SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months ended September 30, 2000 Commission File No. 0-6436
BLOCK DRUG COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 22-1375645
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (I.R.S. Employer Identification No.)
257 Cornelison Avenue, Jersey City, New Jersey 07302-9988
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (201) 434-3000
Indicate by check mark whether Registrant (1) has filed all Commission 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 periods that the
Registrant is required to file such reports) and (2) has been subject to such
filing
requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the period covered by this report.
(CLASS) (OUTSTANDING AT SEPTEMBER 30, 2000)
Common Stock - Class A 14,542,000
Common Stock - Class B 8,671,000
<PAGE>
BLOCK DRUG COMPANY, INC.
INDEX TO FORM 10-Q
SEPTEMBER 30, 2000
Part I. Financial Information - Unaudited Page No.
Consolidated Balance Sheets - September 30, 2000
and March 31, 2000 3
Consolidated Statements of Income for the three and six
months ended September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive
Income for the three and six months ended
September 30, 2000 and 1999. 5
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis of
Operating Results and Financial Condition 11-17
Part II. Other Information 18
<PAGE>
<TABLE>
ITEM 1: FINANCIAL STATEMENTS
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(UNAUDITED)
ASSETS September 30, 2000 March 31, 2000
------------------ --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 53,249,000 $ 41,645,000
Marketable securities at market..................................... 8,954,000 23,557,000
Accounts receivable, less allowance of $8,530,000 at (09/30/00) and
$9,494,000 (03/31/00)............................................. 161,130,000 162,173,000
Inventories: 146,426,000 144,740,000
Other current assets................................................ 56,165,000 44,213,000
----------------- ------------------
Total Current Assets............................................ 425,924,000 416,328,000
Property, plant and equipment, less accumulated
depreciation of $144,169,000 (9/30/00)
and $134,469,000 (3/31/00)........................................ 221,236,000 229,156,000
Long-term securities................................................ 308,939,000 259,705,000
Goodwill and other intangible assets - net of amortization.......... 259,625,000 260,424,000
Other assets........................................................ 10,464,000 11,318,000
------------------ ------------------
Total Assets.................................................... $1,226,188,000 $1,176,931,000
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and bonds payable............................................. $ 171,440,000 $ 155,157,000
Accounts payable & accrued expenses................................. 165,770,000 154,717,000
Income taxes payable................................................ 20,064,000 17,241,000
Dividends payable................................................... 5,618,000 5,618,000
-------------------------------------
Total Current Liabilities....................................... 362,892,000 332,733,000
Notes and bonds payable............................................. 102,906,000 105,308,000
Deferred compensation and other liabilities......................... 45,700,000 42,784,000
Deferred income tax................................................. 21,088,000 13,733,000
---------------- -----------------
Total Liabilities............................................... 532,586,000 494,558,000
--------------- ----------------
Shareholders' Equity:
Class A common stock, non-voting, par
value $.10-20,000,000 shares authorized,
14,542,000 (09/30/2000) and 14,538,000 (3/31/00)
shares issued and outstanding..................................... 1,454,000 1,454,000
Class B common stock par value $.10-
40,000,000 shares authorized, 8,671,000 (09/30/2000) and (03/31/2000)
shares issued and outstanding................................... 867,000 867,000
Capital in excess of par value...................................... 319,824,000 319,693,000
Retained earnings................................................... 415,089,000 396,381,000
Accumulated other comprehensive loss................................ (43,632,000) (36,022,000)
----------------- ----------------
Total Shareholders' Equity........................................ 693,602,000 682,373,000
---------------- ----------------
Total Liabilities & Shareholder's Equity.......................... $1,226,188,000 $1,176,931,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales................... $215,165,000 $205,475,000 $423,742,000 $399,430,000
Interest, dividends
and other income......... 7,151,000 7,077,000 13,828,000 18,728,000
-------------- -------------- ------------ -------------
222,316,000 212,552,000 437,570,000 418,158,000
------------ ------------ ----------- ------------
Cost and expenses:
Cost of goods sold.......... 76,183,000 74,053,000 145,742,000 141,420,000
Selling, general and
administrative........... 118,533,000 116,579,000 240,864,000 233,277,000
Transaction costs........... 2,500,000 - 2,500,000 -
Interest expense............ 3,747,000 3,585,000 7,111,000 6,842,000
------------- -------------- ------------- --------------
200,963,000 194,217,000 396,217,000 381,539,000
----------- ------------ ----------- ------------
Income before income taxes.. 21,353,000 18,335,000 41,353,000 36,619,000
Income taxes................ 6,013,000 4,457,000 11,413,000 9,594,000
------------ -------------- ------------- -------------
Net income.................. $15,340,000 $13,878,000 $29,940,000 $27,025,000
=========== ============ ============ ============
Average number of
shares outstanding....... 23,210,613 23,578,505(1) 23,210,027 23,573,373(1)
============ =============== ============== =============
Earnings per common share -
basic and diluted........ $ 0.66 $ 0.59(1)$ 1.29 $ 1.15(1)
Cash dividends per share
Class A.................. $ .32 $ .3175 $ 0.64 $ 0.635
Class B.................. $ .11125 $ .110625$ 0.2225 $ 0.221
</TABLE>
(1) Restated to reflect 3% stock dividend declared in October 1999.
See notes to consolidated financial statements
<PAGE>
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income.................. $15,340,000 $13,878,000 $29,940,000 $27,025,000
----------- ----------- ----------- -----------
Other comprehensive (loss) income:
Foreign currency
translation adjustment *. (5,372,000) (4,200,000) (10,339,000) (19,550,000)
Unrealized holding gains (losses)
on marketable
securities, net of taxes. 2,954,000 (1,051,000) 2,729,000 ( 3,661,000)
------------- ------------ ------------- ------------
Other comprehensive loss.... (2,418,000) (5,251,000) (7,610,000) (23,211,000)
------------- ----------- ------------- -------------
Comprehensive income ....... $12,922,000 $ 8,627,000 $22,330,000 $ 3,814,000
============= =========== ============= ============
</TABLE>
* The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
See notes to consolidated financial statements
<PAGE>
BLOCK DRUG COMPANY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ ------------
CASH FLOW FROM CONTINUING OPERATING ACTIVITIES... $ 57,161,000 $43,980,000
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from Product divestiture............... - 19,000,000
Additions to Property, Plant and Equipment...... (8,303,000) (17,293,000)
Proceeds from Sales of Assets................... - 1,343,000
Proceeds from Sales of long-term Securities..... 9,501,000 18,683,000
Purchase of long-term Securities................ (55,503,000) (32,137,000)
Decrease in Marketable Securities............... 14,500,000 18,098,000
Payments for Products Acquired.................. (8,679,000) (50,586,000)
------------ -----------
Net Cash Used in Investing Activities............... (48,484,000) (42,892,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to Shareholders................... (11,233,000) (11,054,000)
Excercised Stock Options......................... 131,000 -
Decrease in Long-Term Debt....................... (2,235,000) (2,660,000)
Increase in Short-Term Debt...................... 22,231,000 36,573,000
------------ -----------
Net Cash Provided by Financing Activities........... 8,894,000 22,859,000
------------ -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents.................................. (5,967,000) (3,005,000)
------------ -----------
Increase in Cash and Cash Equivalents............... 11,604,000 20,942,000
Cash and Cash Equivalents, Beginning of Period...... 41,645,000 48,363,000
------------ -----------
Cash and Cash Equivalents, End of Period............ $ 53,249,000 $ 69,305,000
============ =============
SUPPLEMENTAL CASH FLOW DATA:
Cash Paid during the Year:
Interest....................................... $ 7,283,000 $ 6,819,000
Income taxes................................... $ 9,348,600 $ 10,743,000
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements reflect all normal recurring
adjustments, which, in management's opinion, are necessary for a fair
presentation of the results for interim periods. Certain prior year amounts
have been reclassified to conform with the current year presentation.
The accompanying consolidated financial statements should be read in
conjunction with the financial statement disclosures contained in the
Company's 2000 Form 10-K, Form 8-K filed on October 10, 2000 and Form 14-D
filed on October 19, 2000.
2. Provision for certain expenses, including income taxes, media advertising,
and consumer promotions, are based on full year assumptions. Such expenses
are charged to operations in the year incurred and are included in the
accompanying consolidated financial statements in proportion with estimated
annual sales or annual tax rates or with the passage of time.
3. Inventories by major classes were as follows:
September 30, 2000 March 31, 2000
------------------ --------------
(Unaudited)
Raw and packaging materials $ 38,991,000 $ 41,845,000
Finished goods 107,435,000 102,895,000
------------ -------------
$146,426,000 $144,740,000
============ ============
4. During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and in 2000 it issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133". These standards must
be adopted by the Company by April 1, 2001. They require that all
derivative financial instruments be recorded on consolidated balance sheets
at fair value. Changes in the fair value of derivatives will be recorded
each period in earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transactions and the extent to which the hedge is
effective in mitigating the exposure. Gains and losses on derivative
instruments reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are affected by the hedged item.
The Company is evaluating the impact, if any, of those standards on its
fiscal 2002 financial position, results of operations and disclosures.
5. In April 2000, the Company acquired the Spectro(TM) line of over-the
counter dermatology products for its Canadian subsidiary. The line includes
soapless hand and face cleansers, an antifungal antiseptic cleanser and a
skin barrier cream. The acquisition price was $8.7 million. Goodwill
recorded in connection with this product acquisition amounted to $8.4
million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
6. The Company's operations are managed as two divisions. The Americas
Division includes markets in North and South America; the International
Division includes Europe, Asia/Pacific, Africa and the Middle East.
Six Months ended September 30,
2000 1999
---- ----
(in thousands)
--------------
Net Sales
Americas $201,809 $197,890
International 221,933 201,540
-------- ---------
Total consolidated net sales $423,742 $399,430
======== ========
Operating Income:
Americas $ 21,678 $ 23,359
International 35,749 28,356
---------- ----------
Consolidated operating income 57,427 51,715
General corporate expenses (16,074) (15,096)
----------- ----------
Consolidated income before income taxes $ 41,353 $ 36,619
========== =========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
7. In the fourth quarter of fiscal 1997, the Company approved a program (the
"Program") to consolidate its manufacturing operations by closing six of
its twelve production facilities in various parts of the world. The
facilities to be exited were located in Belgium, the United Kingdom,
Australia, Canada, the U.S. and Argentina. Significant components of the
Program involved the termination of approximately 450 manufacturing
employees (23% of its manufacturing workforce), the cleanup, closing and
sale of plants, and the physical disposition of inventory and equipment.
During fiscal 2000, the Company completed the program. (See Note 13 to the
March 31, 2000 consolidated financial statements.)
The following table displays a rollforward of the liabilities for the
manufacturing restructuring from inception to March 31, 2000:
<TABLE>
<CAPTION>
Original Amounts Amount Amount Amount Amount
Provision Utilized Remaining Utilized Remaining Utilized Reversed Ending Amount Reversed Remaining
Fiscal in Fiscal Balance in Fiscal Balance in Fiscal in Fiscal Balance Utilized in Fiscal Balance
Type Cost 1997 1997 3-31-97 1998 Other 3-31-98 1999 1999 3-31-99* Fiscal 2000 2000 3-31-00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Employee $15,454(a) - $15,454 ($7,516) ($3,300) $ 4,638 ($2,637) ($2,001) - - - -
severance
and
related
costs
Plant 32,978(b)($24,468) 8,510 - (8,510) - - - - - - -
closing
and
related
asset
write-offs
Re-engineer 7,184(c) (7,184) - - - - - - - - - -
Contractual 16,834(d) (5,042) 11,792 (7,500) 11,110 15,402 (562) (5,640) $9,200 ($623) ($8,577) -
obligations ------ ------- ------ ------ ------ ------ ------ ------- ------ ------ -------- ----
and other
$72,450 ($36,694) $35,756($15,016) ( $700) $20,040 ($3,199) ($7,641) $9,200 ($623) ($8,577) -
======= ========= ======= ======== ====== ======= ======= ====== ====== ====== ======== ====
</TABLE>
*The balance at the end of the quarter is classified as a current liability.
(a) Represents severance costs for approximately 450 production employees
at six facilities. Estimates were based on calculations derived by attorneys who
considered the local labor laws at each location.
(b) Represents estimated impairment losses on land and buildings to be sold
($15 million) and machinery and equipment to be disposed ($14 million). Also
included is the estimate of site cleanup costs ($4 million). Estimates were
based principally on appraisals from third-party appraisers.
(c) Principally represents consulting costs, as well as limited training
and maintenance costs, which were expensed during 1997.
(d) Represents consulting and legal fees and other costs.
8. Earning Per Share:
Basic earnings per share is computed by dividing net income for the period
by the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income for the period by the
weighted average number of common shares outstanding and dilutive common
stock equivalents of 88,815 and 64,126 for the quarter and six months ended
September 30, 2000, respectively. The difference, if any, between the
number of shares used in the basic earnings per share calculation compared
to the diluted earnings per share calculation is due primarily to the
dilutive effect of outstanding stock options. Stock options for 156,588 and
168,035 for the quarter and six months ended September 30, 2000,
respectively, were not included in the computation of diluted earnings
<PAGE>
per share because the exercise prices were greater than the average market
price of the common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. Transaction Costs:
On June 6th, 2000, the Company announced that it had retained Goldman Sachs
to assist the Company in a review of its strategic options. On October 9,
2000, SmithKline Beecham (SB) and the Company announced an agreement for SB
to acquire the Company for $1.24 billion or $53.00 per share. Completion of
the transaction is subject to regulatory clearance, both in the US and
Europe. Expenses relating to this transaction total $2.5 million to date.
These expenses are classified as Transaction costs in the income statement.
The Company filed Form 8-K and Form 14D on October 10, 2000 and October 19,
2000, respectively.
10. Legal Proceedings:
The company is involved in various routine litigation incidental to its
continuing and discontinued operations. While the significance of these
matters cannot be fully assessed at this time, management, on advice of
counsel, does not believe that any liability that may arise from these
proceedings will have a material adverse impact on the Company's
consolidated financial position, results of operations or liquidity.
11. Subsequent Event:
On November 7, 2000, the Company exercised its option to purchase the
Balmex brand diaper rash ointment from Macsil, Inc. with a final payment of
$3.5 million. The total purchase price was $5.5 million and was recorded as
goodwill.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results:
Consolidated Sales:
Consolidated worldwide net sales for the second quarter ended September 30, 2000
were $215.2 million, up by 4.7 % compared to prior year second quarter sales of
$205.5 million. Excluding the effects of the stronger US dollar, consolidated
sales were $223.4 million, up by 8.7 % compared to prior year second quarter
sales of $205.5 million. In accordance with EITF 00-14 "Accounting for Coupons,
Rebates and Discounts", coupon expense has been reclassified from Selling,
General and Administrative and netted against Sales.
For the six month period, consolidated worldwide net sales were $423.7 million,
an increase of 6.1% over the prior year six months results of $399.4 million.
Excluding the effects of the stronger US dollar, consolidated sales were $437.4
million, 9.5% higher than the comparable prior year periods results of $399.4
million.
The Companys operations are divided into two divisions: The Americas Division
includes markets in North and South America; the International Division includes
Europe, Asia/ Pacific, Africa and the Middle East.
<PAGE>
SECOND QUARTER SALES BY DIVISION:
Three Months ended September 30,
Percent
2000 1999 Change
---- ---- -------
Americas Division $103,837 $100,116 3.7%
International Division 111,328 105,359 5.7%
-------- --------
$215,165 $205,475 4.7%
======== ========
Americas Division:
Americas Division net sales of $103.8 million for the second quarter ended
September 30, 2000 were up by 3.7 % compared to the prior year second quarter
sales of $100.1 million. US sales were up 1.1 % primarily due to continued
growth of Sensodyne toothpaste and Balmex diaper rash ointments which was
partially offset by lower sales of Denture Cleansers. Sensodyne reported steady
sales growth of 8.3 % for the second quarter. Beano Anti-Gas increased 13.4% in
the second quarter.
Canadian sales for the second quarter increased 17% compared to prior year
second quarter sales. Sensodyne toothpaste reported 32% sales growth. Polident
also had a strong second quarter, whereas Poli-Grip sales declined during the
second quarter.
In Brazil, net sales were up 25% for the second quarter, primarily due to
the strong performance of Sensodyne, Parodontax toothpastes and Silidron
anti-gas. In Mexico, sales were up 33% due to strong marketing support behind
key brands and a strong local currency.
International Division:
Total International net sales increased 5.7 % for the second quarter ended
September 30, 2000. Excluding the effects of a stronger US dollar, sales
increased 12.6%.
The Asia Group reported strong sales growth of 68%, reflecting strong
performance in Japan, Australia Export markets and Korea. Japan net sales
increased 80% for the second quarter, attributable to ongoing core business
growth buoyed by the strong Yen. In Korea, Parodontax reported continued sales
growth despite the difficult economic climate.
The UK Group reported a sales increase of 7% for the second quarter,
primarily due to growth of the Sensodyne, Poli-Grip, Setlers and Piriton brands.
Continental group sales were down 11% in U.S. dollars. However, sales in
Euros were up 1% compared to last year. In Holland, sales were up 13% for the
second quarter, reflecting continued growth for both Sensodyne and Parodontax
toothpastes. In Germany, France and Italy, sales were lower by 22%, 6% and 5%,
respectively, primarily due to the soft Euro currency.
<PAGE>
SIX MONTHS SALES BY DIVISION:
Six Months ended September 30,
Percent
2000 1999 Change
---- ---- ------
Americas Division $201,809 $197,890 2.0%
International Division 221,933 201,540 10.1%
-------- --------
$423,742 $399,430 6.1%
======== ========
Americas Division:
Americas Division net sales of $201.8 million for the six months ended
September 30, 2000 were up by 2.0 % compared to the prior year six months sales
of $197.9 million. US sales were up by 1.1%. The oral health care products, led
by Sensodyne, continued to show favorable growth while the consumer products
registered a decline largely attributable to weakness of Denture Cleanser
brands. Balmex reported a 22 % sales increase for the six month period.
Sensodyne continued its steady sales growth of 8.5%, while sales of Beano
Anti-Gas increased 18.5% for the six month period. Canadian sales for the six
month period increased 9% compared to prior year six months sales primarily due
to favorable performance by the Sensodyne Toothpaste, Polident and Pediculicide
brands.
In Brazil, net sales were up 40% for the six month period primarily due to
the successful geographical expansion program increasing our distribution
throughout the country, as well as strong performance by key brands Sensodyne,
Parodontax and Silidron. In Mexico, sales were up 31% due to strong marketing
support behind key brands and a strong local currency.
International Division:
Total International net sales increased 10.1 % for the six months ended
September 30, 2000. Excluding the effects of a stronger US dollar, sales
increased 16.9 %.
The Asia Group reported sales growth of 53%, reflecting strong performance
in Japan, Australia Export markets and Korea. Japan sales increased 58% for the
six months ended September 30, 2000, attributable to ongoing core business
growth, a stronger Yen and improving economic conditions. Denture adhesive
brands reported strong growth. Poli-Grip Flavor Free reported sales growth of
43%. In Korea, Parodontax reported strong sales growth despite a difficult
economic climate.
The UK Group reported a sales increase of 8% for the first half of the year
primarily due to increased sales of the Sensodyne, Poli-Grip, Setlers and
Piriton brands. Spain continued to post strong sales growth of 26%, partially
due to incremental volume from the newly acquired Marie Yvonne depilatory brand.
Continental group reported sales for the six month period were down 1% in
U.S. dollars. However, sales in Euros for the six month period were up 12% led
by strong gains in Germany, Austria, France, Holland and Belgium. On a U.S.
dollar basis, in Holland sales were up 6% for the six month period primarily due
to sales growth of Sensodyne and Parodontax. In Germany, sales increased 2%,
whereas in France and Italy
<PAGE>
sales decreased 2% and 10%, respectively. The soft Euro offset local currency
growth in most markets.
Other Income and Operating Expenses:
Interest, dividends and other income of $13.8 million for the six months ended
September 30, 2000 decreased by 26.2% compared to prior year period income of
$18.7 million. The decrease is primarily a result of the prior year income
including a foreign currency swap gain of $5 million in Brazil.
The cost of goods sold percentage to sales was 34.4 % and 35.4 % for the first
half of the current and prior fiscal year. The cost of goods sold for the
Americas Division was 37.3 % for the six months compared to 35.6 % for the prior
year period. The cost of goods sold for the International Division was 31.7 %
for the six months compared to 35.2 % for the prior year period.
The US cost of goods as a percentage of sales was up 1% primarily due to
mix of products sold. In Canada and Latin America the cost of goods sold
increased due to a stronger US dollar and mix of products sold,respectively. In
the International Division the cost of goods as a percentage of sales were lower
primarily due to selective price increases and favorable mix of products sold.
(Freight and shipping costs have been reclassified from Selling, General and
Administrative to Cost of Goods in accordance with EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs").
Selling, general and administrative expenses represented 56.8 % and 58.4 % of
sales for the six months of the current and prior fiscal year, respectively. The
major portion is related to advertising and promotional activities. These
expenses reflect major spending programs to meet significant competition and to
build brand equities. The reduction as a percentage of sales for the first half
of fiscal 2001 is due to lower general and administrative spending as a
percentage of sales versus prior year period.
Interest expense was $7.1 million and $6.8 million for the first half of the
current and prior fiscal year, respectively.
The Company's interest rate exposures result from financing activity in the
form of short and long-term variable rate debt and from investments in long-term
fixed rate securities. The Company uses interest rate cap and swap agreements to
manage the exposures resulting from variable rate debt. The notional amount of
such interest rate caps at September 30, 2000 was $100,000,000 and Euro
100,000,000 (equivalent to $88,200,000). Notional amount of floating and fixed
interest rate swaps were 12,500,000 Canadian dollars (equivalent to $8,325,000),
and 4,650,000 Deutsche marks (equivalent to $2,097,000). Investments in
long-term fixed income securities are typically held to maturity, and
fluctuations in their market value, which are included in Other Comprehensive
Income, are not hedged.
The Company's foreign exchange exposures derive primarily from the activities of
its foreign subsidiaries and affiliates which sell products to customers
generating receivable balances both in their own and other currencies. Certain
subsidiaries, principally manufacturing locations in the United Kingdom, Ireland
and Brazil, also incur significant costs denominated in currencies other than
their functional currency. Additionally, the Company is exposed to the risk that
the results of operations of its foreign affiliates may translate to lower than
expected net income for inclusion in the Company's consolidated results.
Interest rate cap and swap agreements and foreign currency options are the
only types of
<PAGE>
derivatives used by the Company for risk management. The costs and benefits
derived from the interest rate caps are taken into income over the term of the
agreements, to the extent the notional value of such agreements corresponds to
variable rate loan balances. Costs associated with notional amounts in excess of
loan balances are expensed in the period during which the excess occurs and
contracts are marked to market and the change in market value is included in
period results. No benefits were derived from interest rate cap agreements
during fiscal 2000 or 2001 but the Euro caps were slightly in-the-money at the
latest reset date and should produce some benefits during fiscal 2001. The
Company's Canadian subsidiary completed 7 year variable rate acquisition
financing in the amount of CAD 12,500,000 during the quarter. This loan, which
requires equal quarterly principal amortization payments, was swapped to a fixed
rate of 6.25%.
The Company manages its most significant foreign currency exposures, principally
inventory purchases, by purchasing average rate currency options that protect
against the fiscal year average value of each currency declining more than an
acceptable amount from the average from the prior year. Put options acquired
during fiscal 2001 were combined in zero cost collar structures such that they
were paid for with the proceeds of sale of call options that obligate the
Company to pay counter parties in the event that the foreign currency
strengthens against the U.S. dollar by more than a pre-determined amount.
Currencies that are highly correlated to the U.S. dollar and those to which the
Company has a modest exposure are not hedged. Affiliates whose functional
currencies are illiquid or have high interest rates (and therefore high hedging
cost) do not hedge with options, but may instead maintain significant cash
balances in U.S. dollars. Thus, if the affiliate's functional currency declines
in value against the U.S. dollar, the value (in the unit's functional currency)
of this U.S. dollar cash balance increases producing incremental income and
thereby offsetting the declining value of the affiliate's results included in
the Company's consolidated net income.
The cost of foreign currency options whose notional amount corresponds to
trading activity of the subsidiary owning the options is expensed over the
period to which they relate. Costs relating to additional notional amounts are
expensed during the period in which the options are acquired. Any benefits, to
the extent the options are deemed effective hedges, are treated as an adjustment
to the related costs of inventory purchased.
Consolidated operating income increased 11% for the six months. Americas
Division operating income decreased 7.2 % and International Division operating
income increased 26.1%. The decrease in the Americas Division was due to higher
cost of sales. International Division operating income increases were primarily
due to strong sales growth supported by newly acquired products, a stronger Yen,
improving economic conditions, improved gross margins along with a reduction in
S,G&A.
Due to the above factors, income before income taxes was 9.8% of sales for the
six months ended September 30, 2000 as compared to 9.2 % during the prior year
period.
The effective income tax rate of 27.6 % for the six months ended September
30,2000 compared to 26.2 % for the prior fiscal year period is due to increased
income in higher tax jurisdictions of Japan and Canada.
In February 1997, the Company announced the consolidation of its manufacturing
operations by planning to close six of its twelve production facilities in
various parts of the world over a two
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year period. The worldwide manufacturing restructuring and re-engineering
program resulted in a pre-tax charge of $72.5 million ( $55.7 million net of
tax), or $2.60 per share after taxes in fiscal 1997. As of March 31, 2000, the
Company has completed the program. (See Note 7 ).
In April 2000, the Company acquired the Spectro line of over-the counter
dermatology products for its Canadian subsidiary. The line includes soapless
hand and face cleansers, an antifungal antiseptic cleanser and a skin barrier
cream. (See Note 5)
On June 6th, 2000, the Company announced that it had retained Goldman Sachs to
assist the Company in a review of its strategic options. On October 9, 2000,
SmithKline Beecham (SB) and the Company announced an agreement for SB to acquire
the Company for $1.24 billion or $53.00 per share. Completion of the transaction
is subject to regulatory clearance, both in the US and Europe. Expenses relating
to this transaction total $2.5 million to date. These expenses are classified as
Transaction costs in the income statement.
Euro Currency Adoption:
As a result of the European Economic and Monetary Union, a single currency (the
"Euro"), will replace the national currencies of many of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed as of January 1, 1999 with
the participating national currencies scheduled to be removed from circulation
between January 1, and June 30, 2002, and replaced by Euro notes and coinage.
During the transition period from January 1, 1999, through December 31, 2001,
public and private entities as well as individuals may pay for goods and
services using either checks, drafts or wire transfers denominated in Euros or
the participating country's national currency. We do not expect the Euro
conversion to have a material negative impact on operations in fiscal 2001. All
affiliates can operate within the Euro market. We are continuing to upgrade our
computer systems to operate more efficiently within the Euro market in fiscal
2001.
Financial Condition:
Cash increased for the six-month period ended September 30, 2000 to $53.2
million from $41.6 million at year-end March 31, 2000. The increases resulted
primarily from an increase in short-term debt and accrued expenses, partially
offset by purchase of securities and dividends paid to shareholders.
In the prior year six months cash increased to $69.3 million from $48.4 million
at year-end March 31, 1999. The increases resulted primarily from an increase in
short-term debt and proceeds from the divestiture of Lava soap and the sale of
Canadian property partially offset by payments made to acquire new products and
by an increase in inventory.
New Accounting Standards:
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and in 2000 it issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133", These standards must be adopted by the
Company by April 1, 2001. They require that all derivative financial instruments
<PAGE>
be recorded on consolidated balance sheets at fair value. Changes in the fair
value of derivatives will be recorded each period in earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transactions and the extent
to which the hedge is effective in mitigating the exposure. Gains and losses on
derivative instruments reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are affected by the
hedged item. The Company is evaluating the impact, if any, of those standards
on its fiscal 2002 financial position, results of operations and disclosures.
Forward Looking Statements
Certain statements in this document and elsewhere by management of the Company
that are neither reported financial results nor other historical information are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such information includes, without limitation,
the business outlook, assessment of market conditions, anticipated financial
operating results, strategies, future plans, contingencies and contemplated
transactions of the Company. Such forward-looking statements are not guarantees
of future performance and are subject to known and unknown risks, uncertainties
and other factors which may cause or contribute to actual results of Company
operations, or the performance or achievement of the Company, or industry
results, to differ materially from those expressed in or implied by the
forward-looking statements. In addition, to any such risks, uncertainties and
other factors discussed elsewhere herein, risks, uncertainties and other factors
that could cause or contribute to actual results differing materially from those
expressed in or implied by the forward-looking statements include, but are not
limited to, competitive pricing for the Companys products; the success of new
initiatives, acquisitions and ongoing cost reduction efforts; changes in raw
materials, energy and other costs; unanticipated manufacturing disruptions;
fluctuations in demand and changes in production capacities; changes to economic
growth in the U.S. and international economies, especially in Asia and Brazil;
stability of financial markets; governmental policies and regulations, including
but not limited to those affecting the environment and the tobacco industry;
restrictions on trade; interest rates and currency movements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK:
Refer to the market risk and sensitivity analysis in the Management's Discussion
and Analysis section of the Company's 2000 Annual Report and Form 10-K.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The Company is involved in various routine ligation incidental to its
continuing and discontinued operations. While the significance of
these matters cannot be fully assessed at this time, management, on
advise of counsel, does not believe than any liability that may arise
from these proceedings will have a material adverse impact on the
Company's consolidated financial position, results of operations of
liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended
September 30, 2000.
The Company filed Form 8-K on October 10, 2000.
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.
BLOCK DRUG COMPANY, INC.
(Registrant)
November 14, 2000 PETER ANDERSON
----------------- ---------------------------------
DATE Peter Anderson
Senior Vice President &
Chief Financial Officer
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