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 December 31, 1999 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.
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 DECEMBER 31, 1999)
Common Stock - Class A 14,356,000
Common Stock - Class B 8,419,000
<PAGE>1
BLOCK DRUG COMPANY, INC.
INDEX TO FORM 10-Q
DECEMBER 31, 1999
Part I. Financial Information - Unaudited Page No.
Consolidated Balance Sheets - December 31, 1999 and 3
March 31, 1999
Consolidated Statements of Income for the three and nine 4
months ended December 31, 1999 and 1998
Consolidated Statements of Comprehensive 5
Income for the three and nine months ended
December 31, 1999 and 1998.
Condensed Consolidated Statements of Cash Flows 6
for the nine months ended December 31, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements 7-11
Management's Discussion and Analysis of 12-17
Operating Results and Financial Condition
Part II.Other Information 18
<PAGE>2
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
<S> <C> <C>
ASSETS 12/31/99 03/31/99
Current Assets:
Cash and cash equivalents........................................... $ 54,213,000 $ 48,363,000
Marketable securities, at market.................................... 24,401,000 29,994,000
Accounts receivable, less allowances of $4,509,000 (12/31/99) and
$4,750,000 (3/31/99).............................................. 149,477,000 153,470,000
Inventory .......................................................... 146,517,000 135,947,000
Other current assets................................................ 51,980,000 41,867,000
------------- ------------
Total current Assets............................................ 426,588,000 409,641,000
------------- ------------
Property, plant and equipment, less accumulated
depreciation of $140,956,000 (12/31/99)
and $135,261,000 (3/31/99)........................................ 237,999,000 252,270,000
Long-term securities, at market..................................... 258,566,000 257,082,000
Goodwill and other intangible assets - net of amortization.......... 266,604,000 239,818,000
Other assets........................................................ 10,098,000 7,952,000
------------- -------------
Total Assets.................................................... $1,199,855,000 $ 1,166,763,000
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and bonds payable............................................. $ 174,107,000 $ 143,740,000
Accounts payable & accrued expenses................................. 184,090,000 185,270,000
Income taxes payable................................................ 13,324,000 13,532,000
Dividends payable................................................... 5,563,000 5,521,000
------------- ------------
Total Current Liabilities....................................... 377,084,000 348,063,000
------------- ------------
Notes and bonds payable............................................. 100,000,000 107,012,000
Deferred compensation and other liabilities......................... 21,333,000 19,648,000
Deferred income taxes............................................... 14,850,000 8,155,000
------------- -------------
Total Liabilities............................................... 513,267,000 482,878,000
------------- -------------
Shareholders' Equity:
Class A common stock, non-voting, par
value $.10-20,000,000 shares authorized,
14,356,000 (12/31/99) and 14,456,000
(3/31/99) shares issued and outstanding........................... 1,436,000 1,445,000
Class A common stock dividend distributable......................... 43,000
Class B common stock par value $.10-
40,000,000 shares authorized, 8,419,000
shares issued and outstanding................................... 842,000 842,000
Class B common stock dividend distributable......................... 25,000
Capital in excess of par value...................................... 327,253,000 306,433,000
Retained earnings................................................... 385,556,000 384,952,000
Cumulative other comprehensive loss................................. (28,567,000) (9,787,000)
------------- --------------
Total Shareholders' Equity........................................ 686,588,000 683,885,000
------------- --------------
Total Liabilities & Shareholder's Equity.......................... $1,199,855,000 $1,166,763,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>3
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31,
1999 1998 1999 1998
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Net sales................... $209,461,000 $194,485,000 $625,224,000 $587,995,000
Interest, dividends
and other income......... 8,596,000 9,857,000 22,291,000 24,274,000
------------ ------------ ------------ ------------
218,057,000 204,342,000 647,515,000 612,269,000
------------ ============ ============ ============
Cost and expenses:
Cost of goods sold.......... 68,921,000 69,796,000 196,797,000 189,284,000
Selling, general and
administrative........... 134,981,000 113,121,000 393,102,000 365,599,000
Interest expense............ 3,680,000 3,786,000 10,522,000 10,610,000
Manufacturing restructuring
and re-engineering credits (8,577,000) - (8,577,000) (3,967,000)
------------ ------------- ------------ ------------
199,005,000 186,703,000 591,844,000 561,526,000
============ ============= ============ ============
Income before income taxes.. 19,052,000 17,639,000 55,671,000 50,743,000
Income taxes................ 5,437,000 5,326,000 15,031,000 13,701,000
------------ ------------- ------------ ------------
Net income.................. $13,615,000 $12,313,000 $40,640,000 $37,042,000
============ ============ ============ ============
Average number of common
shares outstanding....... 23,539,080(1) 23,545,064(1) 23,561,943(1) 23,532,223(1)
============ ============ ============ ============
Net income per share
basic & diluted.......... $ 0.57(1) $ 0.52(1) $ 1.72(1) $ 1.57(1)
Cash dividends per share
Class A common stock..... $ 0.32 $ 0 .3175 $ 0.9550 $ 0.9475
Class B common stock..... $ 0.11125 $ 0 .110625 $ 0.3325 $ 0.330625
</TABLE>
(1) Restated to reflect a 3% stock dividend declared in October 1999.
See notes to consolidated financial statements.
<PAGE>4
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income.................. $13,615,000 $12,313,000 $40,640,000 $37,042,000
----------- ----------- ----------- -----------
Other comprehensive
income (loss):
Foreign currency
translation adjustment *. 6,638,000 8,835,000 (12,912,000) 4,385,000
Unrealized holding (losses)
gains on marketable
securities, net of taxes. (2,207,000) 12,000 (5,868,000) 2,330,000
-------------- ------------- -------------- -------------
Other comprehensive
income (loss)............ 4,431,000 8,847,000 (18,780,000) 6,715,000
-------------- ------------- -------------- -------------
Comprehensive income........ $18,046,000 $21,160,000 $ 21,860,000 $43,757,000
============== ============= ============== =============
</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>5
<TABLE>
BLOCK DRUG COMPANY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOW FROM CONTINUING OPERATING ACTIVITIES......................... $ 54,834,000 $ 60,894,000
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from Product divestiture................................... 19,000,000 -
Additions to Property, Plant and Equipment.......................... (23,202,000) (27,179,000)
Proceeds from Sales of Assets....................................... 10,964,000 31,790,000
Proceeds from Sales of Securities................................... 25,827,000 101,963,000
Purchase of Securities.............................................. (46,679,000) (106,132,000)
Decrease (Increase) in Marketable Securities....................... 17,979,000 (59,000)
Payments for Products Acquired...................................... (54,511,000) (26,428,000)
------------- --------------
Net Cash Used in Investing Activities.................................. (50,622,000) (26,045,000)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of notes payable............................. - 50,000,000
Dividends paid to Shareholders...................................... (16,617,000) (15,972,000)
Payments of Notes Payable........................................... (7,110,000) (2,370,000)
Common Shares Repurchased........................................... (3,142,000) -
Increase (decrease) in short-term debt.............................. 30,465,000 (72,634,000)
------------- -------------
Net Cash Provided by (Used in ) Financing Activities................... 3,596,000 (40,976,000)
-------------- -------------
Effect of Exchange Rate changes on Cash and Cash equivalents........... (1,958,000) (776,000)
-------------- -------------
Increase (decrease) in Cash and Cash equivalents....................... 5,850,000 (6,903,000)
Cash and Cash equivalents Beginning of Period.......................... 48,363,000 37,320,000
------------ -------------
Cash and Cash equivalents End of Period................................ $54,213,000 $30,417,000
============ ===========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest.......................................................... $15,752,000 $ 9,962,000
Income taxes...................................................... $ 8,766,000 $ 9,179,000
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
3% Stock Dividend................................................... $23,419,000 $25,222,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements reflect all normal recurring
adjustments, except for the manufacturing restructuring and re-engineering
credit, 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 1999 Form 10-K.
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 the
passage of time or with estimated annual sales or annual tax rates.
3. Inventories by major classes were as follows:
December 31, 1999 March 31, 1999
----------------- --------------
(Unaudited)
Raw and packaging materials $ 42,875,000 $ 30,997,000
Finished goods 103,642,000 104,950,000
------------- -------------
$146,517,000 $135,947,000
============ ============
4. Under the provisions of SFAS No. 130 "Reporting Comprehensive Income", the
Company has included a statement of Comprehensive Income in the
accompanying financial statements. Comprehensive income is comprised
primarily of net income, unrealized gain (loss) on marketable securities
and foreign currency translation adjustments.
5. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. In June 1999, the FASB issued SFAS No. 137,
"Accounting For Derivatives and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133," which makes SFAS No. 133 effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
is currently evaluating the impact of the new statement on its financial
position, results of operations and disclosures for fiscal 2002.
6. During the nine month period ending December 31, 1999 the Company acquired
Chlorhexamed, a medicated mouth wash in Holland. In Latin America, the
Company acquired Silidron and Espasmo Silidron, two anti-gas medicines sold
in Brazil and Pelo Libre line of pediculicides in Argentina. In the UK, the
Company acquired the Louis Marcel, a deplitory brand, and Interdens, a
professional dental product. In Spain, the Company acquired Marie Yvonne, a
depilatory brand. The aggregate amount spent on these acquisitions was
$54.5 million. Goodwill recorded in connection with these product
acquisitions amounted to $53.9 million.
<PAGE>7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
7. During the nine month period ended December 31, 1999, the Company increased
its net borrowings by $23.4 million primarily from lines of credit from
various banks bearing interest at variable rates.
8. During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 establishes
standards for the way public business enterprises report information about
operating segments in reports to shareholders. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information. At the end of fiscal 1999 the segments
were divided into three geographic areas: United States; Europe, Africa,
Middle East, and Latin America, Canada, Asia/Pacific. During the current
period, the operations are divided into two geographic areas: Americas,
covering USA, Canada and Latin America, and International, covering Europe,
Asia/Pacific, Africa and Middle East. Prior year data has been restated for
comparability purposes.
Nine Months ended December 31,
1999 1998
---- ----
(in thousands)
--------------
Net Sales
Americas $304,354 $304,038
International 320,870 283,957
-------- --------
Total consolidated sales $625,224 $587,995
======== ========
Operating Income:
Americas $ 45,795 $ 49,948
International 39,490 26,577
--------- ----------
85,285 76,525
General corporate expenses (29,614) (25,782)
------------ ------------
Consolidated income before income taxes $ 55,671 $ 50,743
======== ========
<PAGE>8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. 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 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. The program was completed during the
quarter resulting in an excess amount of $8.6 million due to early
termination of the contractual obligations to produce a product for another
entity as a result of the sale of production facility. Accordingly, the
Company recorded a restructuring credit of $8.6 million in its statement of
income for the quarter ended December 31, 1999. As of December 31, 1998,
the Company identified an excess amount of approximately $4 million due to
favorable experiences in calculating final severance payments and
settlement of post-closing adjustments in connection with the sale of one
its production facilities. Consequently, the Company recorded a
restructuring credit of approximately $4 million in its income statement
for the period ended December 31, 1998.
The following table displays a roll forward of the liabilities for the
manufacturing restructuring from inception to December 31, 1999.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Original Amount Amount
Provision Utilized Remaining Utilized Remaining
Fiscal in Fiscal Balance in Fiscal Balance
Type Cost 1997 1997 3-31-97 1998 Other 3-31-98
- --------- --------- --------- --------- -------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Employee $15,454(a) - $15,454 ($7,516) ($3,300) $ 4,638
severance
and
related
costs
Plant 32,978(b) ($24,468) 8,510 - (8,510) -
closing
and
related
asset
write-offs
Re-engineering 7,184(c) (7,184) - - - -
Contractual
obligations
and other 16,834(d) (5,042) 11,792 (7,500) 11,110 15,402
-------- -------- -------- --------- ------ --------
$72,450 ($36,694) $35,756 ($15,016) ($700) $20,040
======= ======== ======= ======== ====== =======
</TABLE>
<PAGE>9
<TABLE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
<CAPTION>
(Dollars in Thousands)
Amount
Amount Amount Utilized Amount
Utilized Reversed Ending for Nine Reversed Remaining
in Fiscal in Fiscal Balance Months in Fiscal Balance
Type Cost 1999 1999 3-31-99 Fiscal 2000 2000 12-31-99
- --------- --------- --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee ($ 2,637) ($2,001) - - - -
severance
and
related
costs
Plant - - - - - -
closing
and
related
asset
write-offs
Re-engineering - - - - - -
Contractual
obligations
and other (562) (5,640) $9,200 ($623) ($8,577) 0
------- ------- ------ ------ ------- -
($3,199) ($7,641) $9,200 ($623) ($8,577) 0
======= ======= ====== ====== ======= =
</TABLE>
(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.
As of December 31, 1999 the Company has completed the manufacturing
restructuring and re-engineering program including the termination of
contractual obligations to produce a product for another entity.
During the third quarter, the Company sold the remaining manufacturing
facility at a price that is approximately equal to the net book value of
the property and incurred training costs and other expenses to move
production equipment to an unrelated party's facility.
<PAGE>10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
10. Stockholder's Equity:
On December 7, 1999, the Company announced that it may repurchase up to
500,000 shares of its Class A common stock on the open market or in
privately negotiated transactions depending on market conditions and other
factors. As of December 31, 1999 the Company has repurchased and retired
118,363 Class A shares which represent 0.8% of total outstanding Class A
shares. To date, the Company has repurchased 370,276 Class A shares at an
average price of $28.02.
11. 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. The difference 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 26,411 and 261,021 shares were not
included in the computation of diluted earnings per share for the quarter
and nine months ended December 31, 1999, respectively, because the exercise
prices were greater than the average market price of the common stock.
12. 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 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.
<PAGE>11
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results:
Consolidated worldwide sales were $209.5 million in the third quarter and
$625.2 million for the nine months ended December 31, 1999, increases of 7.7%
and 6.3% respectively over the comparable prior year periods. In the first
quarter the company sold the Lava brand hand soap and during the fiscal year
ended March 31, 1999 the company had sold three of its household products
brands. Excluding the effects of these divestitures and the stronger US dollar,
consolidated sales were $214.0 million in the third quarter and $637.8 million
for the nine months of the year, increases of 11.1% and 11.3%, respectively over
the prior year periods.
Our operations are divided into two divisions: the Americas Division
covering markets in North and South America and the International Division,
covering Europe, Asia/Pacific, Africa and the Middle East.
The Americas Division reported third quarter sales of $98.4 million, 3 %
lower than the prior year's results of $101.5 million. Sales for the nine month
period were flat vs. the prior year. Total US Division sales were $75.4 million
for the third quarter, 5.6 % lower than the prior year comparable period. Sales
in the US of $ 243.1 million for the nine months were 2.4 % higher than the
prior year comparable period. Excluding the household products divestitures,
growth in the US would have been 6.1 % higher for the nine month period.
In the third quarter, despite the fact that the U.S. sales were lower,
the brands with the positive sales growth were Sensodyne toothpaste, analgesic
brand, Balmex diaper rash ointment and Atridox periodontal disease treatment.
Latin America third quarter sales of $13.0 million were flat compared to
the prior year, despite the negative impact of currency weakness in Brazil and
economic softness in Argentina. Sales in Canada grew 16.1 % in the third
quarter, primarily due to increased sales of pediculicides, denture cleansers
and adhesives.
For the nine month period, Latin America sales were lower by 12.5%
primarily due to currency devaluation in Brazil and weak economy in Argentina,
partially offset by strong sales growth of 42% in Mexico.
Excluding the effects of the divestitures and the stronger US Dollar, total
Latin America sales would have shown a year-to-date increase of 27.7 %.
<PAGE>12
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
Total International Division sales of $111.1 million for the third quarter
increased 19.4 % over last year. Both Asia and Europe were contributors to
this growth. Sales of $27.0 million and $84.1 million for the third quarter
for the Asia and Europe Groups respectively, increased 77 % and 8%, over the
prior year. Asia/Pacific sales growth was primarily due to the
introduction of Parodontax toothpaste in Korea, strong sales of Polident
denture cleanser in Japan, a stronger Japanese yen during the year and Sensodyne
sales in Australia. The leading contributors to sales growth in Europe were
denture cleansers in Germany, Sensodyne toothpaste in France and Parodontax
toothpaste in Holland.
Interest, dividends and other income of $ 22.3 million decreased by 8.2%
compared to nine months of the prior year income of $24.3 million. The decrease
was primarily due to prior year income which included a gain on the sale of
Household products during the first quarter ended June 30, 1998.
The cost of goods sold percentage to sales was 31.5% and 32.2% in the nine
months of the current and prior year, respectively. The cost of goods sold for
the Americas Division was 33.8% for the nine months of the current year compared
to 32.7 % for the prior year period. The cost of goods sold for International
Division was 29.3% for the nine months of the current year compared to 31.7% for
the prior year period. The change in the cost of goods sold was primarily due to
changes in product mix.
Selling, general and administrative expenses represented 62.9% and 62.2%
of sales for the nine months of current year and prior year, respectively. The
major portion is related to advertising and promotional activities. These
expenses consist of major spending programs to meet significant competition and
build brand equities.
The Company's foreign exchange exposures derive primarily from the
activities of its foreign subsidiaries and affiliates which sell products to
customers generating accounts receivable both in their own local currency and in
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 risks 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.
<PAGE>13
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
Interest rate cap agreements and foreign currency options are the only
types of derivatives used by the Company for risk management. The costs and
benefits derived from the interest rate caps are taken into income over the
terms of the respective agreements. Subsequent to the end of the quarter, the
Company entered into currency option contracts that will protect against the
average exchange rate of certain currencies declining against the dollar during
fiscal 2001 below budgeted exchange rates. The Company also entered into
contracts that protect against significant declines in the average exchange
rates of selected currencies against the dollar in fiscal 2002 vs. fiscal 2001.
All of these contracts take the form of "zero cost" collars.
The Company purchased additional interest rate caps in the second quarter
to protect against increases in the cost of servicing Euros 100 Million of Euro
denominated variable rate debt. These agreements cover a period of five years,
protecting against the 90 day Euribor rate exceeding 4.5% during the first two
years and 5.5% during the next three years. The cost of the agreements is being
paid in quarterly installments over their term and these costs are expensed as
incurred.
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 for the prior year. Currencies
that are highly correlated to the U.S. dollar and those that are illiquid or
have high interest rates (and therefore hedging cost) are not hedged. However,
certain affiliates in high interest rate environments maintain cash balances in
U.S. Dollars. If the affiliate's functional currency declines against the
dollar, such balances would produce incremental income, thereby offsetting the
declining dollar value of the affiliate's results included in the Company's net
income.
The cost of foreign currency options are expensed over the period to which
they relate and any benefits, to the extent of options deemed effective hedges,
are treated as an adjustment to the related costs of inventory when purchased.
It is difficult to predict future exchange rate movement. If exchange rates
would continue at current levels, management does not anticipate any
material effects on the Company's future financial condition, operating results
or liquidity.
Consolidated operating income increased 11.4% for the nine months ended
December 31, 1999. Americas operating income decreased 8.3% and International
operating income increased 48.6 %. The decrease in the Americas Division was
primarily due to divestiture of Household product brands. The growth in the
International division was primarily due to improved gross margins along with a
reduction in S,G&A as a percentage of sales.
Due to the above factors, income before taxes was 8.9 % of sales during the
nine months period ended December 31, 1999 as compared to 8.6 % during the prior
year.
<PAGE>14
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
The effective income tax rate of 27.0% for the nine months ended December
31, 1999 and 1998 reflect tax exempt interest from government securities and
income from the lower tax areas of Puerto Rico and Ireland.
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 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. During the quarter, the Company sold the remaining plants
and was released from the contractual agreement to manufacture a product
for another Company. The program was completed during the quarter resulting in
an excess amount of $8.6 million due to early termination of its contractual
obligations to produce a product for another entity. Therefore, the Company
recorded a restructuring credit of $8.6 million in its statement of income for
the quarter ended December 31, 1999. As of December 31, 1998, the Company
identified an excess amount of approximately $4 million due to favorable
experiences in calculating final severance payments and settlement of
post-closing adjustments in connection with the sale of one its production
facilities.Consequently, the Company recorded a restructuring credit of
approximately $4 million in its income statement for the period ended December
31, 1998. (See Note 9).
During the nine month period ending December 31, 1999 the Company acquired
Chlorhexamed, a medicated mouth wash in Holland. In Latin America, the Company
acquired Silidron and Espasmo Silidron, two anti-gas medicines sold in Brazil
and Pelo Libre line of pediculicides in Argentina. In the UK, the Company
acquired the Louis Marcel, a deplitory brand, and Interdens, a professional
dental product. In Spain, the Company acquired Marie Yvonne, a depilatory
brand. The aggregate amount spent on these acquisitions was $54.5 million.
Goodwill recorded in connection with these product acquisitions amounted to
$53.9 million.
YEAR 2000
The Company and each of its operating subsidiaries have concluded their Y2K
compliance readiness program with the objective of having all of their
significant Business Systems, including those that affect facilities and
manufacturing activities, functioning properly with respect to the Y2K problem
before January 1, 2000.
Since transitioning into the year 2000, the Company has not experienced any
major disruptions to its business nor has it experienced any Y2K related
disruptions impacting its customers and suppliers. Furthermore, the Company did
not experience any material impact on inventories at calendar year end. The
Company will continue monitoring its critical systems but does not anticipate
any significant impact due to Y2K exposure.
The Company estimated that costs would reach a total of about $17.5 million
to address its Y2K effort as well as other business information requirements.
The Company accomplished its goals within the estimated $17.5 million.
<PAGE>15
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
Euro Currency Adoption
As 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. Euro conversion did not have a
material negative impact on operations in fiscal 2000. All affiliates can
operate within the Euro market.
We are currently upgrading our computer systems so that we can operate more
efficiently within the Euro market in fiscal 2000.
Financial Condition
Cash increased for the nine month period ended December 31, 1999 to $54.2
million from $48.4 million at year-end March 31, 1999. The increase resulted
primarily from an increase in short-term debt and proceeds from the divestiture
of Lava soap and the sale of properties taken out of service as a result of the
Company's recently completed Production Optimization Project. The increase was
mostly offset by additions to Property, Plant and Equipment and Payments for
Products acquired and an increase in inventories.
In the prior year nine months cash decreased to $30.4 million from $37.3
million at year-end March 31, 1998. The decrease resulted primarily from a
decrease in short-term debt, and additions to Property Plant and Equipment and
Payments for products acquired partially offset by the issuance of long-term
debt and proceeds from the sale of assets.
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 1999 Annual Report and Form
10-K.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. In June 1999, the FASB issued SFAS No. 137, "Accounting For
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No.
133," which makes SFAS No. 133 effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is currently evaluating the impact of
the new statement on its financial position, results of operations and
disclosures for fiscal 2002.
<PAGE>16
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
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 and 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 company's products; the
success of new initiatives, acquisitions and ongoing cost reduction efforts;
changes in raw materials, energy and other costs; impact of Year 2000 issues;
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.
<PAGE>17
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
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.
Item 6. Exhibits and Reports on Form 8K
(a) The exhibits filed as part of this report are listed below:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8K
There were no reports on Form 8K for the three months ended
December 31, 1999.
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)
February 14, 2000 PETER ANDERSON
DATE Peter Anderson
Senior Vice President &
Chief Financial Officer
<PAGE>18
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