Item 1B.
Unresolved Staff Comments
None
Our principal executive office is located in Westport, Connecticut and is occupied pursuant to a lease which expires in 2011 with a five year option to renew. Our manufacturing facilities are located in Dover, Delaware and Sidney and Streetsboro, Ohio. We maintain a research and development facility in Allendale, New Jersey under a lease which expires in 2013. We lease our Canadian facility in Mississauga, Ontario, which is a warehouse and office site. This lease expires in 2006. We have adequate productive capacity to meet all of our current demands.
The following table lists our principal owned and leased properties as of March 3, 2006.
In addition, we also lease regional sales offices throughout the U.S.
Beginning in 1980, published studies reported a statistical association between tampon use and Toxic Shock Syndrome (“TSS”), a rare, but potentially serious illness. Since these studies, numerous claims have been filed against all tampon manufacturers, a small percentage of which have been litigated to conclusion. The number of TSS claims relating to our tampons has declined substantially over the years. As of the end of February 2006, there was one pending claim. Additional claims, however, may be asserted in the future.
During 2005, we settled certain patent infringement cases and an advertising dispute that resulted in a net increase to pre-tax income to us of $1.2 million included as a reduction of SG&A, exclusive of legal expenses associated with the cases.
We are a party to various other legal proceedings, claims and investigations that arise in the normal course of business. In our opinion, the ultimate disposition of these matters, including those described above, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
Listed below are our executive officers as of March 3, 2006 and a short description of their prior work experiences. There are no family relationships or arrangements between any of them pursuant to which they were hired or promoted by the Company.
Neil P. DeFeo has been President, Chief Executive Officer and a Director since October 2004. Prior to joining the Company, Mr. DeFeo served as President and Chief Executive Officer of Remington Products Company, L.L.C. (“Remington”), a consumer products company, and as Chairman of the Board of Remington from 2001 to September 30, 2003. From 1993 to 1996, Mr. DeFeo served as Group Vice President of U.S. Operations of The Clorox Company, and from 1968 to 1993 he held positions of increasing responsibility at The Procter & Gamble Company (“P&G”). Presently he serves as a director of American Woodmark Corporation (AMWD) and several privately held companies.
Kris J. Kelley has been Executive Vice President and Chief Financial Officer since December 2004 and was Senior Vice President Finance since joining the Company in October 2004. Mr. Kelley was Vice President of Finance and Controller at Remington from 1997 to 2004. Prior to that Mr. Kelley held various positions in financial management at Uniroyal Chemical Company, Kendall International, Inc. and the Henley Group.
Andrew A. Abraham has been Senior Vice President, Marketing since 2005. Prior to joining us in May 2005, Mr. Abraham was Group Vice President of Roundy’s, Inc., a regional grocery chain, from 2003 to 2005. From 2001 to 2003, he was Vice President of Marketing for RadioShack Corporation. From 1989 to 2001, Mr. Abraham held various marketing positions with P&G, including Marketing Director for the Feminine Protection Category.
Perry R. Beadon has been Senior Vice President, Global Sales since 2005. Prior to joining us in January 2005, Mr. Beadon was Senior Vice President, Sales - North America with Remington from 1998 to 2004. From 1992 to 1998, he was President of Remington, Canada and from 1987 to 1992, he was Director of Canadian Sales. Prior to that, Mr. Beadon held various marketing and merchandising positions with several specialty retail chains.
James S. Cook has been Senior Vice President, Operations since 1991. From 1990 to 1991, he was our Vice President of Dover Operations. From 1988 to 1990, he was our Vice President of Distribution, Logistics & Management Information Systems. Prior to that, Mr. Cook held various senior level positions in manufacturing and distribution with the Company and with P&G.
Thomas M. Schultz, Ph.D. has been Senior Vice President, Research and Development since 2005. Prior to joining us in September 2005, Dr. Schultz was Vice President, Corporate Technology Officer of the Nu Skin Division of Nu Skin Enterprises from 2004 to 2005. From 2001 to 2004, he was President, Chief Executive Officer of Aspect, LLC (a DuPont subsidiary). Prior to that, he held various research and development executive positions at Clairol, Shiseido, L’Oreal, Chanel and P&G.
Gretchen R. Crist has been Vice President of Human Resources for the Company since 2005. From 2003 to 2004, she was our Director of Human Resources. Prior to that, from 2000 to 2003, Ms. Crist was Vice President of Human Resources at The New Power Company. From 1996 to 2000 she was the Director of Human Resources at Playtex Products, Inc. Prior to that she held various positions within Human Resources at Philip Morris Companies, Inc., Nestle Waters North America and Kraft General Foods Corporation.
Paul E. Yestrumskas has been Vice President, General Counsel and Secretary since 1995. Prior to that, Mr. Yestrumskas was Senior Counsel of Rhone-Poulenc, Inc. from 1991 to 1995. Prior to 1991, Mr. Yestrumskas held various positions in legal and government relations at Timex, Hubbell, Inc. and General Motors.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “PYX”. No cash dividends have ever been paid on our stock. Because we are restricted in our ability to pay dividends by the terms of our debt agreements (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and Note 7 to our consolidated financial statements in this Annual Report on Form 10-K), we do not expect to pay any dividends in the foreseeable future.
The following table lists the high and low sale price per share of our stock during fiscal 2005 and fiscal 2004 as reported by the New York Stock Exchange - Composite Transactions:
We have two classes of authorized stock:
Securities Authorized for Issuance under Equity Compensation Plans
The information under the heading “Equity Compensation Plan Information” in the proxy statement is incorporated into Item 12 in this Annual Report on Form 10-K by reference.
Issuer Purchases of Equity Securities
None
Item 6.
Item 6. Selected Financial Data
The following selected financial data are extracted from our Consolidated Financial Statements and should be read in conjunction with our audited consolidated financial statements and notes, included in Item 8 of this Annual Report on Form 10-K presented on pages through.
(1)
Our fiscal year end is on the last Saturday in December nearest to December 31 and, as a result, a fifty-third week is added every five or six years. Fiscal 2005 was a fifty-three week year. All other years presented are fifty-two week years.
(3)
Includes net restructuring charges of $10.0 million and $3.5 million of other related costs included in SG&A, as a result of our operational restructuring initiated in December 2003 and our strategic realignment announced in February 2005 (see Note 3 to our consolidated financial statements in this Annual Report on Form 10-K). Includes an intangible asset impairment charge of $16.4 million related to the write-down of two trademarks due to a change in the competitive environment and a strategy shift related to our non-core brands. Both of these trademarks were sold as part of the divestiture of the remaining non-core brand assets in 2005. Also includes a gain on the sale of our Woolite rug and upholstery brand assets of $56.5 million.
(5)
Includes an aggregate restructuring and asset impairment charge of $7.6 million as a result of the closing of our Watervliet, New York plastic molding facility.
facility. In addition, this includes a net gain related to the repurchase on the open market of $10.0 million principal amount of our 9-3/8% Notes, resulting in a gain of approximately $0.5 million, which was offset in part by approximately $0.2 million write-off of unamortized deferred financing fees. In 2002, we recorded a write-off of unamortized deferred financing fees of $5.9 million related to the retirement of our then outstanding indebtedness. In 2001, we recorded a write-off of $32.2 million of fees and other costs associated with the retirement of our then outstanding indebtedness.
(7)
Includes a charge for the cumulative effect of accounting change of $12.4 million, net of income tax benefit of $7.1 million, as a result of our implementation of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” More than offsetting this charge is a tax benefit of $14.3 million recorded as a result of new tax regulation associated with loss disallowance rules.
(9)
Defined as current assets (excluding cash and cash equivalents) less current liabilities.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading manufacturer and marketer of a diversified portfolio of well-recognized branded consumer products. For the year ended December 31, 2005, we generated approximately 98% of our sales from products in the number one or number two dollar market share position in the United States. At December 31, 2005, our lines of business include Feminine Care, Skin Care and Infant Care products.
In late 2005, we completed the sale of the remaining non-core brand assets. The divested brand assets included intellectual property, inventory, molds and equipment for the Baby Magic, Mr. Bubble, Ogilvie, Binaca, Dorothy Gray, Dentax, Tek, Tussy, Chubs and Better Off brands (see Note 4 to our consolidated financial statements in this Annual Report on Form 10-K). These non-core brand assets accounted for approximately 8% of consolidated net sales in fiscal 2005 compared to 10% in fiscal 2004 and 11% in fiscal 2003. Our 2005 results include the impact of the non-core brands’ sales and operating income through late 2005. Including fees and expenses, we recorded a net loss of $2.4 million on the sale of the non-core brand assets on net proceeds of $55.7 million.
In 2005 we acquired certain distribution rights associated with our Banana Boat product for $32.5 million. These acquisitions give us full control over the Banana Boat franchise and reduce complexity related to the management of third-party distributorships.
In February 2005, we announced a realignment of our business to improve focus on our core categories, reduce organizational complexity and obtain a more competitive cost structure. This is a continuation of our operational restructuring which began in late 2003. Some of the specific realignment initiatives include: consolidation of the U.S./International divisional structure in favor of a product category structure; realignment of the sales and marketing organizations and related support functions; rationalization of manufacturing, warehousing and office facilities, including the outsourcing of gloves production to Malaysia; the closing of our manufacturing facility in Canada; and a reduction in the corporate headquarters office space. We estimate that annual savings related to the realignment will be approximately $23 million, which will be fully realized in 2006. Savings in 2005, before restructuring and related costs of $7 million, were approximately $13 million.
During 2005, we utilized available cash generated from the sale of non-core brand assets and the net cash provided by operations to repurchase $120.8 million principal of our 8% Senior Secured Notes due 2011 (“8% Notes”), at a premium of $9.8 million. In 2006, we may continue to repurchase our 8% Notes and possibly call a portion of our 9-3/8% Senior Subordinated Notes due 2011 (the “9-3/8% Notes,”) (collectively, the “Notes,”) starting in June in accordance with the indentures for the Notes.
On November 2, 2004, we completed the sale of the assets of our Woolite rug and upholstery brand to Bissell Homecare, Inc. (see Note 4 to our consolidated financial statements in this Annual Report on Form 10-K). This transaction resulted in a gain of $56.5 million on net proceeds of $59.9 million. Woolite accounted for approximately 4% of consolidated net sales in fiscal 2004 compared to 5% in fiscal 2003 and 4% in fiscal 2002. Our 2004 results include the impact of Woolite sales and operating income through November 2, 2004.
Results of Operations
The following table sets forth our Consolidated Statements of Income, including net sales by segment, as well as our consolidated results of operations expressed as a percentage of net sales for the years ended December 31, 2005, December 25, 2004 and December 27, 2003. The discussion should be read in conjunction with our Consolidated Financial Statements and accompanying notes in this Annual Report on Form 10-K ($ in thousands).
Year Ended December 31, 2005 Compared To Year Ended December 25, 2004
Net Sales - Our consolidated net sales decreased $23.1 million, or 3%, to $643.8 million in 2005. This decrease was due to the impact of the divestiture of the non-core brand assets. Net sales of the divested non-core brands were down $42.0 million versus the full year 2004. Exclusive of the divestitures, net sales increased $18.9 million, or 3%, in 2005 as compared to the similar period in 2004.
Net sales in the Feminine Care segment increased $2.7 million, or 1%, to $229.7 million in 2005. This increase is due to higher shipments of Gentle Glide due, in part, to the introduction of the 36-count multi-pack product and increased advertising and promotion for this key brand. This increase was partially offset by the impact of a price reduction on Beyond to position the product more competitively and lower Beyond sales due to pipeline volume for the initial launch of the product in the first quarter of 2004. Overall, our tampon dollar market share has remained relatively stable since the fourth quarter of 2003 at approximately 25%.
Net sales in the Skin Care segment increased $12.4 million, or 7%, to $195.7 million in 2005. The increase in net sales is due primarily to increased shipments in Wet Ones and Banana Boat. Wet Ones net sales were higher in fiscal 2005 as consumption in the pre-moistened towelette category continued to show positive growth trends and improved distribution, including front-end placement at certain key retailers. Shipments of Banana Boat were above year ago due to higher consumption in the U.S. sun care category resulting in improved product sell-through for the 2005 season and higher international shipments in 2005 versus 2004.
Net sales in the Infant Care segment increased $3.8 million, or 2%, to $169.8 million in 2005 due primarily to higher shipments of Hip Hammock and pacifiers versus the comparable period in 2004. While shipments in hard bottles were up, this increase was offset by lower disposable bottle shipments as competitive activity, particularly in private label, continued in this area. Net sales in cups and Diaper Genie were up slightly year over year.
Gross Profit - Our consolidated gross profit decreased by only $0.9 million to $342.8 million in 2005 despite lower comparative net sales. As a percent of net sales, gross profit increased 170 basis points to 53.2% in 2005 versus 51.5% in 2004. The increased gross profit margin was due primarily to the restructuring and realignment savings, a lower sun care returns rate and the positive impacts from the acquisition of the remaining Banana Boat distribution rights. These positive impacts were partially offset by significantly higher raw material costs versus the prior year.
Operating Income - Our consolidated operating income decreased $31.8 million, or 24%, to $99.4 million in fiscal 2005. Included in operating income in 2005 was a net loss of $2.4 million associated with the sale of the remaining non-core brands while 2004 had a net gain of $56.5 million from the sale of the Woolite assets. Exclusive of the impact of the gains/losses from the sales of the divested brand assets in each period, operating income would have increased by $27.2 million in fiscal 2005 versus fiscal 2004. This increase was due to an impairment charge of $16.4 million in fiscal 2004 to reduce the carrying value of certain trademarks, lower restructuring charges of $5.7 million in fiscal 2005 as compared to fiscal 2004 related to our realignment program and lower SG&A expenses of $7.4 million.
The net decrease in SG&A of $7.4 million as compared to fiscal 2004 was driven by restructuring and realignment savings, partially offset by equity compensation expenses from new compensation plans of $8.0 million, higher net legal expenses, and increased advertising and promotion spending.
Amortization of intangibles increased by $1.5 million as compared to fiscal 2004 due primarily to a full year of amortization of the non-compete agreement for the former CEO as compared to only one quarter in 2004.
Interest Expense, Net - Our consolidated interest expense, net decreased $5.2 million to $64.4 million in 2005. The decrease in interest expense is due primarily to the repurchase on the open market of $120.8 million principal amount of 8% Notes during 2005 and higher interest income in 2005 on available cash balances.
Expenses Related to Retirement of Debt - In 2005, we repurchased on the open market, and subsequently canceled, $120.8 million principal amount of our 8% Notes at a premium of $9.8 million. In addition, we wrote off $2.1 million of unamortized deferred financing fees, representing a pro-rata portion of the unamortized deferred financing fees associated with the repurchased 8% Notes. On February 19, 2004, we terminated our then outstanding credit facility and receivables facility. As a result, we wrote off approximately $6.7 million in unamortized deferred financing fees relating to these facilities. In addition, we recorded a gain of $0.5 million, which was partially offset by a write-off of $0.2 million of unamortized deferred financing fees, as a result of the repurchase on the open market of $10.0 million principal of our 9-3/8% Notes (see Notes 5 and 7 to our consolidated financial statements in this Annual Report on Form 10-K).
Other Expenses - Our consolidated other expenses in 2004 were primarily the costs associated with our receivables facility. This facility was terminated as a result of our refinancing on February 19, 2004.
Provision (Benefit) for Income Taxes - Our consolidated income tax expense was $10.5 million for fiscal 2005 compared to a consolidated income tax benefit of $0.7 million in fiscal 2004. Included in 2005 is a tax benefit of $6.8 million to reflect the reduced tax rate associated with the special repatriation of undistributed earnings from our foreign subsidiaries under The American Jobs Creation Act of 2004. In addition, we divested the remaining non-core assets resulting in a $2.4 million loss for financial reporting purposes. This divestiture included $8.1 million of non-deductible goodwill and a $16.0 million capital loss for tax reporting purposes. The future tax benefit of the capital loss carryover that expires in 2010 was fully reserved due to the uncertainty of its future utilization. The additional federal and state tax expense included in the provision for income taxes related to the non-core asset sales noted above was $8.8 million. Included in 2004 was a $17.8 million income tax benefit resulting from the reversal of a previously established valuation allowance on a capital loss carryforward. We had established a valuation allowance because we did not believe that we would utilize this capital loss carryforward before its expiration in December 2004. However, as a result of the gain generated by the sale of certain Woolite assets in
November 2004, we were able to utilize a portion of this capital loss carryforward resulting in a reversal of the valuation allowance noted. In addition, we recorded an income tax benefit of $2.8 million in 2004 as a result of the favorable outcome of certain tax audits. Our effective tax rate is 45.7% for 2005 compared to (1.3%) in 2004. Excluding the impact of the dividend received deduction, change in valuation allowance for capital loss carryforward and non-deductible goodwill associated with sale of non-core brands noted above our 2005 effective tax rate would have been 38.6%, compared to 36.3% in 2004 excluding the impact of the tax benefit from the utilization of the capital loss carryforward associated with the sale of assets of the Woolite rug and upholstery brand and benefit of favorable foreign tax audit noted above.
Year Ended December 25, 2004 Compared To Year Ended December 27, 2003
Net Sales - Our consolidated net sales increased $23.0 million, or 4%, to $666.9 million in 2004.
Net sales in the Feminine Care segment increased $13.7 million, or 6%, to $227.1 million in 2004. This increase is due primarily to higher shipment volume driven by the launch of Beyond, our cardboard applicator tampon, in the first quarter of 2004 and stabilization of our overall tampon market share. Our tampon market share has been relatively flat since the fourth quarter of 2003.
Net sales in the Skin Care segment increased $20.4 million, or 12%, to $183.3 million in 2004. The increase in net sales is due primarily to higher shipment volume in Sun Care related to improved weather versus the prior year. In 2003, poor weather conditions resulted in decreased consumption of Banana Boat. We shifted product shipments closer to consumption in 2004. As a result, 2004 was positively impacted by the shift of approximately $3 million of shipments from the fourth quarter of 2003 into the first quarter of 2004. This was a continuation of a trend noted in 2003. In addition, shipments of Wet Ones were higher in fiscal 2004 versus fiscal 2003 due to continued consumption growth in the category.
Net sales in the Infant Care segment were essentially flat at approximately $166.0 million in 2004 when compared to 2003 volume. Higher shipment volume versus the comparable period in disposable and reusable bottles was offset by lower shipments in cups as competitive activity continued in this category.
Net sales in the Divested segment (inclusive of those brands divested in 2005 and 2004) amounted to $90.6 million in 2004 as compared to $101.7 million in 2003. This decrease in net sales was due primarily to the sale of the assets of the Woolite rug and upholstery brand on November 2, 2004 and lower shipment volumes of our other recently divested non-core brands, which was due primarily to declining category trends.
Gross Profit - Our consolidated gross profit increased $17.2 million, or 5%, to $343.7 million in 2004. As a percent of net sales, gross profit increased 80 basis points to 51.5% in 2004 versus 2003. The increase in gross profit was due primarily to the increase in net sales, which accounted for approximately $12 million. The increase in gross profit as a percent of net sales was due primarily to improved product costs due, in part, to the first phase of our operational restructuring efforts announced in 2003.
Operating Income - Our consolidated operating income increased $45.3 million, or 53%, to $131.1 million in fiscal 2004. This increase was driven by a gain on the sale of Woolite assets of $56.5 million partially offset by a loss on intangible asset impairment of $16.4 million and net restructuring charges of $10.0 million. In fiscal 2003, operating income was negatively impacted by a restructuring charge of $3.9 million. Exclusive of these items, consolidated operating income increased $11.3 million or 13% as compared to fiscal 2003. This increase was due to higher gross profit of $17.2 million driven by higher net sales partially offset by higher SG&A of $5.5 million as compared to fiscal 2003.
The increase in SG&A of $5.5 million as compared to fiscal 2003 was driven by $3.5 million of consulting and restructuring related costs as a result of our realignment initiatives, $2.2 million of costs associated with implementation of the internal control requirements of the Sarbanes-Oxley Act of 2002 and higher advertising and promotional expenses of $2.1 million. Included in SG&A for fiscal 2003 were $3.8 million of tampon litigation costs, which were reduced to $0.4 million in fiscal 2004. Operating income in 2003 was also positively impacted by $1.7 million of out-of-period adjustments related primarily to a reduction of our estimate for advertising and promotional costs.
Amortization of intangibles increased by $0.4 million as compared to fiscal 2003 due primarily to the commencement of amortization of the non-compete agreement for the former CEO in the fourth quarter of 2004.
Interest Expense, Net - Our consolidated interest expense, net increased $14.5 million to $69.6 million in 2004. The increase in interest expense is the result of higher interest rates on outstanding debt driven by the refinancing of our then existing senior debt in February 2004. The refinancing changed the composition of our debt such that we have considerably less variable rate indebtedness, although at higher interest rates, and more fixed rate debt. In 2004, our weighted average interest rate for all debt was 8.27% for the year ended December 25, 2004, up 1.78 percentage points versus the prior year. Our average debt balances decreased by $1.4 million in 2004 versus 2003.
Expenses Related to Retirement of Debt - On February 19, 2004, we refinanced our then outstanding credit facility and terminated our receivables facility. We wrote off approximately $6.6 million in unamortized deferred financing fees relating to our then outstanding Term C Loan, revolver, credit agreement and related amendments and $0.1 million of an unamortized fee paid to originate the receivables facility in 2001. In addition, we recorded a net gain of $0.3 million, which included a write-off of $0.2 million of unamortized deferred financing fees, as the result of the repurchase on the open market of the $10.0 million principal of our 9-3/8% Notes (see Notes 5 and 7 to our consolidated financial statements in this Annual Report on Form 10-K).
Other Expenses - Our consolidated other expenses were primarily the costs associated with our receivables facility. Since this facility was terminated as a result of our refinancing in February 2004, costs associated with this facility decreased for fiscal 2004, versus the prior year, by $1.6 million.
Provision (Benefit) for Income Taxes - Our consolidated income tax benefit was $0.7 million for fiscal 2004 compared to $10.6 million of consolidated income tax expense in fiscal 2003. Included in 2004 was a $17.8 million income tax benefit resulting from the reversal of a previously established valuation allowance on a capital loss carryforward. We had established a valuation allowance because we did not believe that we would utilize this capital loss carryforward before its expiration in December 2004. However, as a result of the gain generated by the sale of certain Woolite assets, we were able to utilize a portion of this capital loss carryforward resulting in a reversal of the valuation allowance noted. In addition, we recorded an income tax benefit of $2.8 million in 2004 as a result of the favorable outcome of certain tax audits.
Liquidity and Capital Resources
Cash and Cash Equivalents
At December 31, 2005, we had $94.4 million of cash and cash equivalents as compared to $137.8 million at December 25, 2004. This decrease in cash was primarily the result of the repurchase of $120.8 million principal amount of 8% Notes on the open market during 2005, at a premium of $9.8 million. The cash balance was positively impacted by the net proceeds from the sale of the remaining non-core assets in late 2005 of $55.7 million. The remaining change in cash was due to the positive impact of net cash provided by operations and proceeds from stock issuance associated with the exercise of stock options, partially offset by the purchase of certain capital and intangible assets. We invest our cash in highly liquid, U.S. government or other highly-rated investments, as stipulated by our credit agreement. The cash on hand at December 31, 2005 may be used to repurchase bonds on the open market, depending upon availability and price, and we may call a portion of our 9-3/8% Notes in accordance with the indenture, to finance investments in our brands and to make scheduled bond interest payments. In 2006, during the period from January 1 to March 3, 2006, we have repurchased and retired an additional $49.0 million principal amount of our 8% Notes.
Cash Flows Analysis (in thousands)
Net Cash Provided by Operations - Our net cash provided by operations decreased $10.0 million to $62.7 million in fiscal 2005. The decrease in net cash provided by operations was due primarily to higher cash payments for taxes of $7.7 million due primarily to higher pre-tax income in fiscal 2005 exclusive of the large pre-tax gain on the sale of brand assets in fiscal 2004, which was substantially excluded from taxes due to a capital loss carryforward, incremental cash payments of $7.1 million as compared to fiscal 2004 for our operational restructuring and realignment program and higher cash interest payments of $4.5 million due to timing of interest payment dates. These increases in cash payments in fiscal 2005 were offset, in part, by an increase in cash operating income and continued improvement in working capital.
Net Cash Provided by Investing Activities - Our cash provided by investing activities of $6.6 million was primarily driven by the net proceeds from the sale of the remaining non-core brand assets of $55.7 million. This was partially offset by payments of $38.8 million for intangible assets, of which $32.5 million was for the purchase of certain Banana Boat distribution rights, $3.8 million for certain licensing arrangements and $2.5 million to our former CEO as part of a non-compete agreement. Our capital expenditures to support new products, upgrade production equipment, invest in new technologies and improve our facilities were $10.4 million in 2005. Capital expenditures for 2006 are expected to be approximately $14 million.
Net Cash Used for Financing Activities - Our cash used for financing activities of $112.7 million in 2005 was the result of the repurchase on the open market and subsequent retirement of $120.8 million principal amount of our 8% Notes plus related premiums of $9.8 million. This was partially offset by $12.1 million of proceeds from the issuance of stock associated with the exercise of stock options. In addition, our Canadian subsidiary drew down $6.0 million from its revolving line of credit, established in 2005, to finance its own working capital needs and shift a portion of our debt to the Canadian balance sheet, which reduces taxable income in Canada.
We intend to fund our operating cash, capital expenditures and debt service requirements through cash generated from operations and borrowings under our revolvers through fiscal 2009. However, we may not generate sufficient cash from operations to make either the $290.2 million scheduled principal payment on the 8% Notes, as adjusted for note repurchases subsequent to year-end, or the $340.0 million 9-3/8% Notes, both due in fiscal 2011. Accordingly, we may have to refinance our obligations, sell assets or raise equity capital to repay the principal amounts of these obligations. Historically, our cash from operations and refinancing activities have enabled us to meet all of our obligations. However, we cannot guarantee that our operating results will continue to be sufficient or that future borrowing facilities will be available for the payment or refinancing of our debt on economically attractive terms.
We have a variable rate credit facility comprised of a $100.0 million revolving credit facility for use in the United States and a $20.0 million Canadian revolving credit facility for use in Canada (collectively, the “Revolver”).
The availability under the Revolver is subject to a borrowing base calculation, which is dependent upon the level of certain assets including eligible receivables, eligible inventory and eligible equipment, as defined in the credit agreement. As of December 31, 2005, our availability under the Revolver, based on our borrowing base calculation, is $54.0 million, as reduced for our outstanding balance of $6.0 million (in Canada) and outstanding letters of credit, as defined in the credit agreement.
The rates of interest we have paid in the past, and will continue to pay in the future, on our Revolver are, at our option, a function of various alternative short term borrowing rates, such as the prime rate or the London Inter-Bank Offer Rate (“LIBOR”).
The vast majority of our indebtedness at December 31, 2005 is comprised of fixed rate notes. As a result, at December 31, 2005, our exposure to changing interest rates is not significant. A one percentage point change in our variable interest rate would not have a material impact on our consolidated interest expense. Due to the attributes of our debt portfolio, reductions of our outstanding debt may require that we repurchase bonds on the open market, in privately negotiated transactions, under certain call provisions provided in the note indentures, or otherwise from time to time. Such repurchases may be subject to bond availability and may require substantial premiums depending on prices in the marketplace and the call provisions.
Our credit agreements and the indentures to our notes contain various restrictions and limitations that may impact us. These restrictions and limitations relate to:
• incurrence of indebtedness,
• contingent obligations,
• liens,
• capital expenditures,
• mergers and acquisitions,
• asset sales, dividends and distributions,
• redemption or repurchase of equity interests,
• certain debt payments and modifications,
• loans and investments,
• transactions with affiliates,
• changes of control,
• payment of consulting and management
fees, and
• compliance with laws and regulations.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2005, (in thousands):
(1)
Does not include interest.
(2)
Includes open purchase orders primarily for the procurement of raw materials, packaging and supplies for use in the production process. Excludes severance payments under the strategic realignment plan (see Note 3 to our consolidated financial statements in this Annual Report on Form 10-K).
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect:
•
the reported amounts and timing of revenue and expenses,
•
the reported amounts and classification of assets and liabilities, and
•
the disclosure of contingent assets and liabilities.
Actual results could vary from our estimates and assumptions. These estimates and assumptions are based on historical results, assumptions that we make, as well as assumptions by third parties.
Key areas where assumptions and estimates are used include:
Sun Care Returns - Our practice is not to accept returned goods unless authorized by management of the sales organization. Returns result primarily from damage and shipping discrepancies. Exceptions to this policy include our Sun Care seasonal returns. Under certain circumstances, we allow customers to return Sun Care products that have not been sold by the end of the sun care season, which is normal practice in the sun care industry. We record sales at the time the products are shipped and title transfers. The terms of these sales vary but, in all instances, the following conditions are met: the sales arrangement is evidenced by purchase orders submitted by customers; the selling price is fixed or determinable; product has shipped and title transferred; there is an obligation to pay at a specified date or dates without any additional conditions or actions required by us; and collectibility is reasonably assured. Simultaneously with the time of the shipment, we reduce sales and cost of sales, and reserve amounts on
our consolidated balance sheet for anticipated returns based upon an estimated return level, in accordance with GAAP. Customers are required to pay for the Sun Care product purchased during the season under the required terms. Due to the seasonal nature of sun care, we offer a limited extension of terms to certain qualified customers. This limited extension requires substantial cash payments prior to or during the summer sun care season. We generally receive returns of our Sun Care products from September through March following the summer sun care season. We estimate the level of sun care returns using a variety of inputs including historical experience, consumption trends during the sun care season and inventory positions at key retailers as we move through the sun care season. We monitor shipment activity and inventory levels at key retailers during the season in an effort to gauge potential returns issues. This allows us to manage shipment activity to our customers, especially in the latter stages of the sun care season, to reduce the potential for returned product. The level of returns may fluctuate from our estimates due to several factors including weather conditions, customer inventory levels, and competitive conditions. Based on our 2005 Sun Care results, each percentage point change in our returns rate would have impacted our reported net sales by $1.4 million and our reported operating income by $1.2 million.
Bad Debt Reserves - The extension of trade credit carries with it the chance that the customer may not pay for the goods when payment is due. We measure past due status based on the date the invoice is due. We review our receivables portfolio and provide reserves for potential bad debts including those we know about and those that have not been identified but may exist due to the risk associated with the granting of credit. The estimated reserves required to cover potential losses are developed using historical experience, analysis of our accounts receivable aging and the overall credit worthiness of our portfolio of customers. Reserve balances are based on the best information available to us and are re-evaluated and adjusted as additional information is received. The adequacy of the estimated reserve may be impacted by the deterioration of a large customer and/or significant weakness in the economic environment resulting in a higher level of customer bankruptcy filings.
Long-Lived Assets - Long-lived assets, including fixed assets and intangible assets with finite useful lives, are evaluated periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If the sum of the undiscounted cash flows is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The estimate of cash flow requires significant management judgment and requires, among other things, certain assumptions about future volume, revenue and expense growth rates, and as such, may differ from actual cash flows.
Goodwill and Indefinite-Lived Intangible Assets - Carrying values of goodwill and intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Our impairment review is based on a discounted cash flow approach that requires significant management judgments, similar to those noted above for long-lived assets, and for the selection of an appropriate discount rate. We measure the fair value of each of our reporting units, as defined in SFAS No. 142, for purposes of testing the appropriateness of the carrying value of our goodwill. We do this by estimating the discounted cash flows of each reporting unit. We then compare the fair value of the reporting unit to the carrying value of its net assets, including goodwill, to ensure no impairment is indicated. We measure fair value for purposes of testing our trademarks for impairment using the relief from royalty method (a discounted cash flow methodology). Our research indicates that this is the most widely used approach for valuing assets of this type. We consider a number of factors in determining the relevant variables for this calculation including royalty rates for similar products licensed in the marketplace and the additional rights and obligations inherent in the ownership of a trademark as opposed to a licensing arrangement including product extension, geographical expansion opportunities, exclusivity of use and transferability. In addition, we utilize a discount rate that reflects the rights and obligations of ownership, which results in an inherent premium as compared to a valuation of a licensing agreement since the discount rate of a licensee would reflect the additional risks of a license-only arrangement. An impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the asset. We use our judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities may signal that an asset has become impaired. In 2005, we reorganized our business segments as a result of our strategic realignment. In accordance with the requirements of SFAS No. 142, we reallocated goodwill to our new reporting units on a relative fair value basis.
Promotion Accruals - We offer a variety of sales incentive programs to customers and consumers, such as cooperative advertising programs, feature price discounts, in store display incentives and consumer coupons. The recognition of the costs for these programs, which are classified as a reduction of revenue, involves the use of judgment related to performance and redemption estimates. We account for these programs in accordance with Emerging Issues Task Force No. Issue 01-09, “Accounting for Consideration by a Vendor to a Customer (Including a Reseller of a Vendor’s Product).” Settlement of associated liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a customer from amounts otherwise due to us. As a result, the ultimate cost of certain trade promotion programs is dependent on the relative success of the events. Accruals for consumer coupons are made at the time the coupon is distributed. These estimates are made utilizing the value of the coupon and the expected redemption rates. Expected redemption rates are determined using historical redemption experience for similar programs. We monitor monthly redemption activity with the assistance of a third party, which tracks actual redemptions and provides updated estimates for future redemptions of the coupons. Actual expenses may differ if the level of redemption rates and performance vary from estimates.
Restructuring and Related Charges - Restructuring liabilities are recorded for estimated costs of facility closures, significant organizational adjustments, and measures undertaken by us to exit certain activities. We estimate the costs of such activities after evaluating detailed analyses of the cost to be incurred. Such liabilities could include amounts for items such as severance costs and related benefits (including settlements of pension plans), impairment of property and equipment or other assets, lease termination payments, plus any other items directly related to the exit activities. While the actions are carried out as expeditiously as possible, restructuring and related charges are estimates. Changes in estimates resulting in an increase to or a reversal of a previously recorded liability may be required as we execute the restructuring plan. During fiscal 2003, we adopted the requirements of SFAS No.146, “Accounting for Costs Associated with Exit or Disposal Activities,” which impacts the timing of recognition of certain exit or disposal costs.
Restructuring and related charges, which are reflected in operating expenses, include but are not limited to, termination and related costs, any asset impairments relating to the restructuring, and other costs directly related to the initiatives implemented.
See Note 3 to the Consolidated Financial Statements in this Annual Report on Form 10-K for a more complete discussion of restructuring initiatives and related costs.
Pension and Postretirement Benefits - Included in our results of operations are pension and postretirement costs and credits, which are measured using actuarial valuations, with associated assets and/or liabilities recorded in our Consolidated Balance Sheet. Inherent in these valuations are key assumptions including assumptions about discount rates, expected return on plan assets, annualized increases in salaries and wages, the future number of participants and, in the case of postretirement health care benefits, the future cost of health care. These assumptions are updated on an annual basis. We are required to consider market conditions, including changes in interest rates, in making these assumptions. A one percentage point increase or decrease in the assumed health care cost trend rate would change the sum of the service and interest cost components of the fiscal 2005 net periodic postretirement benefit expense by less than 1%. A one percentage point increase or decrease in the assumed health care cost trend rate would change the accumulated postretirement benefit obligation as of December 31, 2005 by less than 1%. A one percentage point change up or down in the discount rate or in the long-term rate of return on plan assets would not have a significant impact on net periodic pension expense.
Stock-Based Compensation - We account for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” As permitted by SFAS No. 123 and SFAS No. 148, we follow the intrinsic value approach of Accounting Principles Board Opinion No. 25 (“APB No. 25”), and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB No. 25” issued for determining compensation expense related to the issuance of stock options. Accordingly, we have not recorded any expense for our stock options that vested solely on continuous service. In accordance with APB No. 25, we have recorded $8.0 million of compensation expense in fiscal 2005 related to the issuance of restricted stock, performance restricted stock and performance based stock options during the same period. The expense for restricted stock awards was based upon the closing price of our stock on the date of the award amortized over the associated service period. The expense for the performance
restricted shares was based on management’s estimation of the performance awards that will vest over the associated service period and the spread between the recipient’s basis in the award, which is par value, and the closing stock price at the end of the fiscal period. The expense for the performance stock options was based on management’s estimation of the performance awards that will vest over the associated service period and the spread between the option grant price and the closing stock price at the end of the fiscal period. There were no charges to income for stock-based compensation plans in fiscal 2004 and 2003. As noted in Notes 2 and 10 to the Consolidated Financial Statements, we adopted SFAS No. 123 (revised 2004), “Share-based Payment” in the first quarter of fiscal 2006. This new accounting pronouncement will require us to measure all employee stock-based compensation awards using a fair value method and recognize such expense in our consolidated financial statements.
Other Significant Accounting Policies - Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to understanding our Consolidated Financial Statements. The notes to our Consolidated Financial Statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-based Payment.” SFAS No. 123(R) requires us to measure all employee stock-based compensation awards using a fair value method and recognize such expense in our consolidated financial statements. In addition, SFAS No. 123 (R) requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from stock-based payment arrangements. In April 2005, the Securities and Exchange Commission (“SEC”) indicated that it would not require companies to record any expense in accordance with SFAS No. 123 (R) until the first annual period beginning after June 15, 2005, which is fiscal 2006 for us (see Notes 2 and 10 to our consolidated financial statements in this Annual Report on Form 10-K.)
We have adopted SFAS No. 123 (R) on January 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning January 1, 2006 for all share-based payments granted on or after that date and for all awards granted to employees prior to January 1, 2006 that remain unvested on that date. We estimate the charge to pre-tax income for our stock-based compensation plans in fiscal year 2006 will be in the range of $8 to $10 million. The following factors and management assumptions may impact this estimate and other future expense amounts for any particular quarterly or annual period: the Company’s future stock-based compensation strategy including the timing, size and composition of new equity grants, stock price volatility, estimated forfeitures, employee stock option exercise behavior, and the attainment levels of associated performance criteria. SFAS No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as currently required, thereby potentially reducing net operating cash flows and increasing net financing cash flows in periods after adoption. Such amounts cannot be estimated for future periods with certainty because they depend largely on when employees will exercise the stock options and the market price of the Company’s stock at the time of exercise.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. This statement is effective for our first quarter of fiscal 2006. We do not believe this statement will have a material impact on our Consolidated Financial Statements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk
Substantially all of our indebtedness at December 31, 2005 is comprised of fixed rate notes (see Note 7 to our consolidated financial statements in this Annual Report on Form 10-K). We have in the past and may in the future use financial instruments, such as derivatives, to manage the impact of interest rate changes on our debt and its effect on our income and cash flows. Our policies prohibit the use of derivative instruments for the sole purpose of trading for profit on price fluctuations, or to enter into contracts, which intentionally increase our underlying interest rate exposure. Our indebtedness at December 31, 2005 was comprised of $340.0 million of 9-3/8% Notes, $339.2 million of 8% Notes and $6.0 million of a variable rate revolving line of credit. As such, at December 31, 2005, a one percentage point change in our variable interest rate would not have a material impact on our consolidated interest expense.
For the fiscal year ended December 31, 2005, we derived approximately 9% of net sales in currencies denominated other than the U.S. dollar, of which approximately 7% was from our Canadian subsidiary. We conduct our international operations in a variety of countries and derive our sales in currencies including: the Euro, British pound, Canadian dollar and Australian dollar, as well as the U.S. dollar. Our results may be subject to volatility because of currency changes, inflation changes and changes in political and economic conditions in the countries in which we operate. The majority of our products are manufactured in the U.S., but we do source some equipment, finished goods, componentry and raw materials from overseas, the majority of which is denominated in U.S. dollars.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our Consolidated Financial Statements and related Notes to Consolidated Financial Statements are filed as part of this Form 10-K and can be found on pages to. The Reports of our Independent Registered Public Accounting Firm, dated March 14, 2006, are included in the financial statements filed as part of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management carried out an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act), as of the end of the latest fiscal quarter. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, the Company’s disclosure controls and procedures were effective to ensure that material information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our management carried out an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2005, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included in the financial statements filed as part of this Form 10-K.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
None
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
Directors and Executive Officers - The name, age and background of each of our directors nominated for election will be contained under the caption “Election of Directors - Information Regarding Nominees” in our Proxy Statement for our Annual Meeting of Stockholders, to be held May 16, 2006, (the “Proxy Statement”) and are incorporated herein by reference. Pursuant to Item 401(b) of Regulation S-K, our executive officers are reported under the caption “Our Executive Officers” in Part I, Item 4A of this Annual Report on Form 10-K.
Beneficial Ownership Reporting Compliance - Information on the beneficial ownership reporting for our directors and executive officers will be contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement, which is incorporated herein by reference.
Audit Committee Financial Expert - Information on our audit committee financial expert will be contained in our Proxy Statement, which is incorporated herein by reference.
Code of Conduct and Ethics -We have a Code of Conduct and Ethics that applies to all of our employees, including our Directors, Chief Executive Officer, Chief Financial Officer and Controller. Our Code of Conduct and Ethics was distributed to employees and is available free of charge on our website at www.playtexproductsinc.com under the section entitled, “Investor Relations - Corporate Governance.” We intend to post on our web site any amendments to, or waivers from our Code of Conduct and Ethics applicable to Senior Financial Executives.
Corporate Governance Guidelines - Our Board of Directors has adopted Corporate Governance Guidelines in accordance with the revised New York Stock Exchange Listing Standards and rules adopted by the Securities and Exchange Commission, which are available free of charge on our website at www.playtexproductsinc.com under the section entitled, “Investor Relations - Corporate Governance.”
The information required by this item, which will appear in the Proxy Statement under the caption, “Executive Compensation,” is incorporated by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item, which will appear in the Proxy Statement under the captions, “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” is incorporated by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions
The information required by this item, which will appear in the Proxy Statement under the caption, “Certain Transactions,” is incorporated by reference.
Item 14.
Item 14.
Principal Accountant Fees and Services
The information required by this item, which will appear in the Proxy Statement under the caption, “Independent Registered Public Accountants,” is incorporated by reference.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedule
(2) Financial Statement Schedule
The financial statement schedule - Schedule II - Valuation and Qualifying Accounts, is filed as part of this Form 10-K and is on page. All other schedules are omitted as the required information is not applicable to us or the information is already presented in our Consolidated Financial Statements or related Notes to Consolidated Financial Statements.
(3) Exhibits
Please see our Exhibit Index on Pages X-1 to X-3 of this Form 10-K.
PLAYTEX PRODUCTS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PLAYTEX PRODUCTS, INC.
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated this 14th day of March, 2006.
PLAYTEX PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Playtex Products, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Playtex Products, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of Playtex Products, Inc. and subsidiaries is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the internal control over financial reporting of Playtex Products, Inc. and subsidiaries based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Playtex Products, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by COSO. Also, in our opinion, Playtex Products, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Playtex Products, Inc. and subsidiaries as of December 31, 2005 and December 25, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years ended December 31, 2005, December 25, 2004 and December 27, 2003, and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Stamford, Connecticut
March 14, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Playtex Products, Inc.:
We have audited the accompanying consolidated balance sheets of Playtex Products, Inc. and subsidiaries as of December 31, 2005 and December 25, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years ended December 31, 2005, December 25, 2004 and December 27, 2003. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the management of Playtex Products, Inc. and subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Playtex Products, Inc. and subsidiaries as of December 31, 2005 and December 25, 2004, and the results of their operations and their cash flows for each of the years ended December 31, 2005, December 25, 2004 and December 27, 2003, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the internal control over financial reporting of Playtex Products, Inc. and subsidiaries as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/S/ KPMG LLP
Stamford, Connecticut
March 14, 2006
PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
PLAYTEX PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See accompanying notes to consolidated financial statements.
PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
See accompanying notes to consolidated financial statements.
PLAYTEX PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to consolidated financial statements.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Description of Business - We are a leading manufacturer and marketer of a diversified portfolio of well-recognized branded consumer products. At December 31, 2005, our business segments include Feminine Care, Skin Care and Infant Care products.
Basis of Presentation - Our Consolidated Financial Statements include the accounts of Playtex Products, Inc. and all of our subsidiaries. All significant intercompany balances have been eliminated in consolidation.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts and classification of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts and timing of revenue and expenses. Actual results could vary from our estimates and assumptions.
Certain amounts in the prior year financial statements have been reclassified to conform to our current year presentation. Our fiscal year end is on the last Saturday in December nearest to December 31 and, as a result, a fifty-third week is added every 5 or 6 years. Fiscal 2005 was a fifty-three week year. Fiscal 2004 and 2003 were fifty-two week years.
Revenue Recognition - We derive revenue from the sale of consumer products. In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” revenue is recognized when the following conditions are met: a purchase order submitted by a customer has been received; the selling price is fixed or determinable; products have been shipped and title transferred; and there is reasonable assurance of collectibility. Estimated shipping and handling costs are considered in establishing product prices billed to customers.
Our practice is not to accept returned goods unless authorized by management of the sales organization. Returns result primarily from damage and shipping discrepancies. We accrue for damaged product and shipping discrepancies, and thus reduce net sales, based on historical experience related to these types of returns. Under certain circumstances, we authorize customers to return Sun Care products that have not been sold by the end of the sun care season, which is normal practice in the sun care industry. We record sales at the time the products are shipped and title transfers. The terms of these sales vary but, in all instances, the revenue recognition conditions noted above are met. Simultaneously with the time of the shipment, we reduce sales and cost of sales, and increase an accrued liability on our Consolidated Balance Sheet for anticipated returns based upon an estimated return level. Customers are required to pay for the Sun Care product purchased during the season under the required terms. Due to the seasonal nature of sun care, we offer a limited extension of terms to certain qualified customers. This limited extension requires substantial cash payments prior to or during the summer sun care season. We generally receive returns of our Sun Care products from September through March following the summer sun care season.
We routinely commit to customer trade promotions and consumer coupon programs that require us to estimate and accrue the ultimate costs of such programs. Customer trade promotions include introductory marketing funds (slotting fees), cooperative marketing programs, shelf price reductions on our products, advantageous end of aisle or in-store displays, graphics, and other trade promotion activities conducted by the customer. We account for these programs in accordance with Emerging Issues Task Force No. Issue 01-09, “Accounting for Consideration by a Vendor to a Customer (Including a Reseller of a Vendor’s Product).” Costs of trade promotions, cash discounts offered to the trade as a payment incentive and consumer coupons are recorded as a reduction of net sales.
Research and Development - Research and development costs are expensed in selling, general and administrative (“SG&A”) as incurred and amounted to $15.6 million in fiscal 2005, $16.9 million in fiscal 2004 and $16.3 million in fiscal 2003.
Advertising and Promotion Expenditures - Costs associated with advertising and promotion, including fees to advertising agencies, are expensed in SG&A as incurred. Media advertising production costs are expensed the first time the advertising takes place. Our advertising and promotion expenditures were $92.7 million in fiscal 2005, $91.7 million in fiscal 2004 and $89.3 million in fiscal 2003.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Warehousing and Handling Costs - Costs associated with inventory storage and handling costs at our distribution centers are included as a component of SG&A. These costs are expensed as incurred and amounted to $17.8 million, $19.0 million and $20.4 million in fiscal 2005, 2004 and 2003, respectively. Warehousing and handling costs exclude inbound and outbound freight, which are included in cost of sales.
Cash and cash equivalents - Cash equivalents are short-term, highly liquid investments with original maturities of 90 days or less. Outstanding checks are not deducted from reported cash and cash equivalents until presentment. The associated liability is included as a component of accounts payable in the current liability section of the Consolidated Balance Sheets.
Inventories - Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventory costs include material, labor and manufacturing overhead.
Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation and amortization is determined on the straight-line method over the estimated useful life of the respective asset. Our estimated useful lives for our fixed asset classes are as follows:
• land improvements range from 15 to 40 years,
• building and improvements range from 20 to 40 years,
• leasehold improvements vary based on the shorter of asset life or lease term,
• furniture and fixtures range from 5 to 10 years,
• computer hardware and software range from 3 to 4 years, and
• machinery and equipment range from 4 to 20 years.
Capitalized Software Costs - We capitalize significant costs incurred in the acquisition and development of software for internal use, including the costs of the software, materials, and consultants incurred in developing internal-use computer software once final selection of the software is made. Costs incurred prior to the final selection of software and costs not qualifying for capitalization are charged to expense.
Goodwill and Indefinite-Lived Assets - We conduct annual testing of our goodwill and indefinite-lived assets in the second quarter of our fiscal year. In addition, an intangible asset that is not subject to amortization will be tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. We measure the fair value of each of our reporting units for purposes of testing the appropriateness of the carrying value of our goodwill. We do this by estimating the discounted cash flows of each reporting unit. We then compare the fair value of the reporting unit to the carrying value of its net assets, including goodwill, to ensure no impairment is indicated. We measure fair value for purposes of testing our trademarks for impairment using the relief from royalty method (a discounted cash flow methodology). Our research indicates that this is the most widely used approach for valuing assets of this type. We consider a number of factors in determining the relevant variables for this calculation including royalty rates for similar products licensed in the marketplace and the additional rights and obligations inherent in the ownership of a trademark as opposed to a licensing arrangement including product extension, geographical expansion opportunities, exclusivity of use and transferability. In addition, we utilize a discount rate that reflects the rights and obligations of ownership, which results in an inherent premium as compared to a valuation of a licensing agreement since the discount rate of a licensee would reflect the additional risks of a license-only arrangement. In 2005, we reorganized our business segments as a result of our strategic realignment. As a result, we reallocated goodwill to our new reporting units on a relative fair value basis. As part of the sale of the remaining non-core brand assets in late 2005, $8.1 million of goodwill, which represented the amount of goodwill allocated to our “non-core” reporting unit, was included in the calculation of the net loss on the sale of the remaining non-core brand assets. Additionally, we reviewed the remaining goodwill for impairment subsequent to the sale of the divested non-core brands, and no impairment was indicated. In the fourth quarter of 2004, we recorded an asset impairment charge of approximately $16.4 million. This non-cash charge was required to write down the value of two trademarks due to a change in the competitive environment
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
and a decision by management to not invest in non-core brands. Both of these trademarks were sold as part of the divestiture of the remaining non-core brand assets in late 2005.
Long-Lived Assets - We review long-lived assets, including fixed assets and intangible assets with definitive lives, such as patents, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The vast majority of our long-lived assets are located in the United States (“U.S.”). Amortization of patents and other intangible assets is expected to be approximately $2.5 million a year in fiscal 2006 through fiscal 2008, $2.2 million in fiscal 2009 and $0.9 million in 2010. Intangible assets subject to amortization are amortized on a straight-line basis over the estimated useful lives. Useful lives for patents are 17 years, the remaining legal life, or the estimated product life, whichever is shorter, and others are determined by contractual obligations. The weighted average useful life of our long-lived intangible assets is approximately 10 years.
Deferred Financing Costs - Expenses incurred to issue debt are capitalized and amortized on a straight line basis, which approximates the effective yield method, over the life of the related debt agreements, and are included as a component of interest expense in the Consolidated Statements of Income.
Income Taxes - Deferred tax assets and liabilities are provided using the asset and liability method for temporary differences between financial and tax reporting bases using the enacted tax rates in effect for the period in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that we believe are more likely than not realizable.
Foreign Currency Translation - Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at average exchange rates during the period. Net foreign currency translation gains or losses are shown as a component of accumulated other comprehensive income (loss) in the equity section of the Consolidated Balance Sheet.
Stock-Based Compensation - We account for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” As permitted by SFAS No. 123 and SFAS No. 148, we follow the intrinsic value approach of Accounting Principles Board Opinion No. 25 (“APB No. 25”), and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB No. 25” issued for determining compensation expense related to the issuance of stock options. Accordingly, we have not recorded any expense for our stock options that vested solely on continuous service. In accordance with APB No. 25, we have recorded $8.0 million of compensation expense in fiscal 2005 related to the issuance of restricted stock, performance restricted stock and performance based options during the same period. The expense for restricted stock awards was based upon the closing price of our stock on the date of the award, amortized over the associated service period. The expense for the performance restricted shares was based on management’s estimation of the performance awards that will vest over the associated service period and the spread between the recipient’s basis in the award, which is par value, and the closing stock price at the end of the fiscal period. The expense for the performance stock options was based on management’s estimation of the performance awards that will vest over the associated service period and the spread between the option grant price and the closing stock price at the end of the fiscal period. There were no charges to income for stock-based compensation plans in fiscal 2004 and 2003 (see Notes 2 and 10.)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
The following table illustrates the pro forma effect of stock-based compensation on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):
2. Impact of New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-based Payment.” SFAS No. 123 (R) requires us to measure all employee stock-based compensation awards using a fair value method and recognize such expense in our consolidated financial statements. In addition, SFAS No. 123 (R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from stock-based payment arrangements. In April 2005, the Securities and Exchange Commission (“SEC”) indicated that it would not require companies to record any expense in accordance with SFAS No. 123 (R) until the first annual period beginning after June 15, 2005, which is fiscal 2006 for us.
We have adopted SFAS No. 123 (R) on January 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning January 1, 2006 for all stock-based payments granted on or after that date and for all awards granted to employees prior to January 1, 2006 that remain unvested on that date. We estimate the charge to pre-tax income for our stock-based compensation plans in fiscal year 2006 will be in the range of $8 to $10 million. The following factors and management assumptions may impact this estimate and other future expense amounts for any particular quarterly or annual period: the Company’s future stock-based compensation strategy including the timing, size and composition of new equity grants, stock price volatility, estimated forfeitures, employee stock option exercise behavior, and the attainment levels of associated performance
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Impact of New Accounting Pronouncements (Continued)
criteria. SFAS No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as currently required, thereby potentially reducing net operating cash flows and increasing net financing cash flows in periods after adoption. Such amounts cannot be estimated for future periods with certainty because they depend largely on when employees will exercise the stock options and the market price of the Company’s stock at the time of exercise.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. This statement is effective for fiscal years beginning after June 15, 2005. We do not believe this statement will have a material impact on our Consolidated Financial Statements.
3. Restructuring
In February 2005, we announced a realignment plan (2005 Realignment) to improve focus on our core categories, reduce organizational complexity and obtain a more competitive cost structure. This was a continuation of our operational restructuring that began in late 2003.
Charges for the 2005 realignment totaled $16.7 million, of which $4.2 million in restructuring expenses and $2.0 million of other related expenses ($1.9 million in cost of goods and $0.1 million in SG&A) were recorded in 2005. The initial charges of $10.1 million in restructuring expenses and $0.4 million of other related expenses (in SG&A) were recorded in the fourth quarter of 2004 related primarily to severance liabilities under our existing severance policy. Some of the specific realignment initiatives included:
•
Consolidation of the U.S./International divisional structure in favor of a product category structure,
•
Realignment of the sales and marketing organizations and related support functions, and
•
Rationalization of manufacturing, warehousing and office facilities, including the outsourcing of gloves
production to Malaysia, the discontinuation of manufacturing in Canada and a reduction in the corporate headquarters office space.
As a result, total headcount was reduced by more than 250 positions, or almost 17% of the workforce. The reduction was obtained through a combination of attrition, early retirement and layoffs.
We expect the majority of the remaining restructuring liability will be paid in cash during 2006.
In the fourth quarter of 2003, with the assistance of an outside operations consultant, we initiated our restructuring program to increase operational effectiveness and profitability. As part of this program, we incurred $3.9 million in restructuring charges in the fourth quarter of 2003, primarily for severance costs for employee terminations and costs associated with a voluntary early retirement program. Approximately 100 positions were impacted by this phase of our restructuring, all of which were in manufacturing operations and supporting functions. At the beginning of the first quarter 2003, our restructuring balance was solely related to our March 2002 decision to close our Watervliet, New York plastic molding facility. The closure of the plant was complete as of December 27, 2003 and no further restructuring liabilities remain.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Restructuring (Continued)
The following tables summarize the restructuring activities for fiscal 2005, 2004 and 2003 (in thousands):
4. (Loss) Gain on Sale of Assets
In late 2005, we completed the sale of the remaining non-core brand assets. The divested brand assets included intellectual property, inventory, molds and equipment for Baby Magic, Mr. Bubble, Ogilvie, Binaca, Dorothy Gray, Dentax, Tek, Tussy, Chubs and Better Off brands. We recorded a loss of $2.4 million as a result of the transaction. Gross proceeds received in 2005 from the sale of these brand assets were $55.7 million. The carrying value of the assets sold was $57.2 million and we incurred net fees and expenses related to the sale of the non-core assets of $1.4 million.
On November 2, 2004, we completed the sale of the assets of the Woolite rug and upholstery brand to Bissell Homecare, Inc. We recorded a gain of $56.5 million as a result of the transaction. Gross proceeds from the Woolite sale were $61.9 million. The carrying value of the assets sold, including inventory, equipment and intellectual property, was $3.4 million and we incurred fees and expenses directly related to the transaction of $2.0 million.
5. Expenses Related to Retirement of Debt
In 2005, on varying dates, we repurchased on the open market, and subsequently cancelled, $120.8 million principal amount of our 8% Senior Secured Notes due 2011 (“8% Notes”) at a premium of $9.8 million. In addition, we wrote off $2.1 million of unamortized deferred financing fees, representing a pro-rata portion of the unamortized deferred financing fees associated with the repurchased 8% Notes.
On February 19, 2004, we refinanced our then outstanding credit facility and terminated our receivables facility. We wrote off approximately $6.6 million in unamortized deferred financing fees relating to our then outstanding
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Expenses Related to Retirement of Debt (Continued)
credit facility and $0.1 million of an unamortized fee paid to originate the receivables facility in 2001. Also on February 19, 2004, we repurchased on the open market $10.0 million principal of our 9-3/8% Senior Subordinated Notes due 2011 (the “9-3/8% Notes,” together with the 8% Notes, the “Notes”), at a discount, which resulted in a net gain, including a $0.2 million write-off of unamortized deferred financing fees associated with the repurchased notes, of $0.3 million (see Note 7).
6. Balance Sheet Components
The components of certain balance sheet accounts are as follows (in thousands):
(1)Net of tax effect of $0.6 million at December 31, 2005 and $0.5 million at December 25, 2004.
(2)Net of tax effect of $2.9 million at December 31, 2005 and $0.6 million at December 25, 2004.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
2004 Refinancing - On February 19, 2004, we completed a refinancing (the “2004 Refinancing Transaction”) of our then outstanding credit facility (“Senior Debt”) and receivables facility (see Note 8). As part of the 2004 Refinancing Transaction, we entered into:
In addition, in late November 2005, we originated a $20.0 million (Canadian dollar) Canadian Revolver to provide our Canadian subsidiary with a financing source for working capital.
The net proceeds from the 2004 Refinancing Transaction including borrowings under the Credit Facility were used to repay and/or terminate commitments under our Senior Debt and our receivables facility.
As a result of the 2004 Refinancing Transaction, we incurred approximately $12.9 million in fees and expenses, which have been deferred and are being amortized over the term of the related indebtedness. In 2005, we incurred $0.3 million in fees associated with the Canadian Revolver, which have also been deferred and are being amortized over the term of the Canadian Revolver.
8% Notes - We pay interest on the 8% Notes semi-annually on March 1 and September 1 of each year. At any time prior to March 1, 2007, we may redeem up to 35% of the principal amount of the 8% Notes with the proceeds of certain equity offerings or asset sales, at a redemption price of 100.000% of the principal amount of notes redeemed plus the Applicable Premium, plus accrued and unpaid interest to the redemption date. In addition, at any time prior to March 1, 2007, we may also redeem the 8% Notes, in whole but not in part, upon the occurrence of a change of control, at the redemption price of 100.000% of the principal amount of notes redeemed plus the Applicable Premium, plus accrued and unpaid interest to the redemption date.
“Applicable Premium” means (i) with respect to an equity offering redemption, 8% of the principal amount of the notes redeemed and (ii) with respect to an asset sale redemption or a change of control redemption, the percentage (expressed as percentages of principal amount of notes redeemed) set forth in the following table if redeemed during the twelve-month period prior to March 1 of the years indicated as follows:
The 8% Notes are secured by a first lien on intellectual property owned by Playtex Products, Inc. and its domestic subsidiaries, the guarantors of the 8% Notes, and by a second lien on substantially all personal property and material owned real property, other than intellectual property, owned by us and the guarantors of the 8% Notes. We do not have the option to redeem the 8% Notes from March 1, 2007 through March 1, 2008. At our option,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Long-Term Debt (Continued)
we may redeem the 8% Notes on or after March 1, 2008 at the redemption prices (expressed as percentages of principal amount) listed below plus accrued and unpaid interest to the redemption date:
9-3/8% Notes - We pay interest on the 9-3/8% Notes semi-annually on June 1 and December 1 of each year. At our option, we may redeem the 9-3/8% Notes, in whole or in part, on or after June 1, 2006 at the redemption prices (expressed as percentages of principal amount) listed below plus accrued and unpaid interest to the redemption date:
Revolver - The Revolver expires in February 2009. The rates of interest we pay on the Revolver are, at our option, a function of certain alternative short term borrowing rates such as the London Inter Bank Offer Rate (“LIBOR”) plus an applicable margin, which fluctuates depending on certain financial ratios, or an index rate based upon the prime rate or federal funds rate plus an applicable margin, which fluctuates depending on those same financial ratios. The availability under our Revolver is subject to a borrowing base calculation, which is dependent upon the level of certain assets including eligible receivables, eligible inventory and eligible equipment, as defined in the Credit Facility. As of December 31, 2005, our availability under the Revolver was $54.0 million, as reduced for the outstanding balance of $6.0 million and $3.8 million of open letters of credit. We pay a quarterly commitment fee on the available but unused Revolver balance of 0.375%.
Our Credit Facility is secured by a lien on all personal property and other assets owned by us and the guarantors, and contains various restrictions and limitations that may impact us. These restrictions and limitations relate to:
• incurrence of indebtedness,
• contingent obligations,
• liens,
• capital expenditures,
• mergers and acquisitions,
• asset sales, dividends and distributions,
• redemption or repurchase of equity interests,
• certain debt payments and modifications,
• loans and investments,
• transactions with affiliates,
• changes of control,
• payment of consulting and management fees, and
• compliance with laws and regulations.
On November 16, 2005, we amended our Credit Facility. These amendments allowed us to sell the non-core brand assets sold in late 2005 and originate the Canadian Revolver.
We also amended our Credit Facility in October 2004 to allow us to repurchase the Notes provided we meet certain specified conditions and a certain minimum availability target under our Revolver over a forecasted twelve month period and to sell the Woolite brand assets.
Our Credit Facility and the indenture for our 8% Notes also grant rights of inspection, access to management, the submission of certain financial reports, and requires us to make prepayments with the proceeds generated by us resulting from the disposition of assets, the receipt of condemnation settlements and insurance settlements from casualty losses and from the sale of equity securities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Long-Term Debt (Continued)
The indentures to the Notes also contain certain restrictions and requirements. Under the terms of each of these agreements, payment of cash dividends on our common stock is restricted. Our wholly-owned domestic subsidiaries are guarantors of the Notes (see Note 18).
In 2006, during the period from January 1 to March 3, 2006, we have repurchased and retired an additional $49.0 million principal amount of our 8% Notes at a premium of $3.7 million. In addition, we wrote off $0.7 million of unamortized deferred financing fees, representing a pro-rata portion of the unamortized deferred financing fees associated with the repurchased 8% Notes. The only required principal repayments during the next five years is on our Revolver, which requires us to pay any outstanding principal at the February 2009 termination date.
8. Receivables Facility
On February 19, 2004, the receivables purchase facility agreement (the “Receivables Facility”), was terminated as part of the 2004 Refinancing Transaction (see Note 7). At the time of termination, our wholly-owned subsidiary, Playtex A/R LLC, was merged into Playtex Products, Inc.
In 2001, we entered into the Receivables Facility through our wholly-owned subsidiary, Playtex A/R LLC. Through the Receivables Facility, we sold on a continuous basis to Playtex A/R LLC substantially all of our domestic customers’ trade invoices that we generated. Playtex A/R LLC sold to a third-party commercial paper conduit (the “Conduit”) an undivided fractional ownership interest in these trade accounts receivable. Our retained interest in receivables represented our subordinated fractional undivided interest in receivables sold to Playtex A/R LLC and the net unamortized securitization fee incurred by Playtex A/R LLC.
We sold receivables at a discount, which we included in other expenses in the Consolidated Statements of Income. This discount, which was $0.3 million for 2004, through the termination date of February 19, 2004, and $1.9 million for 2003, reflected the fees required by the Conduit to purchase a fractional undivided interest in the receivables. The fees were based on the payment characteristics of the receivables, most notably their average life, interest rates in the commercial paper market and historical credit losses. Also included in other expenses is the impact of the amortization of a securitization fee incurred by Playtex A/R LLC to establish the Receivables Facility.
The following table summarizes the cash flows between Playtex A/R LLC and us for the year ended December 25, 2004 (in thousands):
9. Income Taxes
The provision (benefit) for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Deferred income tax assets and liabilities are calculated for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts we believe are more likely than not realizable.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
Income before income taxes are as follows (in thousands):
Our provision (benefit) for income taxes are as follows (in thousands):
Our provision (benefit) for income taxes differed from the amount computed using the federal statutory rate of 35% as follows (in thousands):
In late 2005, the Company divested its remaining non-core brand assets (see Note 4) resulting in a $2.4 million loss for financial reporting purposes. This divesture included $8.1 million of non-deductible goodwill and a $16.0 million capital loss for tax reporting purposes. The future tax benefit of the capital loss carryover that expires in 2010 was fully reserved through an increase to the valuation allowance due to the uncertainty of its future utilization.
On January 13, 2005, the U.S. Treasury issued Notice 2005-10 that provided initial guidance for the special repatriation provision provided by The American Jobs Creation Act of 2004. In response, we developed and implemented Domestic Reinvestment Plans (the “Plans”) in 2005. The Plans provided for our Canadian and
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
Australian subsidiaries to pay dividends totaling $23.7 million in multiple installments during 2005. The dividends were used to partially fund our 2005 U.S. advertising program. We had fully provided U.S. taxes for the undistributed earnings of our Canadian and Australian subsidiaries at the statutory rate. As a result, we recorded tax benefits of approximately $6.8 million to reflect the reduced tax rate associated with these special repatriations, which is substantially below the statutory rate.
In 2002, the U.S. Treasury issued new regulations that replaced the loss disallowance rules applicable to the sale of stock of a subsidiary member of a consolidated tax group. These regulations permitted us to utilize a previously disallowed $135.1 million tax capital loss that resulted from the sale of Playtex Beauty Care, Inc. during fiscal 1999. This was utilized on December 15, 2003 in conjunction with the retirement of the then outstanding related party notes. In 2004, we recorded a tax benefit of $17.8 million for an additional utilization of the capital loss carryforward to offset a capital gain resulting from the sale of the Woolite assets (see Note 4). The remaining $44.3 million capital loss carryforward expired on December 25, 2004.
Taxable and deductible temporary differences and tax credit carryforwards which give rise to our deferred tax assets and liabilities at December 31, 2005 and December 25, 2004 are as follows (in thousands):
The change in the valuation allowance of $5.6 million during 2005 relates to a valuation allowance associated with the capital loss carryforward resulting from the non-core asset sale discussed above. Deferred tax assets are regularly reviewed to determine their realizability based on management’s consideration of historical taxable income, estimates of future taxable income, and timing and amounts of reversing deferred tax liabilities. A valuation allowance is established to reduce recorded deferred tax assets to amounts considered by management to be more likely than not realizable.
We have available net operating loss carryforwards (“NOLs”) of $1.6 million at December 31, 2005 that expire in years 2009 through 2012. These NOLs relate to losses generated by Carewell Industries, Inc. prior to our acquisition of them. We can utilize these NOLs, with certain limitations, on our federal, state and local tax returns. We expect to utilize these NOLs prior to their expiration.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans
At December 31, 2005, the Company had two stock-based compensation plans, which are described below.
The Playtex 2003 Stock Option Plan for Directors and Executives and Key Employees of Playtex Products, Inc. (the “2003 Stock Option Plan”) was approved by stockholders at the Company’s annual meeting on May 15, 2003 and permits the granting of non-qualified stock options and incentive stock options to directors and employees. The 2003 Stock Option Plan will terminate on May 14, 2008. Option awards are generally granted with an exercise price equal to the closing market price of Playtex Products, Inc. common stock on the day prior to the grant. Except for formula grants to certain non-employee directors, which vest over three, four and five-year periods, stock option awards generally vest annually over three years of continuous service. Starting in late 2004, certain awards vest annually over three years of continuous service and based upon attaining certain annual performance targets as established by the Compensation and Stock Option Committee of the Board of Directors (the “Compensation Committee”). There are two types of performance stock options. The first type is market condition performance stock options, which were granted to certain members of senior management and vest based upon achieving a specified average common stock price target for the fourth quarters of 2005, 2006 and 2007. The average stock price targets increase each year of the vesting period. If the average stock price targets stock price is not achieved for any year, the vesting tranche rolls into the next year vesting tranche, which has a higher stock price performance criterion. If the targets are not met by the end of 2007, all associated unvested options will be forfeited. The 2005 price targets were achieved and the related options vested. The second type of performance options generally vest annually over approximately a three-year period of continuous service and upon attaining certain annual performance targets (other than stock price performance) as established annually by the Compensation Committee. If the service period requirements or the performance targets are not attained for the non-market condition performance options, the associated vesting tranche is forfeited. Options under this plan expire ten years from the date of grant unless otherwise specified in the award agreement. Under this plan, at December 31, 2005, we have: 8,662,109 options authorized, 5,849,048 options outstanding, and 2,813,061 options available to grant.
The Stock Award Plan was approved by stockholders at the Company’s annual meeting on May 16, 2005, permits the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARS”), restricted stock, restricted stock units and stock bonus and performance compensation awards to employees, directors and consultants. The Stock Award Plan will expire on October 2, 2014. At December 31, 2005, only restricted stock awards and performance restricted stock awards have been granted under this plan. The restricted stocks awards were granted to certain non-employee directors and vest annually over approximately three years of continuous service. The performance restricted stock awards were granted to certain employees and generally vest annually over approximately a three-year period of continuous service and upon attaining certain annual performance targets as established by the Compensation Committee. If the annual performance targets are not attained for the performance restricted stock awards, the associated vesting tranche is forfeited. Under this plan, at December 31, 2005, we have: 4,000,000 shares authorized, 21,440 restricted shares and 1,029,468 performance restricted shares outstanding, all of which were granted in 2005, and 2,949,092 shares available to grant. The weighted average fair value of restricted shares granted in 2005 under the plan is $10.73 per share. Subsequent to December 31, 2005, 284,191 shares of performance restricted stock awards vested.
We account for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” As permitted by SFAS No. 123 and SFAS No. 148, we follow the intrinsic value approach of Accounting Principles Board Opinion No. 25 (“APB No. 25”), and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB No. 25” issued for determining compensation expense related to the issuance of stock options. Accordingly, we have not recorded any expense for our stock options that vested solely on continuous service. In accordance with APB No. 25, we have recorded $8.0 million of compensation expense in fiscal 2005 related to the issuance of restricted stock, performance restricted stock and performance based options during the same period. The expense for restricted stock awards was based upon the value on the date of the award amortized over the associated service period. The expense for the performance restricted shares was based on management’s estimation of the performance awards that will vest
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans (Continued)
over the associated service period and the spread between the recipient’s basis in the award and the closing stock price at the end of the fiscal period. The expense for the performance stock options was based on management’s estimation of the performance awards that will vest over the associated service period and the spread between the option grant price and the closing stock price at the end of the fiscal period. There were no charges to income for stock-based compensation plans in fiscal 2004 and 2003.
As noted in Note 1, we have adopted SFAS No. 123 (R) on January 1, 2006 using the modified prospective transition method in which compensation cost is recognized beginning January 1, 2006 for all stock-based payments granted on or after that date and for all awards granted to employees prior to January 1, 2006 that remain unvested on that date. We estimate the charge to pre-tax income for our stock-based compensation plans in fiscal year 2006 will be in the range of $8 to $10 million. The following factors and management assumptions may impact this estimate and other future expense amounts for any particular quarterly or annual period: the Company’s future stock-based compensation strategy including the timing, size and composition of new equity grants, stock price volatility, estimated forfeitures, employee stock option exercise behavior, and the attainment levels of associated performance criteria. SFAS No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as currently required, thereby potentially reducing net operating cash flows and increasing net financing cash flows in periods after adoption. Such amounts cannot be estimated for future periods with certainty because they depend largely on when employees will exercise the stock options and the market price of the Company’s stock at the time of exercise.
The following table summarizes our stock option activity over the past three fiscal years:
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans (Continued)
The following table summarizes information about our stock options outstanding at December 31, 2005:
11. Earnings Per Share
The following table explains how our basic and diluted Earnings Per Share (“EPS”) were calculated for the last three fiscal years (in thousands, except per share data):
The basic weighted average shares outstanding do not include shares of restricted stock. The shares of restricted stock are included in our issued and outstanding shares but are considered “contingent shares” for purposes of GAAP and are therefore excluded from basic weighted average shares outstanding.
Basic EPS excludes all potentially dilutive securities. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes all dilutive securities. Potentially dilutive securities include stock options granted to our employees. At December 31, 2005, December 25, 2004, and December 27, 2003, stock options to purchase our common stock totaling 1.9 million shares, 7.6 million shares and 7.4 million shares, respectively, were not included in the diluted EPS calculation, since their impact would have been anti-dilutive. In addition, at December 27, 2003, potentially dilutive shares totaling 0.7 million relating to our then outstanding 6% Convertible Notes were not included in the diluted EPS calculation since their impact would have been anti-dilutive. Our last outstanding 6% Convertible Notes were redeemed in the third quarter of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Earnings Per Share (Continued)
2003. Diluted EPS is computed by dividing net income, adjusted by the if-converted method for convertible securities, by the weighted average number of common shares outstanding for the period plus the number of additional common shares that would have been outstanding if the dilutive securities were issued. In the event the dilutive securities are anti-dilutive on net income (i.e. have the effect of increasing EPS), the impact of the dilutive securities is not included in the computation.
12. Commitments and Contingencies
Our leases are primarily for facilities, manufacturing equipment, automobiles and information technology equipment. We lease certain facilities, which have original lease terms ranging from one to fifteen years. The majority of our facility leases provide for a renewal option at our discretion, some of which may require increased rent expense. Some of our facility leases also contain pre-determined rent increases over the lease term, although such increases are not material to our operating results. In addition, certain of our facility leases require payment of operating expenses, such as common area charges and real estate taxes. The majority of our leased equipment contains fair value purchase options at the end of the lease term. Future minimum payments under non-cancelable operating leases, with initial terms exceeding one year, for fiscal years ending after December 31, 2005 are as follows: $7.3 million in 2006, $5.0 million in 2007, $3.3 million in 2008, $2.9 million in 2009, $2.8 million in 2010 and $2.9 million in later years. Sublease rental income commitments are $0.4 million in each of the next two fiscal years.
Rent expense for operating and month-to-month leases amounted to $8.8 million, $9.9 million and $10.8 million for fiscal 2005, 2004 and 2003, respectively. Sublease rental income was $0.4 million for fiscal 2005, 2004 and 2003. Our two largest rental agreements include a provision for scheduled rent increases. For leases entered into prior to 2005, we have not recorded expense on a straight-line basis over the rental term as described in SFAS No. 13, “Accounting for Leases” and FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”. However, we have compared rent expense as recorded to the amount of rent expense using the straight-line method and determined that the difference was immaterial. For perspective, the use of the straight-line method would have resulted in an increase to reported net income of less than $0.1 million in fiscal 2005 and $0.1 million in fiscal 2004 and 2003.
In the ordinary course of our business, we may become involved in legal proceedings concerning contractual and employment relationships, product liability claims, intellectual property rights and a variety of other matters. We do not believe that any pending legal proceedings will have a material impact on our financial position or results of operations.
13. Pension and Other Postretirement Benefits
Defined Benefit Pension Plans - Substantially all of our U.S. hourly and most of our Canadian employees participate in company-sponsored pension plans. At December 31, 2005, approximately 1,000 participants were covered by these plans and approximately 500 of them were receiving benefits. We use a December 31 measurement date for our plans.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Pension and Other Postretirement Benefits (Continued)
Changes in pension benefits, which are retroactive to previous service of employees, and gains and losses on pension assets, that occur because actual experience differs from assumptions, are amortized over the estimated average future service period of employees. Actuarial assumptions for the plans include the following and are based on a calendar year-end measurement date:
In selecting an assumed discount rate, we consider currently available rates of return on high quality fixed income investments expected to be available during the period to maturity of pension benefits. The selection is made by referencing published bond indices, such as the Moody’s Aa and the Citigroup Pension Liability Index, and adjusting those rates for differences in the term of the bonds and the payment stream of our obligations.
Net pension expense for fiscal 2005, 2004 and 2003 is included in operating income in the Consolidated Statements of Income and includes the following components (in thousands):
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Pension and Other Postretirement Benefits (Continued)
Reconciliation of the change in benefit obligations, change in plan assets, and the funded status of the plans for fiscal 2005 and 2004 are as follows (in thousands):
(1)
In 2004, our Canadian Pension Plan was amended. The plan was updated for current pension benefit earned data using employee career average earnings.
Included in the totals above are our Canadian plans, which have accumulated benefit obligations in excess of plan assets as follows (in thousands):
Included in the totals above is our U.S. plan, which has accumulated benefit obligations in excess of plan assets, for fiscal 2005 only, as follows (in thousands):
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Pension and Other Postretirement Benefits (Continued)
The accumulated benefit obligation for all defined benefit pension plans at December 31, 2005 and December 25, 2004 was $58.3 million and $51.4 million, respectively.
The pension plans assets are invested primarily in fixed income and equity mutual funds, marketable equity securities, insurance contracts, and cash and cash equivalents. The plans do not invest in any Playtex Products, Inc. securities. The weighted average asset allocations at December 31, 2005 and December 25, 2004, by asset category, were as follows:
The main objectives of the plans are to: maintain the purchasing power of the current assets and all future contributions, to have the ability to pay all benefits and expense obligations when due, to achieve a “funding cushion,” to maximize return within prudent levels of risk, and to control the cost of administering the plan and managing investments. The investment horizon is greater than five years and the plan’s strategic asset allocation is based on a long-term perspective.
In selecting the expected long-term rate of return on assets assumption, we considered the average rate of income on the funds invested or to be invested to provide for the benefits of these plans. This included considering the trust’s asset allocation and the expected returns likely to be earned over the life of the plans.
Postretirement Benefits Other than Pensions - We provide postretirement health care and life insurance benefits to certain U.S. retirees. These plans require employees to share in the costs. Practically all of our U.S. personnel hired prior to January 1, 2004 would become eligible for these postretirement health care and life insurance benefits if they were to retire from the Company. Employees hired on or after January 1, 2004 may participate in the plan; however, they must pay the full cost of the coverage.
In May 2004, the FASB issued FSP SFAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”).” The Act was signed into law on December 8, 2003 and expanded Medicare to include prescription drugs. We sponsor retiree medical programs and this legislation includes a federal subsidy for qualifying companies. We adopted FSP SFAS 106-2 during our third quarter ended September 25, 2004. FSP SFAS 106-2 requires that the effects of the federal subsidy be considered an actuarial gain and treated like similar gains and losses if it is determined that the prescription drug benefits of the retiree medical program are determined to be actuarially equivalent to those offered under Medicare Part D. We have concluded that the benefits under our plan are at least actuarially equivalent to Medicare Part D under the Act. The effect of the subsidy reduced our benefit obligation at December 31, 2005 by $1.5 million.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Pension and Other Postretirement Benefits (Continued)
The components of the net periodic postretirement benefit expense, which is included in operating income in the Consolidated Statements of Income for fiscal 2005, 2004, and 2003, are as follows (in thousands):
Reconciliation of the change in benefit obligations, change in plan assets, and the funded status of the plans for fiscal 2005 and 2004 are as follows (in thousands):
The components of the $4.2 million actuarial gain for 2005 was the result of certain plan changes ($2.4 million), the impact of the Medicare Part D subsidy ($1.5 million) and the demographic and cost trend assumptions ($0.3 million).
The assumed health care cost trend rate and discount rate were 9.00% and 5.75% in 2005, respectively, compared to 9.00% and 6.00% in 2004, respectively. The assumed health care cost trend rate is anticipated to trend down until the final trend rate of 5.00% is reached in 2013. A one percentage point increase or decrease in the assumed health care cost trend rate would change the sum of the service and interest cost components of the fiscal 2005 net periodic postretirement benefit expense by less than 1%. A one percentage point increase or decrease in
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Pension and Other Postretirement Benefits (Continued)
the assumed health care cost trend rate would change the accumulated postretirement benefit obligation as of December 31, 2005 by less than 1%.
Cash Flows
We are required to contribute approximately $1.1 million to our pension plans during the next fiscal year beginning on January 1, 2006 and ending on December 30, 2006. In addition, we estimate that we will be required to pay approximately $1.0 million to fund the current year cost of our postretirement benefit plans for our retirees.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Defined Contribution Benefit Plans - We also provide four defined contribution plans covering various employee groups, two of which have non-contributory features. The amounts charged to income for the defined contribution plans totaled $6.6 million, $7.5 million and $7.1 million for our last three fiscal years ended 2005, 2004, and 2003, respectively.
14. Business Segments and Geographic Area Information
As a result of our 2005 strategic realignment, we reorganized into three core business segments, Feminine Care, Skin Care and Infant Care, and one non-core business segment, which included all other brands not classified in one of the three core categories. In late 2005, we sold the remaining assets of the non-core business segment as well as certain assets in the Skin Care segment. For comparative purposes, we have included all of these divested assets into a “Divested” business segment to provide a more meaningful comparison of operating results, as impacted by the brand asset sale.
Our Feminine Care segment includes a wide range of plastic and cardboard applicator tampons, as well as complementary products, marketed under such brand names as:
• Plastic applicator tampons:
- Playtex Gentle Glide,
- Playtex Portables, and
- Playtex Slimfits.
• Cardboard applicator tampons:
- Playtex Beyond.
• Personal Cleansing Cloths.
Our Skin Care segment includes the following brands:
• Banana Boat Sun Care products,
• Wet Ones pre-moistened towelettes,
• Playtex Gloves, and,
• other skin care products.
Our Skin Care segment previously included Baby Magic baby toiletries and Mr. Bubble children’s bubble bath which were divested in late 2005. As a result, we have reclassified them in 2005 to the Divested segment for all periods presented.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Business Segments and Geographic Area Information (Continued)
Our Infant Care segment includes the following brands:
• Playtex disposable feeding products,
• Playtex reusable hard bottles,
• Playtex cups and mealtime products,
• Playtex pacifiers,
• Diaper Genie diaper disposal system,
• Embrace breast pump, and
• Hip Hammock child carrier.
Our Divested segment includes the remaining non-core brands that were divested in late 2005. These products include Ogilvie at-home permanents, Binaca breath spray and drops and other health and beauty care products. Fiscal 2004 and 2003 include results of Woolite rug and upholstery products, which was divested on November 2, 2004.
Our business segments’ results for the last three fiscal periods are as follows. Corporate includes general and administrative charges not allocated to the business segments as well as all restructuring charges, equity compensation charges and amortization of intangibles (in thousands):
The amount of depreciation allocated to each business segment is as follows (in thousands):
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Business Segments and Geographic Area Information (Continued)
Geographic Area Information
Net sales and operating income represents sales to unaffiliated customers only. Intergeographic sales are minimal and are not disclosed separately. Net sales and operating income within the U.S. include all 50 states and its territories. Corporate charges that are not allocated to segments (see preceding table) are included in operating income for the U.S. International net sales and operating income represents business activity outside of the U.S. and its territories (in thousands):
Identifiable assets by geographic area represent those assets that are used in our operations in each area. U.S. includes all 50 states and its’ territories and International represents assets outside of the U.S. and its territories (in thousands):
15. Business and Credit Concentrations
Most of our customers are dispersed throughout the United States and Canada. Wal-Mart Stores, Inc., our largest customer, accounted for approximately 28% of our consolidated net sales in 2005 and 2004 and approximately 27% in 2003. Target Corporation, our second largest customer, accounted for approximately 13% of our consolidated net sales in 2005 and approximately 11% in 2004 and 2003. No other customer accounted for more than 10% of our consolidated net sales in fiscal 2005. Outstanding trade accounts receivable related to transactions with our largest customer were $19.4 million at December 31, 2005 and $22.2 million at December 25, 2004. Outstanding trade accounts receivable related to transactions with our customers ranked second through tenth in net sales, ranged from $12.7 million to $1.4 million at December 31, 2005 and ranged from $10.3 million to $0.9 million at December 25, 2004. Sales to these customers were made from all of our business segments.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Disclosure about the Fair Value of Financial Instruments
Cash, Receivables, and Accounts Payable - The carrying amounts approximate fair value because of the short-term nature of these instruments.
Variable Rate Debt - The carrying amount approximates fair value because the rate of interest on borrowings under the credit agreement is, at our option, a function of a short-term interest rates.
Long-term Debt and Other Financial Instruments - The fair value of the following financial instruments was estimated at December 31, 2005 and December 25, 2004 as follows (in thousands):
17. Quarterly Data (Unaudited)
The following is a summary of our quarterly results of operations and market price data for our common stock for fiscal 2005 and 2004 (in thousands, except share and stock price data):
(1)
The estimated fair value was based on quotes provided by independent securities dealers.
(2)
Our Revolver is a variable rate instrument and the carrying amount approximated its fair value because the rate of interest on borrowing under that credit agreement is a function of short-term borrowing rates.
(3)
Earnings per share data are computed independently for each of the periods presented. As a result, the sum of the earnings per share amounts for the quarters may not equal the total for the year.
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information
The payment obligations of our Notes, which were issued by the parent company, Playtex Products, Inc., are guaranteed by our wholly-owned domestic subsidiaries (the “Guarantors”). The Guarantors are joint and several guarantors of the Notes. Such guarantees are irrevocable, full and unconditional. The guarantees are senior subordinated obligations and are subordinated to all senior obligations including guarantees of our obligations under the Credit Facility. Our wholly-owned foreign subsidiaries (the “Non-Guarantors”) do not guarantee the payment of our Notes.
The following information presents our condensed consolidating financial position as of December 31, 2005 and December 25, 2004 and our condensed consolidating statements of income and cash flows for each of the last three fiscal years 2005, 2004 and 2003. The presentation is made as follows:
• the Company on a consolidated basis,
• the parent company only,
• the combined Guarantors, and
• the combined Non-Guarantors.
Condensed Consolidating Balance Sheet
as of December 31, 2005
(In thousands)
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information (Continued)
Condensed Consolidating Balance Sheet
as of December 25, 2004
(In thousands)
Condensed Consolidating Statement of Income
For the Year Ended December 31, 2005
(In thousands)
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information (Continued)
Condensed Consolidating Statement of Income
For the Year Ended December 25, 2004
(In thousands)
Condensed Consolidating Statement of Income
For the Year Ended December 27, 2003
(In thousands)
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information (Continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2005
(In thousands)
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information (Continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 25, 2004
(In thousands)
PLAYTEX PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Condensed Consolidating Financial Information (Continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 27, 2003
(In thousands)
PLAYTEX PRODUCTS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2005, December 25, 2004 and December 27, 2003
(In thousands)
PLAYTEX PRODUCTS, INC.
INDEX TO EXHIBITS
X-1
X-2
Exhibits marked with an “ * ” are filed as a part of this Annual Report on Form 10-K, all other exhibits are incorporated by reference as individually noted. Exhibits listed as 10(b) through and including 10(n) are management contracts, compensatory plans or arrangements.
X-3