in the marketing, sales and
distribution of over-the-counter healthcare, personal care and household
cleaning brands to mass merchandisers, drug stores, supermarkets and club stores
primarily in the United States, Canada and certain other international
markets. Prestige Brands Holdings, Inc. is a holding company with no
assets or operations and is also the parent guarantor of the senior credit
facility and the senior subordinated notes more fully described in Note 9 to the
consolidated financial statements.
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Basis
of Presentation
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The
unaudited consolidated financial statements presented herein have been prepared
in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) for interim financial reporting and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. All significant intercompany transactions and
balances have been eliminated. In the opinion of management, the
financial statements include all adjustments, consisting of normal recurring
adjustments that are considered necessary for a fair presentation of the
Company’s consolidated financial position, results of operations and cash flows
for the interim periods. Operating results for the nine month period
ended December 31, 2009 are not necessarily indicative of results that may be
expected for the fiscal year ending March 31, 2010. This financial
information should be read in conjunction with the Company’s financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2009.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Although these estimates are
based on the Company’s knowledge of current events and the Company’s
expectations, actual results could differ from those estimates. As
discussed below, the Company’s most significant estimates include those made in
connection with the valuation of goodwill and intangible assets, sales returns
and allowances, trade promotional allowances and inventory
obsolescence.
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Cash
and Cash Equivalents
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The
Company considers all short-term deposits and investments with original
maturities of three months or less to be cash
equivalents. Substantially all of the Company’s cash is held by a
large regional bank with headquarters in California. The Company does
not believe that, as a result of this concentration, it is subject to any
unusual financial risk beyond the normal risk associated with commercial banking
relationships.
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Accounts
Receivable
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The
Company extends non-interest bearing trade credit to its customers in the
ordinary course of business. The Company maintains an allowance for
doubtful accounts receivable based upon historical collection experience and
expected collectability of the accounts receivable. In an effort to
reduce credit risk, the Company (i) has established credit limits for all of its
customer relationships, (ii) performs ongoing credit evaluations of customers’
financial condition, (iii) monitors the payment history and aging of customers’
receivables, and (iv) monitors open orders against an individual customer’s
outstanding receivable balance.
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Inventories
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Inventories
are stated at the lower of cost or fair value, with cost determined by using the
first-in, first-out method. The Company provides an allowance for
slow moving and obsolete inventory, whereby it reduces
-5-
inventories
for the diminution of value resulting from product obsolescence, damage or other
issues affecting marketability, equal to the difference between the cost of the
inventory and its estimated market value. Factors utilized in the
determination of estimated market value include (i) current sales data and
historical return rates, (ii) estimates of future demand, (iii) competitive
pricing pressures, (iv) new product introductions, (v) product expiration dates,
and (vi) component and packaging obsolescence.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated using the straight-line
method based on the following estimated useful lives:
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Years
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Machinery
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5
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Computer
equipment
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3
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Furniture
and fixtures
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7
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Leasehold
improvements are amortized over the lesser of the term of the lease or 5
years.
Expenditures
for maintenance and repairs are charged to expense as incurred. When
an asset is sold or otherwise disposed of, the cost and associated accumulated
depreciation are removed from the accounts and the resulting gain or loss is
recognized in the consolidated statement of operations.
Property
and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. An impairment loss is recognized if the carrying amount
of the asset exceeds its fair value.
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Goodwill
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The
excess of the purchase price over the fair market value of assets acquired and
liabilities assumed in business acquisitions is classified as
goodwill. The Company does not amortize goodwill, but performs
impairment tests of the carrying value at least annually in the fourth fiscal
quarter. The Company tests goodwill for impairment at the reporting
unit “brand” level which is one level below the operating segment
level.
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Intangible
Assets
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Intangible
assets, which are composed primarily of trademarks, are stated at cost less
accumulated amortization. For intangible assets with finite lives,
amortization is computed on the straight-line method over estimated useful lives
ranging from 3 to 30 years.
Indefinite-lived
intangible assets are tested for impairment at least annually in the fourth
fiscal quarter; however, at each reporting period an evaluation is made to
determine whether events and circumstances continue to support an indefinite
useful life. Intangible assets with finite lives are reviewed for
impairment whenever events or changes in circumstances indicate that their
carrying amounts exceed their fair values and may not be
recoverable. An impairment loss is recognized if the carrying amount
of the asset exceeds its fair value.
Deferred
Financing Costs
The
Company has incurred debt origination costs in connection with the issuance of
long-term debt. These costs are capitalized as deferred financing
costs and amortized using the straight-line method, which approximates the
effective interest method, over the term of the related debt.
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Revenue
Recognition
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Revenues
are recognized when the following criteria are met: (i) persuasive evidence of
an arrangement exists; (ii) the selling price is fixed or determinable; (iii)
the product has been shipped and the customer takes ownership and assumes the
risk of loss; and (iv) collection of the resulting receivable is reasonably
assured. The Company has determined that these criteria are met and
the transfer of the risk of loss generally occurs when product is received by
the customer and, accordingly, recognizes revenue at that
time. Provision is made for estimated discounts related to customer
payment terms and estimated product returns at the time of sale based on the
Company’s historical experience.
As is customary in the
consumer products industry,
t
he Company
participates
in the
promotional programs of its customers to enhance the sale of its
products.
The cost of these promotional programs varies based
on the actual
-6-
number of
units sold during a finite period of time
.
The
Company estimates the cost of such promotional programs at their inception based
on historical experience and current market conditions and reduces sales by such
estimates
.
These promotional programs
consist of direct to consumer incentives such as
coupons and temporary
price reductions, as well as incentives to the Company’s customers, such as
slotting fees and cooperative advertising. Estimates of the costs of
these promotional programs reflect the Company’s arrangements with its
customers, and are based on (i) historical sales experience, (ii) the current
offering, (iii) forecasted data, (iv) current market conditions, and (v)
communication with customer purchasing/marketing personnel. At the
completion of the promotional program, the estimated amounts are adjusted to
actual results.
Due to
the nature of the consumer products industry, the Company is required to
estimate future product returns. Accordingly, the Company records an
estimate of product returns concurrent with recording sales which is made after
analyzing (i) historical return rates, (ii) current economic trends, (iii)
changes in customer demand, (iv) product acceptance, (v) seasonality of the
Company’s product offerings, and (vi) the impact of changes in product
formulation, packaging and advertising.
|
Cost
of Sales
|
Cost of
sales includes product costs, warehousing costs, inbound and outbound shipping
costs, and handling and storage costs. Shipping, warehousing and
handling costs were $6.0 million and $16.0 million for the three and nine month
periods ended December 31, 2009, respectively. During the three and
nine month periods ended December 31, 2008, such costs were $5.9 million and
$17.6 million, respectively.
|
Advertising
and Promotion Costs
|
Advertising
and promotion costs are expensed as incurred. Slotting fees
associated with products are recognized as a reduction of
sales. Under slotting arrangements, the retailers allow the Company’s
products to be placed on the stores’ shelves in exchange for such
fees. Direct reimbursements of advertising costs are reflected as a
reduction of advertising costs in the periods in which the reimbursement
criteria are achieved.
|
Stock-based
Compensation
|
The Company recognizes
employee stock-based compensation by
measuring the cost of services to be
rendered based on the grant-date fair value of the equity
award. Compensation expense is to be recognized over the period an
employee is required to provide service in exchange for the award, generally
referred to as the requisite service period.
|
Income
Taxes
|
Deferred
tax assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
The Taxes
Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) prescribes a recognition threshold and measurement
attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. As a result,
the Company has applied a more-likely-than-not recognition threshold for all tax
uncertainties. The guidance only allows the recognition of those tax
benefits that have a greater than 50% likelihood of being sustained upon
examination by the various taxing authorities.
The
Company is subject to taxation in the United States and various state and
foreign jurisdictions. The Company remains subject to examination by
tax authorities for years after 2004.
The
Company classifies penalties and interest related to unrecognized tax benefits
as income tax expense in the Statements of Operations.
|
Derivative
Instruments
|
Companies
are required to recognize derivative instruments as either assets or liabilities
in the consolidated Balance Sheets at fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, further, on
the type of hedging
-7-
relationship. For
those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a
net investment in a foreign operation.
The
Company has designated its derivative financial instruments as cash flow hedges
because they hedge exposure to variability in expected future cash flows that
are attributable to interest rate risk. For these hedges, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income (loss) and reclassified into
earnings in the same line item (principally interest expense) associated with
the forecasted transaction in the same period or periods during which the hedged
transaction affects earnings. Any ineffective portion of the gain or
loss on the derivative instruments is recorded in results of operations
immediately. Cash flows from these instruments are classified as
operating activities.
Earnings
Per Share
Basic
earnings per share is calculated based on income available to common
stockholders and the weighted-average number of shares outstanding during the
reporting period. Diluted earnings per share is calculated based on
income available to common stockholders and the weighted-average number of
common and potential common shares outstanding during the reporting
period. Potential common shares, composed of the incremental common
shares issuable upon the exercise of stock options, stock appreciation rights
and unvested restricted shares, are included in the earnings per share
calculation to the extent that they are dilutive.
|
Reclassifications
|
Certain
prior period financial statement amounts have been reclassified to conform to
the current period presentation.
|
Recently
Issued Accounting Standards
|
In
January 2010, the FASB issued authoritative guidance requiring new disclosures
and clarifying some existing disclosure requirements about fair value
measurement. Under the new guidance, a reporting entity should (a)
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers,
and (b) present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs. This guidance is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company does
not expect this guidance to have a material impact on its consolidated financial
statements.
In
August 2009, the FASB issued authoritative guidance to provide
clarification on measuring liabilities at fair value when a quoted price in an
active market is not available. In these circumstances, a valuation
technique should be applied that uses either the quote of the liability when
traded as an asset, the quoted prices for similar liabilities or similar
liabilities when traded as assets, or another valuation technique consistent
with existing fair value measurement guidance, such as an income approach or a
market approach. The new guidance also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. This guidance
became effective beginning with the third quarter of the Company’s 2010 fiscal
year; however, the adoption of the new guidance did not have a material impact
on the Company’s financial position, results from operations or cash
flows.
In
June 2009, the FASB issued authoritative guidance to eliminate the
exception to consolidate a qualifying special-purpose entity, change the
approach to determining the primary beneficiary of a variable interest entity
and require companies to more frequently re-assess whether they must consolidate
variable interest entities. Under the new guidance, the primary
beneficiary of a variable interest entity is identified qualitatively as the
enterprise that has both (a) the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance, and (b) the obligation to absorb losses of the entity that
could potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. This guidance becomes effective for the
Company’s fiscal 2011 year-end and interim reporting periods thereafter.
The Company does not expect this guidance to have a
-8-
material
impact on its consolidated financial statements.
In June
2009, the FASB established the FASB ASC as the source of authoritative
accounting principles recognized by the FASB to be applied in the preparation of
financial statements in conformity with generally accepted accounting
principles. The new guidance explicitly recognizes rules and
interpretive releases of the SEC under federal securities laws as authoritative
GAAP for SEC registrants. The new guidance became effective for our
financial statements issued for the three and six month periods ending on
September 30, 2009; however, the adoption of the new guidance in the second
quarter of the Company’s 2010 fiscal year did not have a material impact on the
Company’s financial position, results from operations or cash
flows.
In May
2009, guidance was issued under the topic Subsequent Events related to the
accounting for, and disclosure of, events that occur after the balance sheet
date, but before the financial statements are issued or are available to be
issued. Additionally, this guidance requires the Company to disclose
the date through which subsequent events have been evaluated, as well as whether
that date is the date the financial statements were issued or the date the
financial statements were available to be issued. For the three and
nine month periods ended December 31, 2009, the Company evaluated, for potential
recognition and disclosure, events that occurred prior to the filing of the
Company’s Quarterly Report on Form 10-Q for the three and nine month periods
ended December 31, 2009 on February 9, 2010.
The
Financial Instruments Topic of the FASB ASC requires disclosures about the fair
values of financial instruments at interim reporting periods in addition to
annual financial statements. Effective April 1, 2009, the new
guidance involves only enhanced disclosures and did not have any impact on the
Company’s financial position, results from operations or cash
flows.
The
Investments-Debt and Equity Securities topic of the FASB ASC modified the
threshold a company must meet to avoid recognizing other-than-temporary
impairments of debt securities purchased as investments. Effective
April 1, 2009, the implementation of the new guidance did not have any impact on
the Company’s financial position, results from operations or cash
flows.
The
Derivatives and Hedging Topic of the FASB ASC requires a company with derivative
instruments to disclose information to enable users of the financial statements
to understand (i) how and why the company uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for, and (iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. Accordingly, the
Derivatives and Hedging Topic requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The
Derivatives and Hedging Topic was effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The implementation of the Derivatives and Hedging guidance
involved enhanced disclosures of derivative instruments and the Company’s
hedging activities and did not have any impact on the Company’s financial
position, results from operations or cash flows.
In
September 2006, the FASB issued guidance on Fair Value Measurements and
Disclosures to address inconsistencies in the definition and determination of
fair value pursuant to GAAP. The guidance provides a single
definition of fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements in an effort to
increase comparability related to the recognition of market-based assets and
liabilities and their impact on earnings. The Fair Value Measurements
and Disclosures guidance was effective for the Company’s interim financial
statements issued after April 1, 2008. However, on November 14, 2007,
the FASB deferred the effective date of the guidance for one year for
non-financial assets and non-financial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis. The implementation of the guidance, effective April 1, 2008,
did not have a material effect on financial assets and liabilities included in
the Company’s consolidated financial statements as fair value is based on
readily available market prices. Additionally, the implementation of
the guidance did not have a material effect as it relates to non-financial
assets and non-financial liabilities that are recognized or disclosed at fair
value in the Company’s financial statements on a non-recurring
basis.
-9-
Management
has reviewed and continues to monitor the actions of the various financial and
regulatory reporting agencies and is currently not aware of any other
pronouncement that could have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
2.
Discontinued Operations and Sale of Certain of Assets
In
October 2009, the Company sold certain assets related to the shampoo brands
previously included in its Personal Care products segment to an unrelated third
party. In accordance with the Discontinued Operations Topic of the
ASC, the Company reclassified the related assets as held for sale in the
consolidated balance sheets as of March 31, 2009 and reclassified the related
operating results as discontinued in the consolidated financial statements and
related notes for all periods presented. The Company recognized a
gain of $253,000 on a pre-tax basis and $157,000 net of tax effects on the sale
in the quarter ended December 31, 2009.
The
following table presents the assets related to the discontinued operations as of
March 31, 2009 (in thousands):
|
March
31,
2009
|
||||
|
Inventory
|
$ | 1,038 | ||
|
Intangible
assets
|
8,472 | |||
|
Total
assets held for sale
|
$ | 9,510 | ||
The
following table summarizes the results of discontinued operations (in
thousands):
|
Three
Months Ended December 31,
|
Nine
Months Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Components
of Income
|
||||||||||||||||
|
Revenues
|
$ | 651 | $ | 2,312 | $ | 4,998 | $ | 7,360 | ||||||||
|
Income
before income taxes
|
140 | 447 | 1,064 | 1,665 | ||||||||||||
The total
purchase price for the assets was $9 million, subject to adjustments for
inventory, as defined, with $8 million received upon closing, and the remaining
$1 million to be paid on the first anniversary of the closing.
3. Accounts
Receivable
Accounts
receivable consist of the following (in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Trade
accounts receivable
|
$ | 31,858 | $ | 37,521 | ||||
|
Other
receivables
|
1,522 | 1,081 | ||||||
| 33,380 | 38,602 | |||||||
|
Less
allowances for discounts, returns and
uncollectible accounts
|
(2,762 | ) | (2,577 | ) | ||||
| $ | 30,618 | $ | 36,025 | |||||
-10-
|
Inventories
|
Inventories
consist of the following (in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Packaging
and raw materials
|
$ | 2,271 | $ | 1,955 | ||||
|
Finished
goods
|
31,821 | 23,984 | ||||||
| $ | 34,092 | $ | 25,939 | |||||
Inventories
are shown net of allowances for obsolete and slow moving inventory of $2.6
million and $1.4 million at December 31, 2009 and March 31, 2009,
respectively.
|
Property
and Equipment
|
Property
and equipment consist of the following (in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Machinery
|
$ | 1,621 | $ | 1,556 | ||||
|
Computer
equipment
|
1,326 | 1,021 | ||||||
|
Furniture
and fixtures
|
239 | 239 | ||||||
|
Leasehold
improvements
|
389 | 357 | ||||||
| 3,575 | 3,173 | |||||||
|
Less
accumulated depreciation
|
(2,278 | ) | (1,806 | ) | ||||
| $ | 1,297 | $ | 1,367 | |||||
|
6.
|
Goodwill
|
A
reconciliation of the activity affecting goodwill by operating segment is as
follows (in thousands):
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
|||||||||||||
|
Balance
– March 31, 2009
|
||||||||||||||||
|
Goodwill
|
$ | 229,627 | $ | 72,549 | $ | 2,751 | $ | 304,927 | ||||||||
|
Accumulated
impairment losses
|
(125,527 | ) | (65,160 | ) | -- | (190,687 | ) | |||||||||
| 104,100 | 7,389 | 2,751 | 114,240 | |||||||||||||
|
Net
adjustments
|
-- | -- | -- | -- | ||||||||||||
|
Balance
– December 31, 2009
|
||||||||||||||||
|
Goodwill
|
229,627 | 72,549 | 2,751 | 304,927 | ||||||||||||
|
Accumulated
impairment losses
|
(125,527 | ) | (65,160 | ) | -- | (190,687 | ) | |||||||||
| $ | 104,100 | $ | 7,389 | $ | 2,751 | $ | 114,240 | |||||||||
At March
31, 2009, in conjunction with the annual test for goodwill impairment, the
Company recorded an impairment charge aggregating $190.7 million to adjust the
carrying amounts of goodwill related to several reporting units within the
Over-the-Counter Healthcare and Household Cleaning segments to their respective
fair values. These charges were a consequence of the challenging
economic environment experienced during our
-11-
fiscal
year ended March 31, 2009, the dislocation of the debt and equity markets, and
contracting consumer demand for the Company’s product
offerings. Although the impairment charges represent management’s
best estimate, the estimates and assumptions made in assessing the fair value of
the Company’s reporting units and the valuation of the underlying assets and
liabilities are inherently subject to significant
uncertainties. Consequently, changing rates of interest and
inflation, declining sales or margins, increases in competition, changing
consumer preferences, technical advances or reductions in advertising and
promotion may require additional impairments in the future.
|
7.
|
Intangible
Assets
|
A
reconciliation of the activity affecting intangible assets is as follows (in
thousands):
|
Indefinite
Lived
|
Finite
Lived
|
Non
Compete
|
||||||||||||||
|
Trademarks
|
Trademarks
|
Agreement
|
Totals
|
|||||||||||||
|
Carrying
Amounts
|
||||||||||||||||
|
Balance
– March 31, 2009
|
$ | 500,176 | $ | 106,773 | $ | 158 | $ | 607,107 | ||||||||
|
Reclassifications
|
(45,605 | ) | 45,605 | -- | -- | |||||||||||
|
Balance
– December 31, 2009
|
$ | 454,571 | $ | 152,378 | $ | 158 | $ | 607,107 | ||||||||
|
Accumulated
Amortization
|
||||||||||||||||
|
Balance
– March 31, 2009
|
$ | -- | $ | 37,828 | $ | 142 | $ | 37,970 | ||||||||
|
Additions
|
-- | 7,293 | 16 | 7,309 | ||||||||||||
|
Balance
– December 31, 2009
|
$ | -- | $ | 45,121 | $ | 158 | $ | 45,279 | ||||||||
At March
31, 2009, in a manner similar to goodwill, the Company completed a test for
impairment of its intangible assets. Accordingly, the Company
recorded an impairment charge aggregating $58.9 million during the three month
period ended March 31, 2009 to the Over-the-Counter Healthcare and Household
Cleaning segments as facts and circumstances indicated that the carrying values
of the assets exceeded their fair values and may not be
recoverable.
The
economic events experienced during the fiscal year ended March 31, 2009, as well
as the Company’s plans and projections for its brands indicated that several of
such brands can no longer support indefinite useful lives. Each of
these brands incurred an impairment charge during the three month period ended
March 31, 2009 and has been adversely affected by increased competition and the
macroeconomic environment in the United States. Consequently, at
April 1, 2009, management reclassified $45.6 million of previously
indefinite-lived intangibles to intangibles with definite
lives. Management estimates the remaining useful lives of these
intangibles to be 20 years.
The fair
values and the annual amortization charges of the reclassified intangibles are
as follows (in thousands):
|
Intangible
|
Fair
Value
as
of
March
31,
2009
|
Annual
Amortization
|
||||||
|
Household
Trademarks
|
$ | 34,888 | $ | 1,745 | ||||
|
OTC
Healthcare Trademark
|
10,717 | 536 | ||||||
| $ | 45,605 | $ | 2,281 | |||||
-12-
At
December 31, 2009, all finite-lived intangible assets are expected to be
amortized over a period of 3 to 30 years as follows (in thousands):
| Year Ending December 31 |
|
||||
|
2010
|
$ | 9,725 | |||
|
2011
|
9,337 | ||||
|
2012
|
8,834 | ||||
|
2013
|
8,127 | ||||
|
2014
|
6,312 | ||||
|
Thereafter
|
64,922 | ||||
| $ | 107,257 | ||||
|
8.
|
Other
Accrued Liabilities
|
Other
accrued liabilities consist of the following (in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Accrued
marketing costs
|
$ | 3,736 | $ | 3,519 | ||||
|
Accrued
payroll
|
3,807 | 750 | ||||||
|
Accrued
commissions
|
315 | 312 | ||||||
|
Accrued
income taxes
|
- | 679 | ||||||
|
Accrued
professional fees
|
2,955 | 1,906 | ||||||
|
Interest
rate swap obligation
|
794 | 2,152 | ||||||
|
Severance
|
1,646 | - | ||||||
|
Other
|
5 | 89 | ||||||
| $ | 13,258 | $ | 9,407 | |||||
During
the second quarter of fiscal 2010, the Company completed a staff reduction
program to eliminate approximately 10% of its workforce. The accrued
severance balance as of December 31, 2009 is related to this reduction in
workforce and consists primarily of the remaining payments of salaries, bonuses
and other benefits for separated employees.
The
Company has reclassified the interest rate swap liability of $2.2 million as of
March 31, 2009 from accounts payable to accrued liabilities.
-13-
|
9.
|
|
Long-term
debt consists of the following (in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Senior
secured term loan facility (“Tranche B Term Loan Facility”) that bears
interest at the Company’s option at either the prime rate plus a margin of
1.25% or LIBOR plus a margin of 2.25%. At December 31, 20
09
, the
interest rate on the Tranche B Term Loan Facility was
2.48%. The interest rate is adjusted either monthly or
quarterly at the Company’s option. Principal payments of
$887,500 plus accrued interest are payable quarterly. Current
amounts outstanding under the Tranche B Term Loan Facility mature on April
6, 2011 and are collateralized by substantially all of the Company’s
assets.
|
$ | 193,337 | $ | 252,337 | ||||
|
Senior
Subordinated Notes that bear interest at 9.25% which is payable on April
15
th
and October 15
th
of each year. The Senior Subordinated Notes mature on April 15,
2012; however, the Company may redeem some or all of the Senior
Subordinated Notes at redemption prices set forth in the indenture
governing the Senior Subordinated Notes. The Senior
Subordinated Notes are unconditionally guaranteed by Prestige Brands
Holdings, Inc., and its domestic wholly-owned subsidiaries other than
Prestige Brands, Inc., the issuer. Each of these guarantees is
joint and several. There are no significant restrictions on the
ability of any of the guarantors to obtain funds from their
subsidiaries.
|
126,000 | 126,000 | ||||||
| 319,337 | 378,337 | |||||||
|
Current
portion of long-term debt
|
(3,550 | ) | (3,550 | ) | ||||
| $ | 315,787 | $ | 374,787 | |||||
The
Tranche B Term Loan Facility contains various financial covenants, including
provisions that require the Company to maintain certain leverage ratios,
interest coverage ratios and fixed charge coverage ratios. The
Tranche B Term Loan Facility and the Senior Subordinated Notes also contain
provisions that restrict the Company from undertaking certain specified
corporate actions, such as asset dispositions, acquisitions, dividend payments,
repurchase of common shares outstanding, changes of control, incurrence of
indebtedness, creation of liens, making of loans and transactions with
affiliates. Additionally, the Tranche B Term Loan Facility and the
Senior Subordinated Notes contain cross-default provisions whereby a default
pursuant to the terms and conditions of either indebtedness will cause a default
on the remaining indebtedness.
Future
principal payments required in accordance with the terms of the Tranche B Term
Loan Facility and the Senior Subordinated Notes are as follows (in
thousands):
| Year Ending December 31 | |||||
|
2010
|
$ | 3,550 | |||
|
2011
|
189,787 | ||||
|
2012
|
126,000 | ||||
| $ | 319,337 | ||||
|
10.
|
Fair
Value Measurements
|
As deemed
appropriate, the Company uses derivative financial instruments to mitigate the
impact of changing interest rates associated with its long-term debt
obligations. At December 31, 2009, the outstanding obligation
-14-
under the
Company’s variable rate Tranche B Term Loan Facility was $193.3
million. Although the Company does not enter into derivative
financial instruments for trading purposes, all of the Company’s derivatives are
over-the-counter instruments with liquid markets. The notional, or
contractual, amount of the Company’s derivative financial instruments is used to
measure the amount of interest to be paid or received and does not represent an
actual liability. The Company is accounting for the interest rate cap
and swap agreements as cash flow hedges.
The
Company entered into an interest rate swap agreement, effective March 26, 2008,
in the notional amount of $175.0 million that decreased to $125.0 million at
March 26, 2009. The Company has agreed to pay a fixed rate of 2.88%
while receiving a variable rate based on LIBOR. The agreement
terminates on March 26, 2010.
As more fully described in
Note 1, the Company adopted
fair value accounting for all financial
instruments. The Fair Value Measurements and Disclosures Topic of the
FASB ASC requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability in the principal
or most advantageous market assuming an orderly transaction between market
participants. The Fair Value Measurements and Disclosures Topic
established market (observable inputs) as the preferred source of fair value to
be followed by the Company’s assumptions of fair value based on hypothetical
transactions (unobservable inputs) in the absence of observable market
inputs.
Based
upon the above, the following fair value hierarchy was created:
| Level 1 – | Quoted market prices for identical instruments in active markets, |
|
|
Level
2 –
|
Quoted
prices for similar instruments in active markets, as well as quoted prices
for identical or similar instruments in markets that are not considered
active, and
|
|
|
Level
3 –
|
Unobservable
inputs developed by the Company using estimates and assumptions reflective
of those that would be utilized by a market
participant.
|
Quantitative
disclosures about the fair value of the Company’s derivative hedging instruments
are as follows (in thousands):
|
Fair
Value Measurements at December 31, 2009
|
||||||||||||||||
|
Description
|
December 31,
2009
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
|
Interest
Rate Swap Liability
|
$ | 794 | $ | -- | $ | 794 | $ | -- | ||||||||
|
Fair
Value Measurements at March 31, 2009
|
||||||||||||||||
|
Description
|
March
31,
2009
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
|
Interest
Rate Swap Liability
|
$ | 2,152 | $ | -- | $ | 2,152 | $ | -- | ||||||||
-15-
A summary
of the fair value of the Company’s derivative instruments, their impact on the
consolidated statements of operations and comprehensive income and the amounts
reclassified from other comprehensive income is as follows (in
thousands):
|
For
the Three Months Ended December 31, 2009
|
||||||||||||||||||
|
December
31, 2009
|
Income
Statement
Account
|
Amount
Income
|
Amount
Gains
|
|||||||||||||||
|
Cash
Flow Hedging
Instruments
|
Balance
Sheet
Location
|
Notional
Amount
|
Fair
Value
Asset/
(Liability)
|
Gains/
Losses
Charged
|
(Expense)
Recognized
In
Income
|
(Losses)
Recognized
In
OCI
|
||||||||||||
|
Interest
Rate Swap
|
Other
Accrued
Liabilities
|
$ | 125,000 | $ | (794 | ) |
Interest
Expense
|
$ | (830 | ) | $ | 778 | ||||||
|
For
the Nine Months Ended December 31, 2009
|
||||||||||||||||||
|
December
31, 2009
|
Income
Statement
Account
|
Amount
Income
|
Amount
Gains
|
|||||||||||||||
|
Cash
Flow Hedging
Instruments
|
Balance
Sheet
Location
|
Notional
Amount
|
Fair
Value
Asset/
(Liability)
|
Gains/
Losses
Charged
|
(Expense)
Recognized
In
Income
|
(Losses)
Recognized
In
OCI
|
||||||||||||
|
Interest
Rate Swap
|
Other
Accrued
Liabilities
|
$ | 125,000 | $ | (794 | ) |
Interest
Expense
|
$ | (2,090 | ) | $ | 1,358 | ||||||
|
For
the Three Months Ended December 31, 2008
|
||||||||||||||||||
|
December
31, 2008
|
Income
Statement
Account
|
Amount
Income
|
Amount
Gains
|
|||||||||||||||
|
Cash
Flow Hedging
Instruments
|
Balance
Sheet
Location
|
Notional
Amount
|
Fair
Value
Asset/
(Liability)
|
Gains/
Losses
Charged
|
(Expense)
Recognized
In
Income
|
(Losses)
Recognized
In
OCI
|
||||||||||||
|
Interest
Rate Swap
|
Prepaid
expenses
|
$ | 175,000 | $ | (2,680 | ) |
Interest
Income
|
$ | 247 | $ | (3,455 | ) | ||||||
|
For
the Nine Months Ended December 31, 2008
|
||||||||||||||||||
|
December
31, 2008
|
Income
Statement
Account
|
Amount
Income
|
Amount
Gains
|
|||||||||||||||
|
Cash
Flow Hedging
Instruments
|
Balance
Sheet
Location
|
Notional
Amount
|
Fair
Value
Asset/
(Liability)
|
Gains/
Losses
Charged
|
(Expense)
Recognized
In
Income
|
(Losses)
Recognized
In
OCI
|
||||||||||||
|
Interest
Rate Swap
|
Prepaid
expenses
|
$ | 175,000 | $ | (2,680 | ) |
Interest
Income
|
$ | 111 | $ | (1,153 | ) | ||||||
The
Company recorded interest expense of $830,000 and interest income of $247,000
during the three month periods ended December 31, 2009 and 2008, respectively,
in connection with this interest rate swap agreement. The Company
recorded interest expense of $2.1 million and interest income of $111,000 during
the nine month periods ended December 31, 2009 and 2008, respectively, in
connection with this interest rate swap agreement. Assuming that the
LIBOR rate does not fluctuate subsequent to December 31, 2009, the Company
estimates that
-16-
it will
recognize approximately $822,000 in additional interest expense during the
remaining three months of its fiscal year ending March 31, 2010.
At
December 31, 2009 and March 31, 2009, the fair values of the interest rate swap
liability were $794,000 and $2.2 million, respectively. Such amounts
were included in other accrued liabilities. The determination of fair
value is based on closing prices for similar instruments traded in liquid
over-the-counter markets. The changes in the fair value of this
interest rate swap are recorded in Accumulated Other Comprehensive Income in the
balance sheet due to its designation as a cash flow hedge.
For
certain of our financial instruments, including cash, accounts receivable,
accounts payable and other current liabilities, the carrying amounts approximate
their respective fair values due to the relatively short maturity of these
amounts.
At
December 31, 2009 and March 31, 2009, the carrying value of the Tranche B Term
Loan Facility was $193.3 and $252.3 million, respectively. The terms
of the facility provide that the interest rate is adjusted, at the Company’s
option, on either a monthly or quarterly basis, to the prime rate plus a margin
of 1.25% or LIBOR plus a margin of 2.25%. The market value of the
Company’s Tranche B Term Loan Facility was approximately $189.4 million and
$244.8 million at December 31, 2009 and March 31, 2009,
respectively. At December 31, 2009 and March 31, 2009, the carrying
value of the Company’s 9.25% Senior Subordinated Notes was $126.0
million. The market value of these notes was approximately $127.3
million and $119.7 million at December 31, 2009 and March 31, 2009,
respectively. The market values of the notes have been determined
from market transactions in the Company’s debt securities.
11.
Stockholders’ Equity
The
Company is authorized to issue 250.0 million shares of common stock, $0.01 par
value per share, and 5.0 million shares of preferred stock, $0.01 par value per
share. The Board of Directors may direct the issuance of the
undesignated preferred stock in one or more series and determine preferences,
privileges and restrictions thereof.
Each
share of common stock has the right to one vote on all matters submitted to a
vote of stockholders. The holders of common stock are also entitled
to receive dividends whenever funds are legally available and when declared by
the Board of Directors, subject to prior rights of holders of all classes of
stock outstanding having priority rights as to dividends. No
dividends have been declared or paid on the Company’s common stock through
December 31, 2009.
During
the year ended March 31, 2009, the Company repurchased 65,000 shares of
restricted common stock from former employees pursuant to the provisions of the
various employee stock purchase agreements. All of such shares have
been recorded as treasury stock. There were no share repurchases
during the three or nine month periods ended December 31, 2009.
-17-
|
12.
|
Earnings
Per Share
|
The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
|
Three
Months Ended December 31
|
Nine
Months Ended December 31
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Numerator
|
||||||||||||||||
|
Income
from continuing operations
|
$ | 10,336 | $ | 7,740 | $ | 28,010 | $ | 23,287 | ||||||||
|
Income
from discontinued operations and gain on sale of discontinued
operations
|
244 | 278 | 818 | 1,034 | ||||||||||||
|
Net
income
|
$ | 10,580 | $ | 8,018 | $ | 28,828 | $ | 24,321 | ||||||||
|
Denominator
|
||||||||||||||||
|
Denominator
for basic earnings per share – weighted average shares
|
50,030 | 49,960 | 50,008 | 49,921 | ||||||||||||
|
Dilutive
effect of unvested restricted common stock (including restricted stock
units), options and stock appreciation rights issued to employees and
directors
|
44 | 80 | 70 | 117 | ||||||||||||
|
Denominator
for diluted earnings per share
|
50,074 | 50,040 | 50,078 | 50,038 | ||||||||||||
|
Earnings
per Common Share:
|
||||||||||||||||
|
Basic
earnings per share from continuing operations
|
$ | 0.21 | $ | 0.15 | $ | 0.56 | $ | 0.47 | ||||||||
|
Basic
earnings per share from discontinued operations and gain on sale of
discontinued operations
|
-- | 0.01 | 0.02 | 0.02 | ||||||||||||
|
Basic
net earnings per share
|
$ | 0.21 | $ | 0.16 | $ | 0.58 | $ | 0.49 | ||||||||
|
Diluted
earnings per share from continuing operations
|
$ | 0.21 | $ | 0.15 | $ | 0.56 | $ | 0.47 | ||||||||
|
Diluted
earnings per share from discontinued operations and gain on sale of
discontinued operations
|
-- | 0.01 | 0.02 | 0.02 | ||||||||||||
|
Diluted
net earnings per share
|
$ | 0.21 | $ | 0.16 | $ | 0.58 | $ | 0.49 | ||||||||
At
December 31, 2009, 212,202 shares of restricted stock granted to employees,
including restricted stock units, subject only to time vesting, were unvested
and excluded from the calculation of basic earnings per share; however, such
shares were included in the calculation of diluted earnings per
share. Additionally, 101,802 shares of restricted stock granted to
employees have been excluded from the calculation of both basic and diluted
earnings per share because vesting of such shares is subject to contingencies
that were not met as of December 31, 2009. Lastly, at December 31,
2009, there were options to purchase 1,391,172 shares of common stock
outstanding that were not included in the computation of diluted earnings per
share because their exercise price was greater than the average market price of
the common stock, and therefore, their inclusion would be
antidilutive.
At
December 31, 2008, 195,000 shares of restricted stock granted to employees,
subject only to time-vesting, were unvested and excluded from the calculation of
basic earnings per share; however, such shares were included
-18-
in the
calculation of diluted earnings per share. Additionally, 437,000
shares of restricted stock granted to employees, as well as 15,000 stock
appreciation rights have been excluded from the calculation of both basic and
diluted earnings per share because vesting of such shares is subject to
contingencies that were not met as of December 31, 2008. Lastly, at
December 31, 2008, there were options to purchase 663,000 shares of common stock
outstanding that were not included in the computation of diluted earnings
because their exercise price was greater than the average market price of the
common stock, and therefore, their inclusion would be antidilutive.
13. Comprehensive
Income
The
following table describes the components of comprehensive income for each of the
three and nine month periods ended December 31, 2009 and 2008 (in
thousands):
|
Three
Months Ended December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Components
of Comprehensive Income
|
||||||||
|
Net
income
|
$ | 10,580 | $ | 8,018 | ||||
|
Unrealized
gain (loss) on interest rate caps, net of income tax of $296 (2009) and
$(1,313) (2008)
|
482 | (2,142 | ) | |||||
|
Comprehensive
Income
|
$ | 11,062 | $ | 5,876 | ||||
|
Nine
Months Ended December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Components
of Comprehensive Income
|
||||||||
|
Net
income
|
$ | 28,828 | $ | 24,321 | ||||
|
Amortization
of interest rate caps reclassified into earnings, net of income tax of $32
(2008)
|
-- | 53 | ||||||
|
Unrealized
gain (loss) on interest rate caps, net of income tax of $516 (2009) and
$(438) (2008)
|
842 | (716 | ) | |||||
|
Comprehensive
Income
|
$ | 29,670 | $ | 23,658 | ||||
|
14.
|
Share-Based
Compensation
|
In
connection with the Company’s initial public offering, the Board of Directors
adopted the 2005 Long-Term Equity Incentive Plan (“Plan”) which provides for the
grant, to a maximum of 5.0 million shares, of restricted stock, stock options,
restricted stock units, deferred stock units and other equity-based
awards. Directors, officers and other employees of the Company and
its subsidiaries, as well as others performing services for the Company, are
eligible for grants under the Plan. The Company believes that such
awards better align the interests of its employees with those of its
stockholders.
During
the nine month period ended December 31, 2009, net compensation costs charged
against income and the related income tax benefit recognized were $1.7 million
and $630,000, respectively. During the nine month
-19-
period
ended December 31, 2008, net compensation costs charged against income, and the
related tax benefits recognized were $2.2 million and $852,000,
respectively.
Restricted
Shares
Restricted
shares granted to employees under the Plan generally vest in 3 to 5 years,
contingent on attainment by the Company of revenue and earnings before income
taxes, depreciation and amortization growth targets, or the attainment of
certain time vesting thresholds. Certain restricted share awards
provide for automatic accelerated vesting if there is a change of control, as
defined in the plan or document pursuant to which the awards were
made. The fair value of nonvested restricted shares is determined as
the closing price of the Company’s common stock on the day preceding the grant
date. The weighted-average fair values of restricted shares granted
during the nine month periods ended December 31, 2009 and 2008 were $7.09 and
$10.85, respectively.
A summary
of the Company’s restricted shares granted under the Plan is presented
below:
|
Restricted
Shares
|
Shares
(in
thousands)
|
Weighted-Average
Grant-Date
Fair
Value
|
||||||
|
Nonvested
at March 31, 2009
|
342.4 | $ | 11.31 | |||||
|
Granted
|
171.6 | 7.09 | ||||||
|
Vested
|
(47.8 | ) | 10.97 | |||||
|
Forfeited
|
(152.2 | ) | 11.54 | |||||
|
Nonvested
at December 31, 2009
|
314.0 | 8.94 | ||||||
|
Nonvested
at March 31, 2008
|
484.7 | 11.78 | ||||||
|
Granted
|
303.5 | 10.85 | ||||||
|
Vested
|
(29.9 | ) | 10.88 | |||||
|
Forfeited
|
(138.1 | ) | 12.24 | |||||
|
Nonvested
at December 31, 2008
|
620.2 | 11.26 | ||||||
Options
The Plan
provides that the exercise price of the option granted shall be no less than the
fair market value of the Company’s common stock on the date the option is
granted. Options granted have a term of no greater than 10 years from
the date of grant and vest in accordance with a schedule determined at the time
the option is granted, generally 3 to 5 years. Certain option awards
provide for automatic accelerated vesting if there is a change in
control.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes Option Pricing Model (“Black-Scholes Model”) that uses the
assumptions noted in the following table. Expected volatilities are
based on the historical volatility of the Company’s common stock and other
factors, including the historical volatilities of comparable
companies. The Company uses both historical and current data to
estimate option exercise and employee termination
behaviors. Employees that are expected to exhibit similar exercise or
termination behaviors are grouped together for the purposes of
valuation. The expected terms of the options granted are derived from
management’s estimates and consideration of information derived from the public
filings of companies similar to the Company and represent the period of time
that options granted are expected to be outstanding. The risk-free
rate represents the yield on U.S. Treasury bonds with a maturity equal to the
expected term of the granted option. The weighted-average grant-date
fair value of the options granted during the nine month period ended December
31, 2009 and 2008 was $3.64 and $5.04, respectively.
-20-
|
Nine
month period Ended December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Expected
volatility
|
45.6 | % | 43.3 | % | ||||
|
Expected
dividends
|
-- | -- | ||||||
|
Expected
term in years
|
7.0 | 6.0 | ||||||
|
Risk-free
rate
|
2.8 | % | 3.2 | % | ||||
A summary
of option activity under the Plan is as follows:
|
Options
|
Shares
(in
thousands)
|
Weighted-Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
(in
thousands)
|
||||||||||||
|
Outstanding
at March 31, 2008
|
253.5 | $ | 12.86 | 9.2 | $ | -- | ||||||||||
|
Granted
|
413.3 | 10.91 | 9.4 | -- | ||||||||||||
|
Exercised
|
-- | -- | -- | |||||||||||||
|
Forfeited
or expired
|
(4.1 | ) | 11.83 | 9.1 | -- | |||||||||||
|
Outstanding
at December 31, 2008
|
662.7 | 11.65 | 9.0 | -- | ||||||||||||
|
Outstanding
at March 31, 2009
|
662.6 | 11.65 | 8.8 | -- | ||||||||||||
|
Granted
|
1,125.0 | 7.16 | 9.7 | -- | ||||||||||||
|
Exercised
|
-- | -- | ||||||||||||||
|
Forfeited
or expired
|
(142.6 | ) | 11.26 | 1.2 | -- | |||||||||||
|
Outstanding
at December 31, 2009
|
1,645.0 | 8.61 | 9.1 | -- | ||||||||||||
|
Exercisable
at December 31, 2009
|
304.7 | 11.98 | 7.9 | -- | ||||||||||||
Stock
Appreciation Rights (“SARs”)
In July
2006, the Board of Directors granted SARs to a group of selected executives;
however, no SARs have been granted since that date. The terms of the
SARs provided that on the vesting date, the executive would receive for each SAR
awarded to an executive the excess of the market price of the Company’s common
stock on the vesting date over the market price of the Company’s common stock on
the date the award was granted. The Board of Directors, in its sole
discretion, may settle the Company’s obligation to the executive in shares of
the Company’s common stock, cash, other securities of the Company or any
combination thereof.
The Plan
provides that the issuance price of a SAR shall be no less than the market price
of the Company’s common stock on the date the SAR is granted. SARs
may be granted with a term of no greater than 10 years from the date of grant
and will vest in accordance with a schedule determined at the time the SAR is
granted, generally 3 to 5 years. The weighted-average grant date fair
value of the SARs granted was $3.68. The fair value of each SAR award
was estimated on the date of grant using the Black-Scholes Model. The
SARs expired on March 31, 2009; and no compensation was paid because the
grant-date market price of the Company’s common stock exceeded the market value
of the Company’s common stock on the measurement date.
-21-
A summary
of SAR activity under the Plan is as follows:
|
SARs
|
Shares
(in
thousands)
|
Grant
Date
Stock
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
(in
thousands)
|
||||||||||||
|
Outstanding
at March 31, 2008
|
16.1 | $ | 9.97 | 1.00 | $ | -- | ||||||||||
|
Granted
|
-- | -- | -- | -- | ||||||||||||
|
Forfeited
or expired
|
(1.2 | ) | 9.97 | 0.25 | -- | |||||||||||
|
Outstanding
at December 31, 2008
|
14.9 | 9.97 | 0.25 | -- | ||||||||||||
At
December 31, 2009, there were $5.5 million of unrecognized compensation costs
related to nonvested share-based compensation arrangements under the Plan based
on management’s estimate of the shares that will ultimately vest. The
Company expects to recognize such costs over the next 4
years. However, certain of the restricted shares vest upon the
attainment of Company performance goals and if such goals are not met, no
compensation costs would ultimately be recognized and any previously recognized
compensation cost would be reversed. The total fair value of shares
vested during the nine months ended December 31, 2009 and 2008 was $525,000 and
$300,000, respectively. There were no options exercised during either
of the nine month periods ended December 31, 2009 and 2008; hence, there were no
tax benefits realized during these periods. At December 31, 2009,
there were 2.9 million shares available for issuance under the
Plan.
|
15.
|
Income
Taxes
|
Income
taxes are recorded in the Company’s quarterly financial statements based on the
Company’s estimated annual effective income tax rate subject to adjustments for
discrete events should they occur. The effective tax rates used in
the calculation of income taxes were 42.92% and 39.84%, respectively, for the
three and nine month period ended December 31, 2009. The effective tax rate used
in the calculation of income taxes was 37.9% for the three and nine month period
ended December 31, 2008. The income tax expense for the three and nine month
period ended December 31, 2009 includes a discrete adjustment to the Company’s
deferred tax liabilities of $930,000 for expected future increases in the
effective state income tax rate.
At
December 31, 2009, Medtech Products Inc., a wholly-owned subsidiary of the
Company, had a net operating loss carryforward of approximately $2 million which
may be used to offset future taxable income of the consolidated group and which
begins to expire in 2020. The net operating loss carryforward is
subject to an annual limitation as to usage pursuant to Internal Revenue Code
Section 382 of approximately $240,000.
Uncertain
tax liability activity is as follows:
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Balance
- March 31
|
$ | 225 | $ | -- | ||||
|
Adjustments
based on tax positions related to
the current year
|
100 | -- | ||||||
|
Balance
- December 31
|
$ | 325 | $ | -- | ||||
The
Company recognizes interest and penalties related to uncertain tax positions as
a component of income tax expense. The Company does not anticipate
any significant events or circumstances that would cause a change to these
uncertainties during the ensuing year.
-22-
|
Commitments
and Contingencies
|
Securities Class Action
Litigation
The
Company and certain of its officers and directors were defendants in a
consolidated securities class action lawsuit filed in the United States District
Court for the Southern District of New York (the “Consolidated
Action”). Plaintiffs purported to represent a class of stockholders
of the Company who purchased shares of the Company’s common stock from February
9, 2005 through November 15, 2005 (the “Class Period”). Plaintiffs
also named as defendants the underwriters in the Company’s initial public
offering and a private equity fund that was a selling stockholder in the
offering. On September 4, 2007, the Court issued an Order certifying
a class consisting of all persons who purchased the Company’s common stock
pursuant, or traceable to, the Company’s initial public offering during the
Class Period and were damaged thereby. After having given notice to
class members, the defendants and the lead plaintiffs have reached an agreement
in principle to settle the Consolidated Action. On December 4, 2009,
the settlement proposed by the defendants and the lead plaintiffs received final
approval from the Court. Insurance covered the costs of all payments
to the plaintiffs and their counsel. As a result, the Consolidated Action, and
all claims made therein against us, our officers and directors and the other
defendants in the action were dismissed with prejudice.
DenTek
Litigation
In April
2007, the Company filed a lawsuit in the United States District Court in the
Southern District of New York against DenTek Oral Care, Inc. (“DenTek”) alleging
(i) infringement of intellectual property associated with
The Doctor’s® NightGuard™
Dental Protector which is used for the protection of teeth from
nighttime teeth grinding; and (ii) the violation of unfair competition and
consumer protection laws. On October 4, 2007, the Company filed a
Second Amended Complaint in which it named Kelly M. Kaplan, Raymond Duane and
C.D.S. Associates, Inc. (“CDS”) as additional defendants in this action and
added other claims to the previously filed complaint. Kaplan and
Duane were formerly employed by the Company, and CDS is a corporation controlled
by Duane through which Duane provided services to the Company. In the
Second Amended Complaint, the Company has asserted claims for patent, trademark
and copyright infringement, unfair competition, unjust enrichment, violation of
New York’s Consumer Protection Act, breach of contract, tortious interference
with contractual and business relations, civil conspiracy and trade secret
misappropriation. On October 19, 2007, the Company filed a motion for
preliminary injunction, asking the Court to enjoin the defendants from (i)
continuing to improperly use the Company’s trade secrets; (ii) continuing to
breach any contractual agreements with the Company; and (iii) marketing and
selling any dental protector products or other products in which Duane or Kaplan
has had any involvement or provided any assistance to DenTek. A
hearing date for the motion for preliminary injunction has not yet been set by
the Court.
On
September 30, 2008, after considering the defendants’ motions to dismiss, the
Company’s responses (including a motion to strike the motions to dismiss) and
the Magistrate’s Report and Recommendations, the Court granted in part and
denied in part the defendants’ Motions to Dismiss, with the following claims
being dismissed without prejudice: (1) breach of the Proprietary Information and
Inventions Agreement (“PIIA”) against Duane; (2) breach of the PIIA against
Kaplan; (3) tortious interference with contractual relations against DenTek; (4)
tortious interference with contractual relations against Duane; and (5) tortious
interference with advantageous business relationship/economic advantage against
all defendants. The Court denied the Company’s Motions to Strike the
Motions to Dismiss filed by DenTek and CDS. The following claims
included in the Company’s Second Amended Complaint remain in the action: (1)
patent, trademark and copyright infringement against DenTek; (2) unjust
enrichment against DenTek; (3) violation of a New York consumer protection
statute against DenTek; (4) breach of the consulting agreement against Duane;
(5) breach of the PIIA against CDS; (6) breach of the release against Kaplan and
Duane; and (7) trade secret misappropriation against DenTek, Kaplan, Duane and
CDS.
In
October 2008, DenTek, Kaplan, Duane and CDS filed Answers to the Second Amended
Complaint. In their Answers, each of DenTek, Duane and CDS has
asserted counterclaims against the Company. DenTek’s counterclaims
allege false advertising, violation of New York consumer protection statutes and
unfair competition relating to
The Doctor’s® NightGuard™
Classic™
dental protector. Duane’s counterclaim is a
contractual indemnity claim seeking to recover attorneys’ fees pursuant to the
release between Duane and Dental Concepts
-23-
LLC
(“Dental Concepts”), a predecessor-in-interest to Medtech Products Inc.,
plaintiff in the DenTek litigation and another wholly-owned subsidiary of
Prestige Brands Holdings, Inc. CDS’ counterclaim alleges a breach of
the consulting agreement between CDS and Dental
Concepts.
In
November 2008, in response to the counterclaims filed against the Company by
DenTek, Duane and CDS, the Company filed a Motion to Dismiss and Strike the
counterclaims made by DenTek, which motion is currently pending before the
Court. In addition, in November 2008, the Company filed an Answer to
the counterclaims asserted by Duane and CDS.
On March
24, 2009, Duane submitted a petition for a Chapter 7 bankruptcy with the United
States Bankruptcy Court for the District of Nevada (the “Nevada Bankruptcy
Court”) which automatically stayed the DenTek litigation in which Duane is a
defendant. On July 21, 2009, the Nevada Bankruptcy Court granted the
Company’s motion for relief from automatic stay with respect to the DenTek
litigation against DenTek, Kaplan, Duane and CDS. Accordingly, the
DenTek litigation has resumed although the Nevada Bankruptcy Court retains
exclusive jurisdiction over any damage claims and other issues which may affect
Duane’s bankruptcy proceeding, except for orders of injunctive relief that may
be issued in the DenTek litigation.
On
November 5, 2009, the Court issued an Opinion and Order construing one of the
claims of the Company’s U.S. Patent No. 6,830,051, which forms the basis for the
patent infringement claims in the DenTek litigation. The Company
believes the Opinion and Order issued by the Court is favorable to the Company’s
patent infringement claim against DenTek.
On
January 15, 2010, the Company and DenTek reached a tentative settlement
agreement in principle to resolve the pending litigation between the Company and
DenTek during a settlement conference before the Court. The
settlement agreement remains subject to the negotiation and execution of a
written settlement agreement acceptable to the Company and DenTek. As
of the date of this Quarterly Report, a final settlement agreement was not yet
executed by the parties. There can be no assurance that the Company and DenTek
will ultimately execute a final settlement agreement and that the litigation
will be resolved. In the event that a final settlement agreement is
not executed or the litigation is not otherwise resolved, the litigation will
resume.
The
Company’s management believes that the counterclaims asserted by DenTek, Duane
and CDS are legally deficient and that it has meritorious defenses to the
counterclaims. In the event the settlement is not consummated and the
litigation resumes, the Company intends to vigorously defend against the
counterclaims; however, the Company cannot, at this time, reasonably estimate
the potential range of loss, if any. The settlement agreement has no
impact on the litigation pending between the Company and each of Duane, CDS and
Kaplan.
In
addition to the matters described above, the Company is involved from time to
time in other routine legal matters and other claims incidental to its
business. The Company reviews outstanding claims and proceedings
internally and with external counsel as necessary to assess probability and
amount of potential loss. These assessments are re-evaluated at each
reporting period and as new information becomes available to determine whether a
reserve should be established or if any existing reserve should be
adjusted. The actual cost of resolving a claim or proceeding
ultimately may be substantially different than the amount of the recorded
reserve. In addition, because it is not permissible under GAAP to
establish a litigation reserve until the loss is both probable and estimable, in
some cases there may be insufficient time to establish a reserve prior to the
actual incurrence of the loss (upon verdict and judgment at trial, for example,
or in the case of a quickly negotiated settlement). The Company
believes the resolution of routine matters and other incidental claims, taking
into account reserves and insurance, will not have a material adverse effect on
its business, financial condition or results from operations.
-24-
Lease
Commitments
The
Company has operating leases for office facilities and equipment in New York and
Wyoming, which expire at various dates through 2014.
The
following summarizes future minimum lease payments for the Company’s operating
leases (in thousands):
|
Facilities
|
Equipment
|
Total
|
|||||||||||
| Year Ending December 31 |
|
||||||||||||
|
2010
|
$ | 698 | $ | 83 | $ | 781 | |||||||
|
2011
|
555 | 79 | 634 | ||||||||||
|
2012
|
573 | 45 | 618 | ||||||||||
|
2013
|
591 | 27 | 618 | ||||||||||
|
2014
|
199 | -- | 199 | ||||||||||
| $ | 2,616 | $ | 234 | $ | 2,850 | ||||||||
Rent
expense for the three and nine month periods ended December 31, 2009 was
$206,000 and $554,000, respectively, while rent expense for the three and nine
month periods ended December 31, 2008 was $155,000 and $461,000,
respectively.
Purchase
Commitments
The
Company has entered into a 10 year supply agreement for the exclusive
manufacture of a portion of one of its household cleaning
products. Although the Company is committed under the supply
agreement to pay the minimum amounts set forth in the table below, the Company
estimates that it will purchase in excess of $270.0 million of the product
during the term of the agreement.
(In
thousands)
| Year Ending December 31 |
|
||||
|
2010
|
$ | 10,743 | |||
|
2011
|
7,541 | ||||
|
2012
|
1,181 | ||||
|
2013
|
1,137 | ||||
|
2014
|
1,094 | ||||
|
Thereafter
|
3,942 | ||||
| $ | 25,638 | ||||
|
Concentrations
of Risk
|
The
Company’s sales are concentrated in the areas of over-the-counter healthcare,
household cleaning and personal care products. The Company sells its
products to mass merchandisers, food and drug accounts, and dollar and club
stores. During the three and nine month periods ended December 31,
2009, approximately 62.3% and 62.8%, respectively, of the Company’s total
sales were derived from its four major brands, while during the three and nine
month periods ended December 31, 2008 approximately 61.1% and 58.9%,
respectively, of the Company’s total sales were derived from its four major
brands. During the three and nine month periods ended December 31,
2009, approximately 24.9% and 25.0%, respectively, of the Company’s sales were
made to one customer, while during the three and nine month periods ended
December 31, 2008, 26.6% and 25.9%, respectively, of sales were to this
customer. At December 31, 2009, approximately 22.9% of accounts
receivable were owed by the same customer.
The
Company manages product distribution in the continental United States through a
main distribution center in St. Louis, Missouri. A serious
disruption, such as a flood or fire, to the main distribution center could
damage the Company’s inventories and could materially impair the Company’s
ability to distribute its products to customers in a timely manner or at a
reasonable cost. The Company could incur significantly higher costs
and experience longer lead times associated with the distribution of its
products to its customers during the time that it takes the
-25-
Company
to reopen or replace its distribution center. As a result, any such
disruption could have a material adverse affect on the Company’s sales and
profitability.
The
Company has relationships with over 36 third-party manufacturers. Of
those, the top 10 manufacturers produced items that accounted for approximately
79% of the Company’s gross sales for the nine months ended December 31, 2009
compared to 75% during the nine months ended December 31, 2008. The Company did
not have long-term contracts with manufacturers of product of approximately 20%
of our gross sales for the nine months ended December 31, 2009 compared to 20%
during the nine months ended December 31, 2008. The lack of
manufacturing agreements for these products exposes the Company to the risk that
a manufacturer could stop producing the Company’s products at any time for any
reason, increase the cost we are charged for our products, or fail to provide
the Company with the level of products the Company needs to meet its customers’
demands. Should one or more of our manufacturers stop producing
product on our behalf or increase our costs in excess of our ability to increase
our sales price, it could have a material adverse effect on our business,
financial condition and results from operations.
|
18.
|
Business
Segments
|
Segment
information has been prepared in accordance with the Segment Topic of the FASB
ASC. The Company’s operating and reportable segments consist of (i)
Over-the-Counter Healthcare, (ii) Household Cleaning and (iii) Personal
Care.
There
were no inter-segment sales or transfers during any of the periods
presented. The Company evaluates the performance of its operating
segments and allocates resources to them based primarily on contribution
margin.
The table
below summarizes information about the Company’s operating and reportable
segments.
|
Three
Months Ended December 31, 2009
|
||||||||||||||||
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 46,160 | $ | 26,828 | $ | 2,009 | $ | 74,997 | ||||||||
|
Other
revenues
|
9 | 437 | 5 | 451 | ||||||||||||
|
Total
revenues
|
46,169 | 27,265 | 2,014 | 75,448 | ||||||||||||
|
Cost
of sales
|
16,919 | 17,481 | 1,241 | 35,641 | ||||||||||||
|
Gross
profit
|
29,250 | 9,784 | 773 | 39,807 | ||||||||||||
|
Advertising
and promotion
|
5,146 | 877 | 76 | 6,099 | ||||||||||||
|
Contribution
margin
|
$ | 24,104 | $ | 8,907 | $ | 697 | 33,708 | |||||||||
|
Other
operating expenses
|
10,007 | |||||||||||||||
|
Operating
income
|
23,701 | |||||||||||||||
|
Other
expense
|
5,558 | |||||||||||||||
|
Provision
for income taxes
|
7,807 | |||||||||||||||
|
Income
from continuing operations
|
10,336 | |||||||||||||||
| Income from discontinued operations, net of income tax | 87 | |||||||||||||||
|
Gain
on sale of discontinued operations, net of income tax
|
157 | |||||||||||||||
|
Net
income
|
$ | 10,580 | ||||||||||||||
-26-
|
Nine
Months Ended December 31, 2009
|
||||||||||||||||
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 137,800 | $ | 82,271 | $ | 9,059 | $ | 229,130 | ||||||||
|
Other
revenues
|
29 | 1,454 | 28 | 1,511 | ||||||||||||
|
Total
revenues
|
137,829 | 83,725 | 9,087 | 230,641 | ||||||||||||
|
Cost
of sales
|
49,664 | 53,765 | 5,241 | 108,670 | ||||||||||||
|
Gross
profit
|
88,165 | 29,960 | 3,846 | 121,971 | ||||||||||||
|
Advertising
and promotion
|
19,264 | 5,080 | 301 | 24,645 | ||||||||||||
|
Contribution
margin
|
$ | 68,901 | $ | 24,880 | $ | 3,545 | 97,326 | |||||||||
|
Other
operating expenses
|
33,869 | |||||||||||||||
|
Operating
income
|
63,457 | |||||||||||||||
|
Other
expense
|
16,853 | |||||||||||||||
|
Provision
for income taxes
|
18,594 | |||||||||||||||
|
Income
from continuing operations
|
28,010 | |||||||||||||||
| Income from discontinued operations, net of income tax | 661 | |||||||||||||||
|
Gain
on sale of discontinued operations, net of income tax
|
157 | |||||||||||||||
|
Net
income
|
$ | 28,828 | ||||||||||||||
|
Three
Months Ended December 31, 2008
|
||||||||||||||||
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 47,526 | $ | 27,586 | $ | 2,233 | $ | 77,345 | ||||||||
|
Other
revenues
|
69 | 552 | - | 621 | ||||||||||||
|
Total
revenues
|
47,595 | 28,138 | 2,233 | 77,966 | ||||||||||||
|
Cost
of sales
|
16,892 | 18,253 | 1,335 | 36,480 | ||||||||||||
|
Gross
profit
|
30,703 | 9,885 | 898 | 41,486 | ||||||||||||
|
Advertising
and promotion
|
9,459 | 1,794 | 96 | 11,349 | ||||||||||||
|
Contribution
margin
|
$ | 21,244 | $ | 8,091 | $ | 802 | 30,137 | |||||||||
|
Other
operating expenses
|
10,622 | |||||||||||||||
|
Operating
income
|
19,515 | |||||||||||||||
|
Other
expense
|
7,051 | |||||||||||||||
|
Provision
for income taxes
|
4,724 | |||||||||||||||
|
Income
from continuing operations
|
7,740 | |||||||||||||||
|
Income
from discontinued operations, net of income tax
|
278 | |||||||||||||||
|
Net
income
|
$ | 8,018 | ||||||||||||||
-27-
|
Nine
Months Ended December 31, 2008
|
||||||||||||||||
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 137,090 | $ | 87,472 | $ | 8,020 | $ | 232,582 | ||||||||
|
Other
revenues
|
93 | 1,828 | - | 1,921 | ||||||||||||
|
Total
revenues
|
137,183 | 89,300 | 8,020 | 234,503 | ||||||||||||
|
Cost
of sales
|
47,667 | 57,113 | 5,009 | 109,789 | ||||||||||||
|
Gross
profit
|
89,516 | 32,187 | 3,011 | 124,714 | ||||||||||||
|
Advertising
and promotion
|
25,150 | 6,595 | 384 | 32,129 | ||||||||||||
|
Contribution
margin
|
$ | 64,366 | $ | 25,592 | $ | 2,627 | 92,585 | |||||||||
|
Other
operating expenses
|
32,573 | |||||||||||||||
|
Operating
income
|
60,012 | |||||||||||||||
|
Other
expense
|
22,513 | |||||||||||||||
|
Provision
for income taxes
|
14,212 | |||||||||||||||
|
Income
from continuing operations
|
23,287 | |||||||||||||||
|
Income
from discontinued operations, net of income tax
|
1,034 | |||||||||||||||
|
Net
income
|
$ | 24,321 | ||||||||||||||
During
the three and nine month periods ended December 31, 2009, approximately 95.5%
and 95.7%, respectively, of the Company’s sales were made to customers in the
United States and Canada while during the three and nine month periods ended
December 31, 2008, approximately 96.2% and 96.4%, respectively, of sales were
made to customers in the United States and Canada. Other than the United States,
no individual geographical area accounted for more than 10% of net sales in any
of the periods presented.
At
December 31, 2009, substantially all of the Company’s long-term assets were
located in the United States of America and have been allocated to the operating
segments as follows:
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
(In
thousands)
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||||
|
Goodwill
|
$ | 104,100 | $ | 7,389 | $ | 2,751 | $ | 114,240 | ||||||||
|
Intangible
assets
|
||||||||||||||||
|
Indefinite-lived
|
334,750 | 119,821 | -- | 454,571 | ||||||||||||
|
Finite-lived
|
67,851 | 33,579 | 5,827 | 107,257 | ||||||||||||
| 402,601 | 153,400 | 5,827 | 561,828 | |||||||||||||
| $ | 506,701 | $ | 160,789 | $ | 8,578 | $ | 676,068 | |||||||||
-28-
The
following discussion of our financial condition and results of operations should
be read together with the consolidated financial statements and the related
notes included in this Quarterly Report on Form 10-Q, as well as our Annual
Report on Form 10-K for the fiscal year ended March 31, 2009. This
discussion and analysis may contain forward-looking statements that involve
certain risks, assumptions and uncertainties. Future results could
differ materially from the discussion that follows for many reasons, including
the factors described in Part I, Item 1A., “Risk Factors” in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2009, as well as those
described in future reports filed with the SEC. See also “Cautionary
Statement Regarding Forward-Looking Statements” on page 47 of this Quarterly
Report on Form 10-Q.
General
We are
engaged in the marketing, sales and distribution of brand name over-the-counter
healthcare, household cleaning and personal care products to mass merchandisers,
drug stores, supermarkets and club stores primarily in the United States and
Canada. We continue to use the strength of our brands, our
established retail distribution network, a low-cost operating model and our
experienced management team as a competitive advantage to grow our presence in
these categories and, as a result, grow our sales and profits.
We have
grown our brand portfolio by acquiring strong and well-recognized brands from
larger consumer products and pharmaceutical companies, as well as other brands
from smaller private companies. While the brands we have purchased
from larger consumer products and pharmaceutical companies generally have had
long histories of support and brand development, we believe that at the time we
acquired them they were considered “non-core” by their previous owners and did
not benefit from the focus of senior level management or strong marketing
support. We believe that the brands we have purchased from smaller
private companies have been constrained by the limited resources of their prior
owners. After acquiring a brand, we seek to increase its sales,
market share and distribution in both existing and new channels. We
pursue this growth through increased spending on advertising and promotion, new
marketing strategies, improved packaging and formulations and innovative new
products.
Discontinued Operations and
Sale of Certain Assets
In
October 2009, the Company sold certain assets related to the shampoo brands
previously included in its Personal Care products segment to an unrelated third
party. In accordance with the Discontinued Operations Topic of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”), the Company reclassified the related assets as held for sale in the
consolidated balance sheets as of March 31, 2009 and reclassified the related
operating results as discontinued in the consolidated financial statements and
related notes for all periods presented. The Company recognized a
gain of $253,000 on a pre-tax basis and $157,000 net of tax effects on the sale
in the quarter ended December 31, 2009.
The
following table presents the assets related to the discontinued operations as of
March 31, 2009 (in thousands):
|
March
31,
2009
|
||||
|
Inventory
|
$ | 1,038 | ||
|
Intangible
assets
|
8,472 | |||
|
Total
assets held for sale
|
$ | 9,510 | ||
-29-
The
following table summarizes the results of discontinued operations (in
thousands):
|
Three
Months Ended December 31
|
Nine
Months Ended December 31
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Components
of Income
|
||||||||||||||||
|
Revenues
|
$ | 651 | $ | 2,312 | $ | 4,998 | $ | 7,360 | ||||||||
|
Income
before income taxes
|
140 | 447 | 1,064 | 1,665 | ||||||||||||
The total
purchase price for the assets was $9 million, subject to adjustments for
inventory, with $8 million received upon closing, and the remaining $1 million
to be paid on the first anniversary of the closing.
|
Three
Month Period Ended December 31, 2009 compared to
the
|
|
|
Three
Month Period Ended December 31,
2008
|
Revenues
(in thousands)
|
2009
Revenues
|
%
|
2008
Revenues
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 46,169 | 61.2 | $ | 47,595 | 61.0 | $ | (1,426 | ) | (3.0 | ) | |||||||||||||
|
Household
Cleaning
|
27,265 | 36.1 | 28,138 | 36.1 | (873 | ) | (3.1 | ) | ||||||||||||||||
|
Personal
Care
|
2,014 | 2.7 | 2,233 | 2.9 | (219 | ) | (9.8 | ) | ||||||||||||||||
| $ | 75,448 | 100.0 | $ | 77,966 | 100.0 | $ | (2,518 | ) | (3.2 | ) | ||||||||||||||
Revenues
for 2009 were $75.4 million, a decrease of $2.5 million, or 3.2%, versus 2008.
Revenues for all segments decreased versus the comparable period in the prior
year. Revenues from customers outside of North America, which represent 4.5% of
total revenues, increased by $347,000 or 11.5% during 2009 compared to 2008 due
to stronger shipments of eye care product to our Australian
distributor.
In early
February 2010, the Company was notified that its largest customer intended to
discontinue the sale of
The
Doctor’s NightGuard
and
The
Doctor’s Brushpicks
due to
that customer’s initiative to reduce the number of vendors in the Oral Care
category.
Both
products are included in our Over-the-Counter Healthcare Segment.
Revenue
and gross profit from these two products during the three months ended December
31, 2009 were approximately $2.1 million and $1.0 million, respectively.
The Company requested a formal review by the customer of the products’
performance in an effort to reverse the customer’s decision; however, there can
be no assurances that the customer’s decision will be reversed or modified in
any way or that sales of these products to that customer will resume at any
level once discontinued.
Over-the-Counter
Healthcare Segment
Revenues
of the Over-the-Counter Healthcare segment decreased $1.4 million, or 3.0%,
during 2009 versus 2008. Revenue increases for
Clear Eyes
,
Murine Tears
,
Chloraseptic
and
Little Remedies
were offset
by revenue decreases on
Allergen Block
,
Dermoplast and Murine Ear
.
The increase in revenues for
Clear Eyes
was primarily the
result of an increase in consumer consumption. The increase in revenues for
Murine Tears
was
primarily the result of higher shipments to markets outside North America.
Chloraseptic
revenues
increased as a result of shipments to customers in advance of the anticipated
strong cough/cold flu season, although after a strong October,
Chloraseptic
consumer
consumption for the period was down slightly.
Little Remedies
revenue
increased due to strong consumer consumption of its non-medicated
products.
Allergen
Block
revenues decreased due to the non-recurrence during the current
period of trade shipments to customers for the introductory advertising support
that took place during the comparable prior year period.
Dermoplast
revenue decreased
due to non-recurrence during the current period of promotional shipments of the
institutional product that took place in the comparable prior year period.
Murine
Ear
's revenues decreased
primarily as the result of slowing consumer consumption, particularly on
Earigate
.
Household
Cleaning Segment
Revenues
for the Household Cleaning segment decreased $873,000, or 3.1%, during 2009
versus 2008. A decrease in revenue for
Comet
was partially offset
with increased revenue of
Spic
and Span
and
Chore
Boy
.
Comet’s
revenues decreased primarily due to lower consumer demand for bathroom
spray.
Chore
Boy
revenues
-30-
increased
as a result of timing of promotional shipments in September 2008 which were not
repeated this year.
Chore Boy
consumer
consumption declined for the period.
Spic and Span
’s revenues
increased primarily due to timing of promotional shipments to the dollar store
class of trade.
Personal
Care Segment
Revenues
of the Personal Care segment decreased $219,000, or 9.8%, during 2009 versus
2008. The revenue decrease was primarily due to lower sales and
higher trade allowances for
Cutex
.
Gross
Profit (in thousands)
|
2009
Gross
Profit
|
%
|
2008
Gross
Profit
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 29,250 | 63.4 | $ | 30,703 | 64.5 | $ | (1,453 | ) | (4.7 | ) | |||||||||||||
|
Household
Cleaning
|
9,784 | 35.9 | 9,885 | 35.1 | (101 | ) | (1.0 | ) | ||||||||||||||||
|
Personal
Care
|
773 | 38.4 | 898 | 40.2 | (125 | ) | (13.9 | ) | ||||||||||||||||
| $ | 39,807 | 52.8 | $ | 41,486 | 53.2 | $ | (1,679 | ) | (4.0 | ) | ||||||||||||||
Gross
profit for 2009 decreased $1.7 million, or 4.0%, when compared with
2008. As a percent of total revenues, gross profit decreased from
53.2% in 2008 to 52.8% in 2009. The decrease in gross profit as a percent of
revenues was primarily due to increased promotional allowances and higher
distribution costs partially offset by lower obsolescence costs.
Over-the-Counter
Healthcare Segment
Gross
profit for the Over-the-Counter Healthcare segment decreased $1.5 million, or
4.7%, during 2009 versus 2008. As a percent of Over-the-Counter
Healthcare revenues, gross profit decreased from 64.5% during 2008 to 63.4%
during 2009. The decrease in gross profit percentage was the result
of higher trade allowances and unfavorable sales mix. The increase in
trade allowances was primarily the result of an increase in trade promotion
activity behind the
Allergen
Block
products. The unfavorable sales mix was due to lower
sales of
Allergen Block
during the period which has a lower product cost than the segment
average.
Household
Cleaning Segment
Gross
profit for the Household Cleaning segment decreased by $101,000, or 1.0%, during
2009 versus 2008. As a percent of Household Cleaning revenue, gross
profit increased from 35.1% during 2008 to 35.9% during 2009. The increase in
gross profit percentage was the result of decreased product costs for
Comet
partially offset by
higher distribution costs for
Comet
due to transition to a
new
Comet
powder
supplier.
Personal
Care Segment
Gross
profit for the Personal Care segment decreased $125,000, or 13.9%, during 2009
versus 2008. As a percent of Personal Care revenues, gross profit
decreased from 40.2% during 2008 to 38.4% during 2009. The decrease
in gross profit percentage was due to higher trade allowances and distribution
costs for
Cutex
.
Contribution
Margin (in thousands)
|
2009
Contribution
Margin
|
%
|
2008
Contribution
Margin
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 24,104 | 52.2 | $ | 21,244 | 44.6 | $ | 2,860 | 13.5 | |||||||||||||||
|
Household
Cleaning
|
8,907 | 32.7 | 8,091 | 28.8 | 816 | 10.1 | ||||||||||||||||||
|
Personal
Care
|
697 | 34.6 | 802 | 35.9 | (105 | ) | (13.1 | ) | ||||||||||||||||
| $ | 33,708 | 44.7 | $ | 30,137 | 38.7 | $ | 3,571 | 11.8 | ||||||||||||||||
Contribution
Margin, defined as gross profit less advertising and promotional expenses,
increased $3.6 million, or 11.8%, during 2009 versus 2008. The
contribution margin increase was the result of a $5.2 million, or 46.3%,
decrease in advertising and promotional spending, partially offset by the
decrease in gross profit as previously
-31-
discussed. The
decrease in advertising and promotional spending was primarily attributable to
decreases in media support in the Over-the-Counter Healthcare and Household
Segments.
Over-the-Counter
Healthcare Segment
Contribution
margin for the Over-the-Counter Healthcare segment increased $2.9 million, or
13.5%, during 2009 versus 2008. The contribution margin increase was the result
of a $4.3 million, or 45.6%, decrease in advertising and promotional spending,
partially offset by the decrease in gross margin as previously discussed. The
decrease in advertising and promotional spending was primarily attributable to a
decrease in media support for the
Allergen Block
products from
introductory media support levels in the prior year.
Household
Cleaning Segment
Contribution
margin for the Household Cleaning segment increased $816,000, or 10.1%, during
2009 versus 2008. The contribution margin increase was the result of
the decrease in gross profit as previously discussed, offset by a decrease
in media support for
Comet
Mildew Spray Gel
.
Personal
Care Segment
Contribution
margin for the Personal Care segment decreased $105,000, or 13.1%, during 2009
versus 2008. The contribution margin decrease was primarily the result of the
decrease in gross profit as previously discussed.
General
and Administrative
General
and administrative expenses were $
7.4
million for
2009 versus $8.3 million for 2008. The decrease in expense was due to a
reduction in legal expenses, favorable currency translation costs partially
offset by higher incentive compensation costs.
Depreciation
and Amortization
Depreciation
and amortization expense was $
2.6
million for
2009 versus $
2.3
million for
2008. Amortization was affected by the transfer of two trademarks in
the Household Cleaning segment and one trademark in the Over-the-Counter
segment, aggregating $
45.6
million, from
indefinite-lived status to intangibles with finite lives. Commencing April 1,
2009, these intangibles are being amortized over a 20 year estimated useful
life. This increase in amortization expense was partially offset by a
reduction in amortization resulting from a trademark that became fully amortized
at March 31, 2009, resulting in a net increase in depreciation and amortization
expense of $
285,000
for the
period.
Interest
Expense
Net
interest expense was $5.6 million during 2009 versus $7.1 million during 2008.
The reduction in interest expense was primarily the result of a lower level of
indebtedness combined with a reduction of variable interest rates on our senior
debt. The average cost of funds decreased from 7.4% for 2008 to 6.8% for 2009
while the average indebtedness decreased from $384.9 million during 2008 to
$328.8 million during 2009.
Income
Taxes
The
provision for income taxes during 2009 was $7.8 million versus $4.7 million
during 2008. The effective tax rate during 2009 was 43.0% versus
37.9% during 2008. The increase in the effective rate was a result of
a $930,000 non-cash charge to deferred tax liability as a result of increasing
the company’s future effective tax rate from 37.9% to 38.3%. The
increase in tax rate is a result of the divestiture of the shampoo business
which increases the overall effective state tax rate on continuing
operations. The new effective rate is applicable for tax years
beginning after March 31, 2010.
-32-
|
Nine
month period Ended December 31, 2009 compared to
the
|
|
|
Nine
month period Ended December 31,
2008
|
Revenues
(in thousands)
|
2009
Revenues
|
%
|
2008
Revenues
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 137,829 | 59.8 | $ | 137,183 | 58.5 | $ | 646 | 0.5 | |||||||||||||||
|
Household
Cleaning
|
83,725 | 36.3 | 89,300 | 38.1 | (5,575 | ) | (6.2 | ) | ||||||||||||||||
|
Personal
Care
|
9,087 | 3.9 | 8,020 | 3.4 | 1,067 | 13.3 | ||||||||||||||||||
| $ | 230,641 | 100.0 | $ | 234,503 | 100.0 | $ | (3,862 | ) | (1.6 | ) | ||||||||||||||
Revenues
for 2009 were $230.6 million, a decrease of $3.9 million, or 1.6%, versus
2008. Revenues for both the Over-the-Counter Healthcare and Personal
Care segments increased versus the comparable period. Revenues for the Household
Cleaning segment declined during the period. Revenues from customers
outside of North America, which represent 4.3% of total revenues, increased by
$1.1 million or 12.2% during 2009 versus 2008.
In early
February 2010, the Company was notified that its largest customer intended to
discontinue the sale of
The
Doctor’s NightGuard
and
The Doctor’s Brushpicks
due
to that customer’s initiative to reduce the number of vendors in the Oral Care
category. Both products are included in our Over-the-Counter Healthcare
Segment. Revenue and gross profit from these two products during the nine months
ended December 31, 2009 were approximately $4.7 million and $2.3 million,
respectively. The Company requested a formal review by the customer of the
products’ performance in an effort to reverse the customer’s decision; however,
there can be no assurances that the customer’s decision will be reversed or
modified in any way or that sales of these products to that customer will resume
at any level once discontinued.
Over-the-Counter
Healthcare Segment
Revenues
for the Over-the-Counter Healthcare segment increased $646,000, or 0.5%, during
2009 versus 2008. Revenue increases for
Clear Eyes
,
Chloraseptic
,
Compound W
,
Little Remedies, Murine Tears
and
The Doctor
's
were partially offset by revenue decreases on
Allergen Block
,
Murine Ear,
Wartner
and
Dermoplast
.
Clear Eyes
revenues increased
primarily due to the launch of a new line of
Clear Eyes Tears
products and
stronger shipments of the traditional and convenience size
items.
Chloraseptic
revenues
increased as the result of a stronger spring flu season driving consumer
consumption and strong orders in advance of the winter cough/cold season.
Compound W
revenues increased
due to increased consumer consumption, particularly behind the non-cryogenic
products.
Little
Remedies
revenues increased as the result of distribution gains and
increased consumer consumption of its non-medicated pediatric products.
Murine Tears
revenues
increased as the result of higher shipments to markets outside North America.
The Doctor
's revenues
increased due to an increase in advertising and the non-recurrence during the
current period of promotional allowances related to the restage of the
Advanced Comfort NightGuard
dental protector that took place in 2008.
Allergen Block
revenues
decreased as current year sales did not equal the pipeline orders that existed
in 2008 as a result of promotions during the introductory period for the
product.
Murine
Ear
's revenues decreased primarily as the result of slowing consumer
consumption, particularly on
Earigate
.
Wartner
's revenues decreased
as the result of lost distribution and softness in the cryogenic segment of the
wart treatment category.
Household
Cleaning Segment
Revenues
for the Household Cleaning segment decreased $5.6 million, or 6.2%, during 2009
versus 2008.
Comet
's
revenues decreased primarily due to softer consumer consumption of bathroom
spray.
Chore
Boy
revenues declined as a result of weaker consumer
consumption and lost distribution.
Spic and Span
revenues were
flat versus 2008.
Personal
Care Segment
Revenues
for the Personal Care segment increased $1.1 million, or 13.3%, during 2009
versus 2008. The revenue increase was driven by
Cutex
and was due to
improving consumption in the nail polish remover category.
-33-
Gross
Profit (in thousands)
|
2009
Gross
Profit
|
%
|
2008
Gross
Profit
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 88,165 | 64.0 | $ | 89,516 | 65.3 | $ | (1,351 | ) | (1.5 | ) | |||||||||||||
|
Household
Cleaning
|
29,960 | 35.8 | 32,187 | 36.0 | (2,227 | ) | (6.9 | ) | ||||||||||||||||
|
Personal
Care
|
3,846 | 42.3 | 3,011 | 37.5 | 835 | 27.7 | ||||||||||||||||||
| $ | 121,971 | 52.9 | $ | 124,714 | 53.2 | $ | (2,743 | ) | (2.2 | ) | ||||||||||||||
Gross
profit during 2009 decreased $2.7 million, or 2.2%, versus 2008. As a
percent of total revenue, gross profit decreased from 53.2% in 2008 to 52.9% in
2009. The decrease in gross profit as a percent of revenues was primarily due to
increased obsolescence costs and supplier transitional costs, partially offset
by decreases in distribution costs.
Over-the-Counter
Healthcare Segment
Gross
profit for the Over-the-Counter Healthcare segment decreased $1.4 million, or
1.5%, during 2009 versus 2008. As a percent of Over-the-Counter
Healthcare revenues, gross profit decreased from 65.3% during 2008 to 64.0%
during 2009. The decrease in gross profit percentage was primarily
the result of higher promotional allowances, unfavorable sales mix and increased
obsolescence costs partially offset by lower distribution costs. The
increase in promotional allowances was primarily the result of an increase in
trade promotion activity behind the
Allergen Block
products. The unfavorable sales mix was due to lower sales of
Allergen Block
, which has a
lower product cost than the segment average. The increase in obsolescence costs
was the result of short dated and slow moving eye care and
Allergen Block
inventory.
Household
Cleaning Segment
Gross
profit for the Household Cleaning segment decreased $2.2 million, or 6.9%,
during 2009 versus 2008. As a percent of Household Cleaning revenues,
gross profit decreased from 36.0% during 2008 to 35.8% during 2009. The decrease
in gross profit percentage was the result of higher promotional allowances
across the segment and
costs associated with the transition to a new
Comet
powder supplier,
partially offset by decreased product costs for
Chore Boy
and
Comet
and lower distribution
costs.
Personal
Care Segment
Gross
profit for the Personal Care segment increased $835,000, or 27.7%, during 2009
versus 2008. As a percent of Personal Care revenues, gross profit
increased from 37.5% during 2008 to 42.3% during 2009. The increase
in gross profit percentage was due to lower promotional allowances and absence
of obsolescence costs for
Cutex
.
Contribution
Margin (in thousands)
|
2009
Contribution
Margin
|
%
|
2008
Contribution
Margin
|
%
|
Increase
(Decrease)
|
%
|
|||||||||||||||||||
|
OTC
Healthcare
|
$ | 68,901 | 50.0 | $ | 64,366 | 46.9 | $ | 4,535 | 7.0 | |||||||||||||||
|
Household
Cleaning
|
24,880 | 29.7 | 25,592 | 28.7 | (712 | ) | (2.8 | ) | ||||||||||||||||
|
Personal
Care
|
3,545 | 39.0 | 2,627 | 32.8 | 918 | 34.9 | ||||||||||||||||||
| $ | 97,326 | 42.2 | $ | 92,585 | 39.5 | $ | 4,741 | 5.1 | ||||||||||||||||
Contribution
Margin, defined as gross profit less advertising and promotional expenses, for
2009 increased $4.7 million, or 5.1%, versus 2008. The contribution margin
increase was the result of a $7.5 million, or 23.3%, decrease in advertising and
promotional spending, partially offset by the decrease in gross profit as
previously discussed. The decrease in advertising and promotional
spending was primarily attributable to decreases in media support for both the
Over-the-Counter Healthcare and Household Cleaning segments, and market research
for the Over-the-Counter Healthcare segment.
-34-
Over-the-Counter
Healthcare Segment
Contribution
margin for the Over-the-Counter Healthcare segment increased $4.5 million, or
7.0%, during 2009 versus 2008. The contribution margin increase was
the result of a $5.9 million, or 23.4%, decrease in advertising and promotional
spending, partially offset by the decrease in gross margin as previously
discussed. The decrease in advertising and promotional spending was
primarily attributable to a decrease in media support for the
Allergen Block
and
Murine Earigate
products, and
a decrease in market research for
Clear Eyes
,
Chloraseptic
and
Compound W
.
Household
Cleaning Segment
Contribution
margin for the Household Cleaning segment decreased $712,000, or 2.8%, during
2009 versus 2008. The contribution margin decrease was the result of the
decrease in gross profit as previously discussed, partially offset by a decrease
in media support for
Comet
Mildew Spray Gel
.
Personal
Care Segment
Contribution
margin for the Personal Care segment increased $918,000, or 34.9%, during 2009
versus 2008. The contribution margin increase was the result of the
increase in gross profit as previously discussed and a modest reduction in trade
promotion and market research for
Cutex
.
General
and Administrative
General
and administrative expenses were $
26.1
million for
2009 versus $
25.6
million for
2008. The increase in expense was due to a $
2.5
million net
charge associated with the reduction in workforce and the CEO change, which took
place in our second fiscal quarter, partially offset by favorable currency
translation costs and a reduction in legal expenses.
Depreciation
and Amortization
Depreciation
and amortization expense was $
7.8
million for
2009 versus $
6.9
million for
2008. Amortization was affected by the transfer of two trademarks in
the Household Cleaning segment and one trademark in the Over-the-Counter
Healthcare segment, aggregating $45.6 million, from indefinite-lived status to
intangibles with finite lives. Commencing April 1, 2009, these intangibles are
being amortized to operations over a 20 year estimated useful
life. This increase in amortization expense was partially offset by a
reduction in amortization resulting from a trademark that became fully amortized
at March 31, 2009, resulting in a net increase in depreciation and amortization
expense of $
856,000
for the
period.
Interest
Expense
Net
interest expense was $16.9 million during 2009 versus $22.5 million during
2008. The reduction in interest expense was primarily the result of a
lower level of indebtedness combined with a reduction of interest rates on our
senior debt. The average cost of funds decreased from 7.6% for 2008
to 6.4% for 2009 while the average indebtedness decreased from $394.6 million
during 2008 to $348.8 million during 2009.
Income
Taxes
The
provision for income taxes during 2009 was $18.6 million versus $14.2 million in
2008. The effective tax rate was 39.9% during 2009 versus 37.9%
during 2008. The increase in the effective rate was a result of
a $930,000 non-cash charge to deferred tax liability as a result of increasing
the company’s future effective tax rate from 37.9% to 38.3%. The
increase in tax rate is a result of the divestiture of the shampoo business
which increases the overall effective state tax rate on continuing
operations. The new effective rate is applicable for tax years
starting after March 31, 2010.
Liquidity
and Capital Resources
Liquidity
We have
financed and expect to continue to finance our operations with a combination of
borrowings and funds generated from operations. Our principal uses of cash
are for operating expenses, debt service, brand acquisitions, working capital
and capital expenditures. Because we allowed our revolving credit
facility to expire in April 2009 and due to the uncertain credit markets, the
Company has increased its cash reserves by an additional $30.0 million to
provide an additional margin of liquidity. The Company expects to
refinance its existing credit facility
-35-
and
Senior Subordinated Notes on or before March 31, 2010; however, the Company
cannot provide any assurance that such refinancing will be consummated by such
date or at a future date.
|
Nine
Months Ended December 31
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Cash
provided by (used for):
|
||||||||
|
Operating
Activities
|
$ | 50,490 | $ | 53,347 | ||||
|
Investing
Activities
|
7,591 | (4,588 | ) | |||||
|
Financing
Activities
|
(59,000 | ) | (26,903 | ) | ||||
Operating
Activities
Net cash
provided by operating activities was $50.5 million for the nine month period
ended December 31, 2009 compared to $53.3 million for the comparable period in
2008. The $2.8 million decrease in net cash provided by operating
activities was the result of a decrease in working capital, primarily due to the
increase in inventories, partially offset by increases in net income and
deferred income taxes.
Consistent
with the nine months ended December 31, 2008, the Company’s cash flow from
operations exceeded net income due to the substantial non-cash charges related
to depreciation and amortization of intangibles, increases in deferred income
tax liabilities resulting from differences in the amortization of intangible
assets and goodwill for income tax and financial reporting purposes, the
amortization of certain deferred financing costs, as well as stock-based
compensation costs.
Investing
Activities
Net cash
provided by investing activities was $
7.6
million for the
nine month period ended December 31, 2009 compared to net cash used for
investing activities of $
4.6
million for the
comparable period in 2008. The net cash provided by investing
activities during the nine month period ended December 31, 2009 was primarily
due to the divestiture of the shampoo business partially offset by the
acquisition of property and equipment. Net cash used for investing
activities during the nine month period ended December 31, 2008 was primarily
due to the $
4.2
million
settlement of a purchase price adjustment associated with the Wartner USA BV
acquisition in 2006. The remainder was for the acquisition of
property and equipment.
Financing
Activities
Net cash
used for financing activities was $
59.0
million for
the nine month period ended December 31, 2009 compared to $
26.9
million for
the comparable period in 2008. During the nine month period ended
December 31, 2009, the Company repaid $
56.3
million of
indebtedness in excess of normal maturities with cash generated from
operations. This reduced our outstanding indebtedness to $
319.3
million at
December 31, 2009 from $
378.3
million at
March 31, 2009.
Capital
Resources
As of
December 31, 2009, we had an aggregate of $319.3 million of outstanding
indebtedness, which consisted of the following:
|
·
|
$193.3
million of borrowings under the Tranche B Senior Secured Term Loan
Facility, and
|
|
·
|
$126.0
million of 9.25% Senior Subordinated Notes due
2012.
|
All loans
under the senior secured term loan facility (“Senior Credit Facility”) bear
interest at floating rates, based on either the prime rate, or at our option,
the LIBOR rate, plus an applicable margin. At December 31, 2009, an
aggregate of $193.3 million was outstanding under the Senior Credit Facility at
an interest rate of 2.48%.
The
Company uses derivative financial instruments to mitigate the impact of changing
interest rates associated with its long-term debt
obligations. Although the Company does not enter into derivative
financial instruments for trading purposes, all of the Company’s derivatives are
straightforward over-the-counter instruments with liquid markets. The
notional, or contractual, amount of the Company’s derivative financial
instruments is used to
-36-
measure
the amount of interest to be paid or received and does not represent an actual
liability. The Company accounts for these financial instruments as
cash flow hedges.
In
February 2008, the Company entered into an interest rate swap agreement in the
notional amount of $175.0 million, decreasing to $125.0 million at March 26,
2009 to replace and supplement a $50.0 million interest rate cap agreement that
expired on May 30, 2008. Under this swap, the Company agreed to pay a
fixed rate of 2.88% while receiving a variable rate based on
LIBOR. The agreement terminates on March 26, 2010. The
fair value of the interest rate swap agreement is included in either other
assets or accrued liabilities at the balance sheet date. At December
31, 2009 and March 31, 2009, the fair values of the interest rate swap were
$794,000 and $2.2 million, respectively. Such amounts were included
in other accrued liabilities.
The
Senior Credit Facility contains various financial covenants, including
provisions that require us to maintain certain leverage ratios, interest
coverage ratios and fixed charge coverage ratios. The Senior Credit
Facility, as well as the Indenture governing the Senior Subordinated Notes,
contain provisions that accelerate our indebtedness on certain changes in
control and restrict us from undertaking specified corporate actions, including
asset dispositions, acquisitions, payment of dividends and other specified
payments, repurchasing the Company’s equity securities in the public markets,
incurrence of indebtedness, creation of liens, making loans and investments and
transactions with affiliates. Specifically, we must:
|
·
|
Have
a leverage ratio of less than 4.0 to 1.0 for the quarter ended December
31, 2009, decreasing over time to 3.75 to 1.0 for the quarter ending
December 31, 2010, and remaining level
thereafter,
|
|
·
|
Have
an interest coverage ratio of greater than 3.0 to 1.0 for the quarter
ended December 31, 2009, increasing over time to 3.25 to 1.0 for the
quarter ending March 31, 2010, and remaining level thereafter,
and
|
|
·
|
Have
a fixed charge coverage ratio of greater than 1.5 to 1.0 for the quarter
ended December 31, 2009, and for each quarter thereafter until the quarter
ending March 31, 2011.
|
At
December 31, 2009, we were in compliance with the applicable financial and
restrictive covenants under the Senior Credit Facility and the Indenture
governing the Senior Subordinated Notes. Additionally, management
anticipates that in the normal course of operations, the Company will be in
compliance with the financial and restrictive covenants during the ensuing
year.
At
December 31, 2009, we had $193.3 million outstanding under the Tranche B Term
Loan Facility which matures in April 2011. We are obligated to make
quarterly principal payments on the Tranche B Term Loan Facility equal to
$887,500, representing 0.25% of the initial principal amount of the term
loan.
As a
result of the expiration of certain credit facilities, the current economic
environment and the state of the credit markets, the Company established and
reached its goal of enhancing its liquidity position and used its strong cash
flow generated from operations to build its cash reserves. Management
estimates that cash reserves of approximately $30.0 million are sufficient to
provide adequate liquidity, allowing the Company to meet its current and future
obligations as they come due. Accordingly, management made repayments
against outstanding indebtedness of $29.3 million in excess of scheduled
maturities during the year ended March 31, 2009 and $56.3 million in excess of
scheduled maturities during the nine month period ended December 31,
2009. While management intends to replace these credit facilities
during the ensuing year, the uncertainties of the credit markets could impede
our ability to do so. As an example, the following factors could
influence the amounts available to us and the interest rates associated with
such an effort:
|
·
|
A
deterioration of the Company’s earnings and its strong cash flows from
operations,
|
|
·
|
Prevailing
interest rates in the market for similar offerings by companies with
comparable credit ratings,
|
|
·
|
Total
amount borrowed and the Company’s intended use of such
proceeds,
|
-37-
|
·
|
Ratio
of amounts bearing fixed and variable rates of interest,
and
|
|
·
|
Total
amount outstanding at the time, giving effect to the Company’s ability to
refinance its existing
indebtedness.
|
In the
current credit environment, management would expect the average interest rate
associated with such a refinancing to be in excess of the Company’s current
average borrowing rate of 5.15%. However, we can give no assurances
that financing will be available, or if available, that it can be obtained on
terms favorable to us or on a basis that is not dilutive to our
stockholders.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements or financing activities with
special-purpose entities.
Inflation
Inflationary
factors such as increases in the costs of raw materials, packaging materials,
purchased product and overhead may adversely affect our operating
results. Although we do not believe that inflation has had a material
impact on our financial condition or results from operations for the periods
referred to above, a high rate of inflation in the future could have a material
adverse effect on our business, financial condition or results from
operations. The recent volatility in crude oil prices has had an
adverse impact on transportation costs, as well as certain petroleum based raw
materials and packaging material. Although the Company takes efforts
to minimize the impact of inflationary factors, including raising prices to our
customers, a high rate of pricing volatility associated with crude oil supplies
may continue to have an adverse effect on our operating results.
|
Critical
Accounting Policies and Estimates
|
The
Company’s significant accounting policies are described in the notes to the
unaudited financial statements included elsewhere in this Quarterly Report on
Form 10-Q, as well as in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2009. While all significant accounting policies are
important to our consolidated financial statements, certain of these policies
may be viewed as being critical. Such policies are those that are
both most important to the portrayal of our financial condition and results from
operations and require our most difficult, subjective and complex estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses or the related disclosure of contingent assets and
liabilities. These estimates are based upon our historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these
estimates under different conditions. The most critical accounting
estimates are as follows:
Revenue
Recognition
We
recognize revenue when the following revenue recognition criteria are met: (i)
persuasive evidence of an arrangement exists; (ii) the product has been shipped
and the customer takes ownership and assumes the risk of loss; (iii) the selling
price is fixed or determinable; and (iv) collection of the resulting receivable
is reasonably assured. We have determined that the transfer of risk
of loss generally occurs when product is received by the customer, and,
accordingly recognize revenue at that time. Provision is made for
estimated discounts related to customer payment terms and estimated product
returns at the time of sale based on our historical experience.
As is
customary in the consumer products industry, we participate in the promotional
programs of our customers to enhance the sale of our products. The
cost of these promotional programs is recorded as advertising and promotional
expenses or as a reduction of sales. Such costs vary from
period-to-period based on the actual number of units sold during a finite period
of time. We estimate the cost of such promotional programs at their
inception based on historical experience and current market conditions and
reduce sales by such estimates. These promotional programs consist of
direct to consumer incentives such as coupons and temporary price reductions, as
well as incentives to our customers, such as slotting fees and cooperative
advertising. We do not provide incentives to customers for the
acquisition of product in excess of normal inventory quantities since such
-38-
incentives
increase the potential for future returns, as well as reduce sales in the
subsequent fiscal periods.
Estimates
of costs of promotional programs are based on (i) historical sales experience,
(ii) the current offering, (iii) forecasted data, (iv) current market
conditions, and (v) communication with customer purchasing/marketing
personnel. At the completion of the promotional program, the
estimated amounts are adjusted to actual results. Our related
promotional expense for the year ended March 31, 2009 was $17.4 million. We
believe that the estimation methodologies employed, combined with the nature of
the promotional campaigns, make the likelihood remote that our obligation would
be misstated by a material amount. However, for illustrative
purposes, had we underestimated the promotional program rate by 10% for the year
ended March 31, 2009, our sales and operating income would have been adversely
affected by approximately $1.7 million. Net income would have been
adversely affected by approximately $1.1 million. Similarly, had we
underestimated the promotional program rate by 10% for the three and nine month
periods ended December 31, 2009, our sales and operating income would have been
adversely affected by approximately $512,000, and $1.5 million,
respectively. Net income would have been adversely affected by
approximately $318,000 and $906,000 for the three and nine month periods ended
December 31, 2009, respectively.
We also
periodically run coupon programs in Sunday newspaper inserts or as on-package
instant redeemable coupons. We utilize a national clearing house to
process coupons redeemed by customers. At the time a coupon is
distributed, a provision is made based upon historical redemption rates for that
particular product, information provided as a result of the clearing house’s
experience with coupons of similar dollar value, the length of time the coupon
is valid, and the seasonality of the coupon drop, among other
factors. During the year ended March 31, 2009, we had 16 coupon
events. The amount recorded against revenues and accrued for these
events during the year was $1.4 million; redemptions during the year were $1.3
million. During the nine month period ended December 31, 2009, we had
19 coupon events. The amounts recorded against revenue and accrued
for these events during the three and nine month periods ended December 31, 2009
were $211,000 and $1.1 million, respectively. The redemption amounts during the
three and nine month periods ended December 31, 2009 were $518,000 and $1.1
million, respectively.
Allowances
for Product Returns
Due to
the nature of the consumer products industry, we are required to estimate future
product returns. Accordingly, we record an estimate of product
returns concurrent with the recording of sales. Such estimates are
made after analyzing (i) historical return rates, (ii) current economic trends,
(iii) changes in customer demand, (iv) product acceptance, (v) seasonality of
our product offerings, and (vi) the impact of changes in product formulation,
packaging and advertising.
We
construct our returns analysis by looking at the previous year’s return history
for each brand. Subsequently, each month, we estimate our current
return rate based upon an average of the previous six months’ return rate and
review that calculated rate for reasonableness giving consideration to the other
factors described above. Our historical return rate has been
relatively stable; for example, for the years ended March 31, 2009, 2008 and
2007, returns represented 3.8%, 4.4% and 3.3%, respectively, of gross
sales. The increase in the returns rate from 2007 to 2008 of 1.1% was
due to the voluntary withdrawal from the marketplace of
Little Remedies
medicated
pediatric cough and cold products in October 2007. Had the voluntary withdrawal
not occurred, the actual returns rate would have been 3.9%. For the
three and nine month periods ended December 31, 2009, product returns
represented 2.6% and 2.9% of gross sales, respectively. At December
31, 2009 and March 31, 2009, the allowance for sales returns was $2.3 million
and $2.2 million, respectively.
While we
utilize the methodology described above to estimate product returns, actual
results may differ materially from our estimates, causing our future financial
results to be adversely affected. Among the factors that could cause
a material change in the estimated return rate would be significant unexpected
returns with respect to a product or products that comprise a significant
portion of our revenues in a manner similar to the
Little Remedies
voluntary
withdrawal discussed above. Based upon the methodology described
above and our actual returns’ experience, management believes the likelihood of
such an event remains remote. As noted, over the last three years our
actual product return rate has stayed within a range of 4.4% to 3.3% of gross
sales. An increase of 0.1% in our estimated return rate as a
percentage of gross sales would have adversely affected our reported sales and
operating income for the year ended March 31, 2009 by approximately
$357,000. Net income would have been adversely affected by
approximately $222,000. An increase of 0.1% in our estimated return
rate as a percentage
-39-
of gross
sales for the three and nine month periods ended December 31, 2009 would have
adversely affected our reported sales and operating income by approximately
$88,000 and $272,000, respectively, while our net income would have been
adversely affected by approximately $55,000 and $169,000,
respectively.
Allowances
for Obsolete and Damaged Inventory
We value
our inventory at the lower of cost or market value. Accordingly, we
reduce our inventories for the diminution of value resulting from product
obsolescence, damage or other issues affecting marketability equal to the
difference between the cost of the inventory and its estimated market
value. Factors utilized in the determination of estimated market
value include (i) current sales data and historical return rates, (ii) estimates
of future demand, (iii) competitive pricing pressures, (iv) new product
introductions, (v) product expiration dates, and (vi) component and packaging
obsolescence.
Many of
our products are subject to expiration dating. As a general rule our
customers will not accept goods with expiration dating of less than 12 months
from the date of delivery. To monitor this risk, management utilizes
a detailed compilation of inventory with expiration dating between zero and 15
months and reserves for 100% of the cost of any item with expiration dating of
12 months or less. At December 31, 2009 and March 31, 2009, the
allowance for obsolete and slow moving inventory was $2.6 million and $1.4
million, representing 7.0% and 5.1%, respectively, of total
inventory. Inventory obsolescence costs charged to operations were
$2.2 million for the year ended March 31, 2009, while for the three and nine
month periods ended December 31, 2009, the Company recorded obsolescence costs
of $(70,000) and $1.8 million, respectively. A 1.0% increase in our
allowance for obsolescence at March 31, 2009 would have adversely affected our
reported operating income and net income for the year ended March 31, 2009 by
approximately $273,000 and $170,000, respectively. Similarly, a 1.0%
increase in our allowance at December 31, 2009 would have adversely affected our
reported operating income and net income for the three and nine month periods
ended December 31, 2009 by approximately $367,000 and $228,000,
respectively.
Allowance
for Doubtful Accounts
In the
ordinary course of business, we grant non-interest bearing trade credit to our
customers on normal credit terms. We maintain an allowance for
doubtful accounts receivable which is based upon our historical collection
experience and expected collectibility of the accounts receivable. In
an effort to reduce our credit risk, we (i) establish credit limits for all of
our customer relationships, (ii) perform ongoing credit evaluations of our
customers’ financial condition, (iii) monitor the payment history and aging of
our customers’ receivables, and (iv) monitor open orders against an individual
customer’s outstanding receivable balance.
We
establish specific reserves for those accounts which file for bankruptcy, have
no payment activity for 180 days or have reported major negative changes to
their financial condition. The allowance for bad debts amounted to
0.7% and
0.3% of accounts receivable at December 31, 2009 and March 31, 2009,
respectively. Bad debt expense for the year ended March 31, 2009 was
$130,000, while during the three and nine month periods ended December 31, 2009,
the Company recorded bad debt expense of $50,000 and $150,000,
respectively.
While
management believes that it is diligent in its evaluation of the adequacy of the
allowance for doubtful accounts, an unexpected event, such as the bankruptcy
filing of a major customer, could have an adverse effect on our future financial
results. A 0.1% increase in our bad debt expense as a percentage of
sales during the year ended March 31, 2009 would have resulted in a decrease in
reported operating income of approximately $303,000, and a decrease in our
reported net income of approximately $188,000. Similarly, a 0.1%
increase in our bad debt expense as a percentage of sales for the three and nine
month periods ended December 31, 2009 would have resulted in a decrease in
reported operating income of approximately $75,000 and $231,000, respectively,
and a decrease in our reported net income of approximately $47,000 and $143,000,
respectively.
Valuation
of Intangible Assets and Goodwill
Goodwill
and intangible assets amounted to $676.1 million and $683.4 million at December
31, 2009 and March 31, 2009, respectively. At December 31, 2009,
goodwill and intangible assets were apportioned among our three operating
segments as follows:
-40-
|
Over-the-
Counter
|
Household
|
Personal
|
||||||||||||||
|
(In
thousands)
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||||
|
Goodwill
|
$ | 104,100 | $ | 7,389 | $ | 2,751 | $ | 114,240 | ||||||||
|
Intangible
assets
|
||||||||||||||||
|
Indefinite-lived
|
334,750 | 119,821 | -- | 454,571 | ||||||||||||
|
Finite-lived
|
67,851 | 33,579 | 5,827 | 107,257 | ||||||||||||
| 402,601 | 153,400 | 5,827 | 561,828 | |||||||||||||
| $ | 506,701 | $ | 160,789 | $ | 8,578 | $ | 676,068 | |||||||||
Our
Clear Eyes, New-Skin,
Chloraseptic
,
Compound
W
and
Wartner
brands comprise the majority of the value of the intangible assets within
the Over-The-Counter Healthcare segment. The
Comet, Spic and Span
and
Chore Boy
brands
comprise substantially all of the intangible asset value within the Household
Cleaning segment.
Cutex
comprised the majority
of the intangible asset value within the Personal Care segment.
Goodwill
and intangible assets comprise substantially all of our
assets. Goodwill represents the excess of the purchase price over the
fair value of assets acquired and liabilities assumed in a purchase business
combination. Intangible assets generally represent our trademarks,
brand names and patents. When we acquire a brand, we are required to
make judgments regarding the value assigned to the associated intangible assets,
as well as their respective useful lives. Management considers many
factors, both prior to and after, the acquisition of an intangible asset in
determining the value, as well as the useful life, assigned to each intangible
asset that the Company acquires or continues to own and promote. The
most significant factors are:
|
·
|
Brand
History
|
A brand
that has been in existence for a long period of time (
e.g.,
25, 50 or 100 years)
generally warrants a higher valuation and longer life (sometimes indefinite)
than a brand that has been in existence for a very short period of
time. A brand that has been in existence for an extended period of
time generally has been the subject of considerable investment by its previous
owner(s) to support product innovation and advertising and
promotion.
|
·
|
Market
Position
|
Consumer
products that rank number one or two in their respective market generally have
greater name recognition and are known as quality product offerings, which
warrant a higher valuation and longer life than products that lag in the
marketplace.
|
·
|
Recent
and Projected Sales Growth
|
Recent
sales results present a snapshot as to how the brand has performed in the most
recent time periods and represent another factor in the determination of brand
value. In addition, projected sales growth provides information about
the strength and potential longevity of the brand. A brand that has
both strong current and projected sales generally warrants a higher valuation
and a longer life than a brand that has weak or declining
sales. Similarly, consideration is given to the potential investment,
in the form of advertising and promotion, which is required to reinvigorate a
brand that has fallen from favor.
|
·
|
History
of and Potential for Product
Extensions
|
Consideration
also is given to the product innovation that has occurred during the brand’s
history and the potential for continued product innovation that will determine
the brand’s future. Brands that can be continually enhanced by new
product offerings generally warrant a higher valuation and longer life than a
brand that has always “followed the leader”.
After
consideration of the factors described above, as well as current economic
conditions and changing consumer behavior, management prepares a determination
of the intangible’s value and useful life based on its
analysis.
-41-
Under
accounting guidelines goodwill is not amortized, but must be tested for
impairment annually, or more frequently if an event or circumstances change that
would more likely than not reduce the fair value of the reporting unit below the
carrying amount. In a similar manner, indefinite-lived assets are no
longer amortized. They are also subject to an annual impairment test,
or more frequently if events or changes in circumstances indicate that the asset
may be impaired. Additionally, at each reporting period an evaluation
must be made to determine whether events and circumstances continue to support
an indefinite useful life. Intangible assets with finite lives are
amortized over their respective estimated useful lives and must also be tested
for impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable and exceeds its fair
value.
On an
annual basis, during the fourth fiscal quarter, or more frequently if conditions
indicate that the carrying value of the asset may not be recovered, management
performs a review of both the values and useful lives assigned to goodwill and
intangible assets and tests for impairment.
Finite-Lived
Intangible Assets
As
mentioned above, when events or changes in circumstances indicate the carrying
value of the assets may not be recoverable, management performs a review to
ascertain the impact of events and circumstances on the estimated useful lives
and carrying values of our trademarks and trade names. In connection
with this analysis, management:
|
·
|
Reviews
period-to-period sales and profitability by
brand,
|
|
·
|
Analyzes
industry trends and projects brand growth
rates,
|
|
·
|
Prepares
annual sales forecasts,
|
|
·
|
Evaluates
advertising effectiveness,
|
|
·
|
Analyzes
gross margins,
|
|
·
|
Reviews
contractual benefits or
limitations,
|
|
·
|
Monitors
competitors’ advertising spend and product
innovation,
|
|
·
|
Prepares
projections to measure brand viability over the estimated useful life of
the intangible asset, and
|
|
·
|
Considers
the regulatory environment, as well as industry
litigation.
|
Should
analysis of any of the aforementioned factors warrant a change in the estimated
useful life of the intangible asset, management will reduce the estimated useful
life and amortize the carrying value prospectively over the shorter remaining
useful life. Management’s projections are utilized to assimilate all
of the facts, circumstances and expectations related to the trademark or trade
name and estimate the cash flows over its useful life. In the event
that the long-term projections indicate that the carrying value is in excess of
the undiscounted cash flows expected to result from the use of the intangible
assets, management is required to record an impairment charge. Once
that analysis is completed, a discount rate is applied to the cash flows to
estimate fair value. The impairment charge is measured as the excess
of the carrying amount of the intangible asset over fair value as calculated
using the discounted cash flow analysis. Future events, such as
competition, technological advances and reductions in advertising support for
our trademarks and trade names could cause subsequent evaluations to utilize
different assumptions.
Indefinite-Lived
Intangible Assets
In a
manner similar to finite-lived intangible assets, at each reporting period,
management analyzes current events and circumstances to determine whether the
indefinite life classification for a trademark or trade name continues to be
valid. Should circumstance warrant a finite life, the carrying value
of the intangible asset would then be amortized prospectively over the estimated
remaining useful life.
The
economic events experienced during the year ended March 31, 2009, as well as the
Company’s plans and projections for its brands, indicated that several of our
brands could no longer support indefinite useful lives. Each of these
brands incurred an impairment charge during the three month period ended March
31, 2009 and has been adversely affected by increased
competition. Consequently, at April 1, 2009, management reclassified
$45.6 million of previously indefinite-lived intangibles to intangibles with
definite lives. Management estimates the useful lives of these
intangibles to be 20 years.
-42-
The fair
values and the annual amortization charges of the reclassified intangibles are
as follows (in thousands):
|
Intangible
|
Fair
Value
as
of
March
31,
2009
|
Annual
Amortization
|
||||||
|
Household
Trademarks
|
$ | 34,888 | $ | 1,745 | ||||
|
OTC
Healthcare Trademark
|
10,717 | 536 | ||||||
| $ | 45,605 | $ | 2,281 | |||||
Management
tests the indefinite-lived intangible assets for impairment by comparing the
carrying value of the intangible asset to its estimated fair
value. Since quoted market prices are seldom available for trademarks
and trade names such as ours, we utilize present value techniques to estimate
fair value. Accordingly, management’s projections are utilized to
assimilate all of the facts, circumstances and expectations related to the
trademark or trade name and estimate the cash flows over its useful
life. In performing this analysis, management considers the same
types of information as listed above in regards to finite-lived intangible
assets. Once that analysis is completed, a discount rate is applied
to the cash flows to estimate fair value. Future events, such as
competition, technological advances and reductions in advertising support for
our trademarks and trade names could cause subsequent evaluations to utilize
different assumptions.
Goodwill
As part
of its annual test for impairment of goodwill, management estimates the
discounted cash flows of each reporting unit, which is at the brand level, and
one level below the operating segment level, to estimate their respective fair
values. In performing this analysis, management considers the same
types of information as listed above in regards to finite-lived intangible
assets. In the event that the carrying amount of the reporting unit
exceeds the fair value, management would then be required to allocate the
estimated fair value of the assets and liabilities of the reporting unit as if
the unit was acquired in a business combination, thereby revaluing the carrying
amount of goodwill. In a manner similar to indefinite-lived assets,
future events, such as competition, technological advances and reductions in
advertising support for our trademarks and trade names could cause subsequent
evaluations to utilize different assumptions.
Impairment
Analysis
In
estimating the value of trademarks and trade names, as well as goodwill at March
31, 2009, management applied a discount rate of 11.0%, the Company’s estimated
future weighted-average cost of funds, to the projected cash
flows. This discounted cash flow methodology is a widely-accepted
valuation technique utilized by market participants in the valuation process and
has been applied consistently. In addition, we considered the
Company’s market capitalization at March 31, 2009, as compared to the aggregate
fair values of our reporting units to assess the reasonableness of our estimates
pursuant to the discounted cash flow methodology.
During
the three month period ended March 31, 2009, as a direct consequence of the
challenging economic environment, the dislocation of the debt and equity
markets, and contracting consumer demand for our branded products, we recorded a
non-cash charge in the amount of $249.6 million related to the impairment of
intangible assets and goodwill across the entire product line because the
carrying amount of these “branded” assets exceeded their respective fair
values. A summary of the impairment activity by segment is as
follows:
-43-
|
Over-the-
Counter
Healthcare
|
Household
Cleaning
|
Personal
Care
|
Consolidated
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Goodwill
|
$ | 125,527 | $ | 65,160 | $ | -- | $ | 190,687 | ||||||||
|
Intangible
assets
|
||||||||||||||||
|
Indefinite-lived
|
28,603 | 16,184 | -- | 44,787 | ||||||||||||
|
Finite-lived
|
12,420 | -- | 1,696 | 14,116 | ||||||||||||
| 41,023 | 16,184 | 1,696 | 58,903 | |||||||||||||
| $ | 166,550 | $ | 81,344 | $ | 1,696 | $ | 249,590 | |||||||||
The
discount rate utilized in the analyses, as well as future cash flows may be
influenced by such factors as changes in interest rates and rates of
inflation. Additionally, should the related fair values of goodwill
and intangible assets continue to be adversely affected as a result of declining
sales or margins caused by competition, changing consumer preferences,
technological advances or reductions in advertising and promotional expenses,
the Company may be required to record additional impairment charges in the
future. However, the Company was not required to recognize an
additional impairment charge during the three or nine month periods ended
December 31, 2009.
Stock-Based
Compensation
The Compensation and
Equity Topics of the FASB ASC
requires the Company to measure the cost of
services to be rendered based on the grant-date fair value of the equity
award. Compensation expense is to be recognized over the period which
an employee is required to provide service in exchange for the award, generally
referred to as the requisite service period. Information utilized in
the determination of fair value includes the following:
|
·
|
Type
of instrument (i.e.: restricted shares vs. an option, warrant or
performance shares),
|
|
·
|
Strike
price of the instrument,
|
|
·
|
Market
price of the Company’s common stock on the date of
grant,
|
|
·
|
Discount
rates,
|
|
·
|
Duration
of the instrument, and
|
|
·
|
Volatility
of the Company’s common stock in the public
market.
|
Additionally,
management must estimate the expected attrition rate of the recipients to enable
it to estimate the amount of non-cash compensation expense to be recorded in our
financial statements. While management uses diligent analysis to
estimate the respective variables, a change in assumptions or market conditions,
as well as changes in the anticipated attrition rates, could have a significant
impact on the future amounts recorded as non-cash compensation
expense. The Company recorded net non-cash compensation expense of
$2.4 million and $1.1 million during the years ended March 31, 2009 and 2008,
respectively. However, during the year ended March 31, 2009,
management was required to reverse previously recorded stock-based compensation
costs of $193,000 and $705,000 related to the May 2008 and 2007 grants,
respectively, as it was determined that the Company would not meet the
performance goals associated with such grants of restricted
stock. During the year ended March 31, 2008, management for the same
reasons was required to reverse previously recorded stock-based compensation
costs of $538,000, $394,000 and $166,000 related to the October 2005, July 2006
and May 2007 grants, respectively. The Company recorded non-cash
compensation expense of $810,000 and $1.7 million during the three and nine
month periods ended December 31, 2009, respectively, and non-cash compensation
of $671,000 and $2.2 million during the three and nine month periods ended
December 31, 2008, respectively. During the nine months ended December 31, 2009,
management was required to reverse previously recorded stock-based compensation
costs of $564,000 recorded in 2009, as the service requirements related to those
grants were not met.
-44-
Loss
Contingencies
Loss
contingencies are recorded as liabilities when it is probable that a liability
has been incurred and the amount of such loss is reasonably
estimable. Contingent losses are often resolved over longer periods
of time and involve many factors including:
|
·
|
Rules
and regulations promulgated by regulatory
agencies,
|
|
·
|
Sufficiency
of the evidence in support of our
position,
|
|
·
|
Anticipated
costs to support our position, and
|
|
·
|
Likelihood
of a positive outcome.
|
Recent
Accounting Pronouncements
In
January 2010, the FASB issued authoritative guidance requiring new disclosures
and clarifying some existing disclosure requirements about fair value
measurement. Under the new guidance, a reporting entity should (a)
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers,
and (b) present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs. This guidance is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company does
not expect this guidance to have a material impact on its consolidated financial
statements.
In
August 2009, the FASB issued authoritative guidance to provide
clarification on measuring liabilities at fair value when a quoted price in an
active market is not available. In these circumstances, a valuation
technique should be applied that uses either the quote of the liability when
traded as an asset, the quoted prices for similar liabilities or similar
liabilities when traded as assets, or another valuation technique consistent
with existing fair value measurement guidance, such as an income approach or a
market approach. The new guidance also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. This guidance
became effective beginning with the third quarter of the Company’s 2010 fiscal
year; however, the adoption of the new guidance did not have a material impact
on the Company’s financial position, results from operations or cash
flows.
In
June 2009, the FASB issued authoritative guidance to eliminate the
exception to consolidate a qualifying special-purpose entity, change the
approach to determining the primary beneficiary of a variable interest entity
and require companies to more frequently re-assess whether they must consolidate
variable interest entities. Under the new guidance, the primary
beneficiary of a variable interest entity is identified qualitatively as the
enterprise that has both (a) the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance, and (b) the obligation to absorb losses of the entity that
could potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. This guidance becomes effective for the
Company’s fiscal 2011 year-end and interim reporting periods thereafter.
The Company does not expect this guidance to have a material impact on its
consolidated financial statements.
In June
2009, the FASB established the FASB ASC as the source of authoritative
accounting principles recognized by the FASB to be applied in the preparation of
financial statements in conformity with generally accepted accounting
principles. The new guidance explicitly recognizes rules and
interpretive releases of the SEC under federal securities laws as authoritative
accounting principles generally accepted in the United States of America
(“GAAP”) for SEC registrants. The new guidance became effective for
our financial statements issued for the three and six month periods ending on
September 30, 2009; however, the adoption of the new guidance in the Company’s
second quarter of the Company’s 2010 fiscal year did not have a material impact
on the Company’s financial position, results from operations or cash
flows.
In May
2009, guidance was issued under the topic Subsequent Events related to the
accounting for and disclosure of events that occur after the balance sheet date,
but before the financial statements are issued or are available to be
issued. Additionally, this guidance requires the Company to disclose
the date through which subsequent
-45-
events
have been evaluated, as well as whether that date is the date the financial
statements were issued or the date the financial statements were available to be
issued. As discussed above, subsequent to the period end the Company
sold certain personal care products to an unrelated third party. The related
assets and operating results were reclassified accordingly.
The
Financial Instruments Topic of the FASB ASC requires disclosures about the fair
values of financial instruments at interim reporting periods in addition to
annual financial statements. Effective April 1, 2009, the new
guidance involves only enhanced disclosures and did not have any impact on the
Company’s financial position, results from operations or cash
flows.
The
Investments-Debt and Equity Securities topic of the FASB ASC modified the
threshold a company must meet to avoid recognizing other-than-temporary
impairments of debt securities purchased as investments. Effective
April 1, 2009, the implementation of the new guidance did not have any impact on
the Company’s financial position, results from operations or cash
flows.
The
Derivatives and Hedging Topic of the FASB ASC requires a company with derivative
instruments to disclose information to enable users of the financial statements
to understand (i) how and why the company uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for, and (iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. Accordingly, the new
guidance requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The
implementation of the new guidance at January 1, 2009 involved enhanced
disclosures of derivative instruments and the Company’s hedging activities and
did not have any impact on the Company’s financial position, results from
operations or cash flows.
In
September 2006, the FASB issued guidance on Fair Value Measurements and
Disclosures, which provides a single definition of fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair
value measurements in an effort to increase comparability related to the
recognition of market-based assets and liabilities and their impact on
earnings. The Fair Value Measurements and Disclosures guidance is
effective for the Company’s interim financial statements issued after April 1,
2008. However, on February 12, 2008, the FASB deferred the effective
date of the guidance for one year for non-financial assets and non-financial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The implementation of the
guidance, effective April 1, 2008, did not have a material effect on financial
assets and liabilities included in the Company’s consolidated financial
statements as fair value is based on readily available market
prices. Additionally, the implementation of the Fair Value
Measurements and Disclosures guidance did not have a material effect as it
relates to non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the Company’s financial statements on a
non-recurring basis.
Management
has reviewed and continues to monitor the actions of the various financial and
regulatory reporting agencies and is currently not aware of any other
pronouncement that could have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
-46-
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”),
including, without limitation, information within Management’s Discussion and
Analysis of Financial Condition and Results of Operation. The
following cautionary statements are being made pursuant to the provisions of the
PSLRA and with the intention of obtaining the benefits of the “safe harbor”
provisions of the PSLRA. Although we believe that our expectations
are based on reasonable assumptions, actual results may differ materially from
those in the forward-looking statements.
Forward-looking
statements speak only as of the date of this Quarterly Report on Form
10-Q. Except as required under federal securities laws and the rules
and regulations of the SEC, we do not have any intention to update any
forward-looking statements to reflect events or circumstances arising after the
date of this Quarterly Report on Form 10-Q, whether as a result of new
information, future events or otherwise. As a result of these risks
and uncertainties, readers are cautioned not to place undue reliance on
forward-looking statements included in this Quarterly Report on Form 10-Q or
that may be made elsewhere from time to time by, or on behalf of,
us. All forward-looking statements attributable to us are expressly
qualified by these cautionary statements.
These
forward-looking statements generally can be identified by the use of words or
phrases such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “will
be,” “will continue,” “will likely result,” or other similar words and
phrases. Forward-looking statements and our plans and expectations
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those anticipated, and our business in general
is subject to such risks. For more information, see “Risk Factors”
contained in Part I, Item 1A. of our Annual Report on Form 10-K for our fiscal
year ended March 31, 2009. In addition, our expectations or beliefs
concerning future events involve risks and uncertainties, including, without
limitation:
|
·
|
General
economic conditions affecting our products and their respective
markets,
|
|
·
|
Our
ability to increase organic growth via new product introductions or line
extensions,
|
|
·
|
The
high level of competition in our industry and markets (including, without
limitation, vendor and SKU rationalization and expansion of private label
of product offerings),
|
|
·
|
Our
ability to invest in research and
development,
|
|
·
|
Our
dependence on a limited number of customers for a large portion of our
sales,
|
|
·
|
Disruptions
in our distribution center,
|
|
·
|
Acquisitions,
dispositions or other strategic transactions diverting managerial
resources, or incurrence of additional liabilities or integration problems
associated with such transactions,
|
|
·
|
Changing
consumer trends or pricing pressures which may cause us to lower our
prices,
|
|
·
|
Increases
in supplier prices and transportation and fuel
charges,
|
|
·
|
Our
ability to protect our intellectual property
rights,
|
|
·
|
Shortages
of supply of sourced goods or interruptions in the manufacturing of our
products,
|
|
·
|
Our
level of indebtedness, and ability to service our
debt,
|
|
·
|
Any
adverse judgments rendered in any pending litigation or
arbitration,
|
|
·
|
Our
ability to obtain additional financing,
and
|
|
·
|
The
restrictions imposed by our Senior Credit Facility and the indenture on
our operations.
|
|
|
-47-
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We are
exposed to changes in interest rates because our Senior Credit Facility is
variable rate debt. Interest rate changes generally do not affect the
market value of the Senior Credit Facility, but do affect the amount of our
interest payments and, therefore, our future earnings and cash flows, assuming
other factors are held constant. At December 31, 2009 we had variable
rate debt of approximately $193.3 million related to our Tranche B term
loan.
In
February 2008, the Company entered into an interest rate swap agreement,
effective March 26, 2008, in the notional amount of $175.0 million, decreasing
to $125.0 million at March 26, 2009, to replace and supplement a $50.0 million
interest rate cap agreement that expired on May 30, 2008. Under the
swap agreement, the Company pays a fixed rate of 2.88% while receiving a
variable rate based on LIBOR.
The fair value of the
interest rate swap agreement of $794,000 was included in other accrued
liabilities at December 31, 2009.
The agreement terminates on
March 26, 2010.
Holding
other variables constant, including levels of indebtedness, a one percentage
point increase in interest rates on our variable rate debt would have an adverse
impact on pre-tax earnings and cash flows for the twelve months ending December
31, 2010 of approximately $1.9 million.
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure
Controls and Procedures
The
Company’s management, with the participation of its Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the Company’s
disclosure controls and procedures, as defined in Rule 13a–15(e) of the
Securities Exchange Act of 1934 (“Exchange Act”) as of December 31,
2009. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of December 31, 2009, the
Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the reports the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms and
that such information is accumulated and communicated to the Company’s
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting
There
have been no changes during the quarter ended December 31, 2009 in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
|
OTHER
INFORMATION
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
The legal
proceedings in which we are involved have been disclosed previously in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our
Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2009 and
September 30, 2009. Except as set forth below, there have been no
material developments in our pending legal proceedings since September 30,
2009. For more information regarding our pending legal proceedings
which we deem to be material to the Company, please see the legal proceedings
disclosure contained in Part I, Item 3 of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009 and Part II, Item 1 of our Quarterly Reports on
Form 10-Q for the fiscal quarters ended June 30, 2009 and September 30,
2009.
-48-
Securities Class Action
Litigation
After
having given notice to class members, the defendants and the lead plaintiffs
reached an agreement in principle to settle the litigation. On
December 4, 2009, the settlement proposed by the defendants and the lead
plaintiffs received final approval from the Court. Insurance covered
the costs of all payments to the plaintiffs and their counsel. The class action
and all claims made therein against us, our officers and directors and the other
defendants in the action were dismissed with prejudice.
DenTek Oral Care, Inc.
Litigation
On
January 15, 2010, the Company and DenTek Oral Care, Inc. (“DenTek”) reached a
tentative agreement in principle to resolve the pending litigation between the
Company and DenTek during a settlement conference before the
Court. The settlement agreement remains subject to the negotiation
and execution of a written settlement agreement acceptable to the Company and
DenTek. As of the date of this Quarterly Report, a final settlement
agreement was not yet executed by the parties. There can be no assurance that
the Company and DenTek will ultimately execute a final settlement agreement and
that the litigation will be resolved. In the event that a final
settlement agreement is not executed or the litigation is not otherwise
resolved, the litigation will resume. The Company’s management
believes that the counterclaims asserted by DenTek, Raymond Duane and C.D.S.
Associates, Inc. (“CDS”) are legally deficient and that it has meritorious
defenses to the counterclaims. In the event the settlement is not
consummated and the litigation resumes, the Company intends to vigorously defend
against the counterclaims; however, the Company cannot reasonably estimate the
potential range of loss, if any. The settlement agreement has no
impact on the litigation pending between the Company and each of Raymond Duane,
CDS and Kelly Kaplan.
In
addition, the Company is involved from time to time in other routine legal
matters and other claims incidental to its business. The Company
reviews outstanding claims and proceedings internally and with external counsel
as necessary to assess probability and amount of potential
loss. These assessments are re-evaluated at each reporting period and
as new information becomes available to determine whether a reserve should be
established or if any existing reserve should be adjusted. The actual
cost of resolving a claim or proceeding ultimately may be substantially
different than the amount of the recorded reserve. In addition,
because it is not permissible under GAAP to establish a litigation reserve until
the loss is both probable and estimable, in some cases there may be insufficient
time to establish a reserve prior to the actual incurrence of the loss (upon
verdict and judgment at trial, for example, or in the case of a quickly
negotiated settlement). The Company believes the resolution of
routine matters and other incidental claims, taking into account reserves and
insurance, will not have a material adverse effect on its business, financial
condition, results from operations or cash flows.
| ITEM 6. | EXHIBITS |
See
Exhibit Index immediately following signature page.
-49-
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.
|
PRESTIGE
BRANDS HOLDINGS, INC.
|
|||
|
Date: February
9, 2010
|
By:
|
/s/ PETER J. ANDERSON | |
| Peter J. Anderson | |||
| Chief Financial Officer | |||
| (Principal Financial Officer and | |||
|
Duly
Authorized Officer)
|
|||
-50-
Exhibit
Index
|
31.1
|
Certification
of Principal Executive Officer of Prestige Brands Holdings, Inc. pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
|
31.2
|
Certification
of Principal Financial Officer of Prestige Brands Holdings, Inc. pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
|
32.1
|
Certification
of Principal Executive Officer of Prestige Brands Holdings, Inc. pursuant
to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
|
|
32.2
|
Certification
of Principal Financial Officer of Prestige Brands Holdings, Inc. pursuant
to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
|
-51-
TABLE OF CONTENTS
Part IItem 1. Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 6. Exhibits