The Daily Magic Formula Stock for 03/06/2008 is Prestige Brands Holdings Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.
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Unless otherwise indicated by the context, all references in this Annual Report on Form 10-K to â€śweâ€ť, â€śusâ€ť, â€śourâ€ť, â€śCompanyâ€ť or â€śPrestigeâ€ť refer to Prestige Brands Holdings, Inc. and its subsidiaries. Similarly, reference to a year (e.g. â€ś2007â€ť) refers to our fiscal year ended March 31 of that year.
We sell well-recognized, brand name over-the-counter healthcare, household cleaning and personal care products in a global marketplace. We operate in niche segments of these categories where we can use the strength of our brands, our established retail distribution network, a low-cost operating model and our experienced management team as a competitive advantage to grow our presence in these categories and, as a result, grow our sales and profits. Our ultimate success is dependent on our ability to:
Develop effective sales, advertising and marketing programs,
Grow our existing products lines,
Acquire new brands, and
Respond to the technological advances and product introductions of our competitors.
Our fourteen major brands, set forth in the table below, have strong levels of consumer awareness and retail distribution across all major channels.
Our products are sold through multiple channels, including mass merchandisers and drug, grocery, dollar and club stores, which allows us to effectively launch new products across all distribution channels and reduce our exposure to any single distribution channel. We focus our internal resources on our core competencies: (i) marketing, (ii) sales, (iii) customer service and (iv) product development. While we perform the production planning and oversee the quality control aspects of the manufacturing, warehousing and distribution of our products, we outsource the operating elements of these functions to entities which offer expertise in such areas and cost efficiencies due to economies of scale. Our operating model allows us to focus on marketing and product development, which we believe enables us to achieve attractive margins while minimizing capital expenditures and working capital requirements.
We have grown our brand portfolio by acquiring strong and well-recognized brands from larger consumer products and pharmaceutical companies, as well as other brands from smaller private companies. While the brands we have purchased from larger consumer products and pharmaceutical companies have long histories of support and brand development, we believe that at the time we acquired them they were considered â€śnon-coreâ€ť by their previous owners. Consequently, they did not benefit from the focus of senior level management or strong marketing support. We also believe that the brands we have purchased from smaller private companies have been constrained by the limited resources of their prior owners. After adding a brand to our portfolio, we seek to increase its sales, market share and distribution in both new and existing channels through our established retail distribution network. We pursue this growth through increased advertising and promotion, new marketing strategies, improved packaging and formulations and innovative new products. Our business and business model, however, are faced with various risks that are described in â€śRisk Factorsâ€ť in Item 1A of this Annual Report on Form 10-K.
Diversified Portfolio of Well-Recognized and Established Consumer Brands
We own and market well-recognized consumer brands, many of which were established over 60 years ago. Our diverse portfolio of products provides us with multiple sources of growth and minimizes our reliance on any one product or category. We provide significant marketing support to our brands in order to grow our sales and our long-term profitability. The markets in which we sell our products, however, are highly competitive and include numerous national and global manufacturers, distributors, marketers and retailers, many of which have greater resources than we do and may be able to spend more aggressively on advertising and marketing, which may have an adverse effect on our competitive position.
Strong Competitor in Attractive, Niche Categories
We strategically choose to compete in niche product categories that address recurring consumer needs and that we believe are considered â€śnon-coreâ€ť to larger consumer products and pharmaceutical companies. We believe we are well positioned in these categories due to the long history and consumer awareness of our brands, our strong market positions and our low-cost operating model. However, a significant increase in the number of product introductions by our competitors in these niche markets could have a material adverse effect on our business, financial condition and results from operations.
Proven Ability to Develop and Introduce New Products
We focus our marketing and product development efforts on identifying underserved consumer needs and then designing products that directly address those needs. Keeping with that philosophy, in late 2007, we introduced Clear Eyes Maximum Redness Relief Â®, a fast acting formula that lubricates as it relieves redness, and Little Tummys Gripe Water, an herbal supplement with ginger and fennel for safe, gentle relief of infant colic, hiccups and upset stomach. The above were designed to augment our 2006 product introductions that included: Clear Eyes Triple Action Relief , formulated to remove redness, moisturize and relieve irritation; Clear Eyes for Dry Eyes ACR Relief , for long lasting relief from pollen, dust and ragweed ; Dermoplast Poison Ivy Treatment, a non-irritating wash that controls the itch and removes oils that cause the rash ; as well as Murine Homeopathic Earache Relief , formulated to promote the bodyâ€™s natural ability to relieve ear pain. Looking forward, in early 2008, we will introduce Comet Spray Gel, a high viscosity mildew stain remover spray, as well as the Murine Earigate Â® Ear Cleaning System, a natural and hypoallergenic wax removal system with a patented â€śreverse spray actionâ€ť that safely rinses away ear wax buildup without harming the user's sensitive eardrums. Although line extensions and new product introductions are important to the overall growth of a brand, our efforts may reduce sales of existing products within that brand. In addition, certain of our product introductions may not be successful, such as Murine Homeopathic Allergy Eye Relief, Murine Homeopathic Tired Eye Relief and Chloraseptic Daily Defense Strips , all of which were introduced in 2006 and discontinued in 2007, as well as Little TeethersÂ® Oral Pain Relief Swabs , which we introduced in February 2005 and discontinued in February 2006.
Efficient Operating Model
To gain operating efficiencies, we directly manage the production planning and quality control aspects of the manufacturing, warehousing and distribution of our products, while we outsource the operating elements of these functions to well-established, lower-cost, third-party providers. This approach allows us to benefit from the core competencies of our third-party providers and maintain a highly variable cost structure, with low overhead, limited working capital requirements and minimal investment in capital expenditures. During 2007, our aggregate gross margin was approximately 52% while our general and administrative expense and our capital expenditures represented less than 9% and 1% of net sales, respectively. This compares slightly less favorably to 2006, when our aggregate gross margin was approximately 53%, and our general and administrative expenses and our capital expenditures represented less than 8% and 1% of net sales, respectively. Our gross margin was impacted by the obsolescence reserves associated with our Chloraseptic inventory and our general and administrative expenses were impacted by the overall growth of the organization. Our operating model, however, requires us to depend on third-party providers for manufacturing and logistics services. The inability or unwillingness of our third-party providers to supply or ship our products may have a material adverse effect on our business, financial condition and results from operations.
Management Team with Proven Ability to Acquire, Integrate and Grow Brands
Our management team has significant experience in consumer product marketing, sales, product development and customer service. We have grown our business through acquisition, integration and expansion of the brands we purchased. Unlike many larger consumer products companies which we believe often entrust their smaller brands to rotating junior employees, we dedicate experienced managers to specific brands. Since the Company has fewer than 100 employees, we seek more experienced personnel to carry the substantial responsibility of brand management. These managers nurture the brands as they grow and evolve.
In order to continue to enhance our brands and drive growth we focus our growth strategy on our core competencies: (i) marketing, (ii) sales, (iii) customer service, and (iv) product development efforts. We plan to execute this strategy through:
Investing in Advertising and Promotion.
We will continue to invest in advertising and promotion to drive the growth of our brands. Our marketing strategy is focused primarily on consumer-oriented programs that include media advertising, targeted coupon programs and in-store advertising. While the absolute level of marketing expenditures differs by brand and category, we typically have increased the amount of investment in our brands after acquiring them. For example, after the acquisition of the Dental Concepts line of products in 2006, we expanded consumer promotion programs and increased advertising, which resulted in domestic annual brand sales growth of approximately 26% during 2007. In 2007, we introduced our first dual-action product, Chloraseptic Sore Throat plus Cough Lozenges, as well as 2 sugar free sore throat lozenges. Looking forward, our sore throat relief strip product, originally introduced in 2003, will be reintroduced in June 2007 with a new and improved formulation and new packaging. Given the competition in our industry, there is a risk that our marketing efforts may not result in increased sales and profitability. Additionally, no assurance can be given that we can maintain these increased sales and profitability levels once attained.
Growing our Categories and Market Share with Innovative New Products
Our strategy is to broaden the categories in which we participate and our share within those categories through ongoing product innovation. As an example, we followed our successful launch in 2005 of an artificial tears product called Clear Eyes for Dry Eyes with another innovative product called Clear Eyes Triple Action Relief , formulated to remove redness, moisturize and relieve irritation in 2006, with yet another product, Clear Eyes Maximum Redness Relief in late 2007. These successful product introductions were the primary drivers of the brandâ€™s continued growth. While there is always a risk that sales of existing products may be reduced by new product introductions, our goal is to grow the overall sales of our brands.
Increasing Distribution Across Multiple Channels
Our broad distribution base ensures that our products are well positioned across all available channels and that we are able to participate in changing consumer retail trends. In 2005, we expanded our sales in wholesale club stores, introducing customized packaging and sizes of our products designed specifically for this higher growth channel. Comet grew approximately 18% in this channel during 2006. There is a risk however, that we may not be able to maintain or enhance our relationships across distribution channels, which could adversely impact our sales, business, financial condition and results from operations.
Growing Our International Business
We intend to increase our focus on growing our international business. International sales outside of North America represented approximately 4.6% of revenues in 2007 and approximately 3.4% of our revenues in 2006. We have designed and developed both product and packaging for specific international markets and expect our international revenues to continue to grow as a percentage of total revenues. In addition to Clear Eyes , Murine and Chloraseptic which are currently sold internationally, we license The Procter & Gamble Company to market the Comet brand in Eastern Europe. Since a number of our other brands have previously been sold internationally, we intend to expand the number of brands sold through our existing international distribution network and are actively seeking additional distribution partners for further expansion into other international markets. There is a risk, however, that increasing our focus on international growth may divert attention and resources from implementing our domestic business strategy. There are additional risks associated with the increase of our international business, such as changes in regulatory requirements and currency exchange controls. See â€śRisk Factorsâ€ť in Item 1A of this Annual Report on Form 10-K.
Pursuing Strategic Acquisitions
We have an active corporate development program and intend to continue to investigate strategic add-on acquisitions that enhance our product portfolio. Our management team has a long track record of successfully identifying, acquiring and integrating new brands and we will continue to investigate the acquisition of highly complementary, recognized brands in attractive categories and channels. For example, during 2007 we purchased the Wartner brand of over-the-counter wart treatment products to augment our ownership of Compound W , the number two selling brand in the wart treatment category. Additionally, during 2006, we purchased the Chore Boy brand, which competes in the scrubber and sponge sector of the household cleaning segment, and The Doctorâ€™s brand, which competes in the dental accessories sector of the oral health category, where we previously had a limited presence. While we believe that there will continue to be a strong pipeline of acquisition candidates for us to investigate, strategic fit and relative cost are of the utmost importance in our decision to pursue such opportunities. We believe our business model will allow us to integrate these future acquisitions in an efficient manner, while also providing opportunities to realize significant cost savings. However, there is a risk that our operating results could be adversely affected in the event we do not realize all of the anticipated operating synergies and cost savings from any future acquisitions, we do not successfully integrate such acquisitions or we pay too much for these acquisitions. Provisions in our senior credit facility and the indenture governing our senior subordinated notes may limit our ability to engage in strategic acquisitions as well.
During 2007, approximately 77% of our net sales were from brands with a number one or number two market position, while during 2006, approximately 74% of our net sales were from brands with a number one or number two market position. Such brands include Chloraseptic , Clear Eyes , Chore Boy, Comet , Compound W , Cutex, Dermoplast (number two in the Pain Relief Spray category in 2006) , The Doctorâ€™s and New-Skin .
See the â€śBusinessâ€ť section on page 1 of this document for information regarding market share and ACV calculations.
Our History and Accomplishments
The Company, through its predecessors-in-interest, was originally formed in 1996, as a joint venture of Medtech Labs and The Shansby Group, to acquire over-the-counter drug brands from American Home Products. Since 2001, our Companyâ€™s portfolio of brand name products has expanded from over-the-counter drugs to include household cleaning and personal care products. We have added brands to our portfolio principally by acquiring strong and well-recognized brands from larger consumer products and pharmaceutical companies. In February 2004, GTCR Golder Rauner II, LLC (â€śGTCRâ€ť), a private equity firm, acquired our business from the owners of Medtech Labs and The Shansby Group. In addition, we acquired the Spic & Span business in March 2004.
In April 2004, we acquired Bonita Bay Holdings, Inc., the parent holding company of Prestige Brands International, Inc., which conducted its business under the â€śPrestigeâ€ť name. After we completed the Bonita Bay acquisition, we began to conduct our business under the â€śPrestigeâ€ť name as well. The Bonita Bay brand portfolio included Chloraseptic, Comet, Clear Eyes and Murine .
In October 2004, we acquired the rights to the Little Remedies brands through our purchase of Vetco, Inc. Vetco is engaged in the development, distribution and marketing of pediatric over-the-counter healthcare products, primarily marketed under the Little Remedies brand name. Vetcoâ€™s products include Little NosesÂ® nasal products, Little TummysÂ® digestive health products, Little ColdsÂ® cough/cold remedies and Little Remedies New Parents Survival Kits . The Little Remedies products deliver relief from common childhood ailments without unnecessary additives such as saccharin, alcohol, artificial flavors, coloring dyes or harmful preservatives.
In February 2005, we raised $448.0 million through an initial public offering of 28.0 million shares of common stock. We used the net proceeds of the offering, which were $416.8 million, plus $3.0 million from our revolving credit facility and $8.8 million of cash on hand to (i) repay $100.0 million of our existing senior indebtedness, (ii) to redeem $84.0 million in aggregate principal amount of our existing 9 1/4% senior subordinated notes, (iii) to repurchase an aggregate of 4.7 million shares of our common stock held by the investment funds affiliated with GTCR and TCW/Crescent Mezzanine, LLC (â€śTWC/Crescentâ€ť) for $30.2 million, and (iv) to contribute $199.8 million to our subsidiary, Prestige International Holdings, LLC, which was used to redeem all of its outstanding senior preferred units and class B preferred units.
In October 2005, we acquired the rights to the â€ś Chore Boy â€ť brand of metal cleaning pads, scrubbing sponges, and non-metal soap pads. The brand has over 84 years of history in the scouring pad and cleaning accessories categories.
In November 2005, we acquired Dental Concepts LLC (â€śDental Conceptsâ€ť), a marketer of therapeutic oral care products sold under â€ś The Doctorâ€™s â€ť brand. The business is driven primarily by two niche segments, bruxism (nighttime teeth grinding) and interdental cleaning. The Doctorâ€™s NightGuard brand was the first FDA-approved OTC treatment for bruxism and The Doctorâ€™s BrushPicks â„˘ are disposable interdental toothpicks.
In September 2006, we completed the acquisition of Wartner USA B.V. (â€śWartnerâ€ť), the owner of the Wartner brand of over-the-counter wart treatment products. The Company expects that the Wartner brand, which is the number three brand in the United States over-the-counter wart treatment category, will enhance the Companyâ€™s leadership position in the category.
During the second half of 2007, we did not consummate any corporate or brand acquisitions. However, in accordance with our strategic plan, we repaid $26.4 million of our senior debt with free cash flow generated from operations. This serves to reduce our interest costs on a going-forward basis, as well as to favorably impact our interest coverage and our debt-to-equity ratios.
We conduct our operations through three principal business segments: (i) over-the-counter healthcare, (ii) household cleaning and (iii) personal care.
Over-the-Counter Healthcare Segment
Our portfolio of over-the-counter healthcare products consists primarily of Clear Eyes, Murine, Chloraseptic, Compound W , Wartner , the Little Remedies line of pediatric healthcare products, The Doctorâ€™s brand of oral care products and first aid products such as New-Skin and Dermoplast. Our other brands in this category include PercogesicÂ® , MomentumÂ®, FreezoneÂ®, MoscoÂ®, OutgroÂ®, Sleep-EzeÂ®, CompozÂ® and HeetÂ®. In 2007, the over-the-counter healthcare segment accounted for 54.8% of our revenues, while in 2006, the over-the-counter healthcare segment accounted for 54.3% of our revenues.
Clear Eyes and Murine
The Clear Eyes and Murine brands were purchased by Bonita Bay Holdings from Abbott Laboratories in December 2002. Since its introduction in 1968, the Clear Eyes brand has been marketed as an effective eye care product that helps take redness away and helps moisturize the eye. Clear Eyes has an ACV of 87%. In February 2007, we introduced Clear Eyes Maximum Redness Relief, while in February 2006, we introduced Clear Eyes Triple Action Relief, and in March 2006 the Clear Eyes for Dry Eyes line was expanded with a new seasonal relief product, Clear Eyes plus ACR Relief. The Murine brand is over 100 years old and its products consist of lubricating, soothing eye drops and ear wax removal aids. The brand was expanded into redness relief in March 2006 with the introduction of Murine for Redness Relief. Clear Eyes and Murine Eye Care are leading brands in the over-the-counter personal eye care category. The 0.5 oz. size of Clear Eyes redness relief eye drops is the number two selling product in the eye redness relief category and Clear Eyes is the number two brand in that category with 16.0 % market share.
Murine Ear Care is the third leading brand in the over-the-counter ear care category with a market share of 13.4%. The ear drop category is composed of products that loosen earwax, treat trapped water (swimmerâ€™s ear) and treat ear aches. In 2008, we look to expand our market share in the ear care category with the introduction of Murine Earigate , Ear Cleaning System, a natural and hypoallergenic wax removal system with a patented â€śreverse spray actionâ€ť that safely rinses away ear wax build-up with out harming the userâ€™s sensitive eardrums.
Chloraseptic was acquired by Bonita Bay Holdings in March 2000 from Procter & Gamble and was originally developed by a dentist in 1957 to relieve sore throats and mouth pain. Chlorasepticâ€™s 6 oz. cherry liquid sore throat spray is the number one selling product in the sore throat liquids/sprays segment. The Chloraseptic brand has an ACV of 95% and is number one in sore throat liquids/sprays with a 44.9% market share.
Historically, Chloraseptic products were limited to sore throat lozenges and traditional sore throat sprays that were stored and used at home. Since its acquisition, the Chloraseptic product line has been expanded to include portable sprays, gargle, mouth pain sprays and relief strips. In 2007, we introduced our first dual-action product, Chloraseptic Sore Throat plus Cough Lozenges, and our relief strip product, originally introduced in 2003, will be reintroduced in June 2007 with a new formulation and new packaging. These product introductions enable us to market Chloraseptic products as a system, encourage consumers to buy multiple types of Chloraseptic products, and increase volume for the entire product line.
We acquired Compound W from American Home Products in 1996. The Compound W brand has a long heritage; its wart removal products having been introduced almost 50 years ago. Compound W products are specially designed to provide relief from common and plantar warts and are sold in multiple forms of treatment depending on the consumerâ€™s need, including Fast-Acting Liquid, Fast-Acting Gel, One Step Pads for Kids, One Step Pads for Adults and Freeze OffÂ® . We believe that Compound W is one of the most trusted names in wart removal.
Compound W is the number two wart removal brand in the United States with a 32.1% market share and an ACV of 85%. Since Compound W â€™s acquisition, we have successfully expanded the wart remover category and enhanced the value associated with the Compound W brand by introducing several new products, such as Compound W Freeze Off , Fast Acting Liquid, One Step Pads for Kids, Waterproof One Step Pads and Invisible Strips Pads. Compound W Freeze Off , a cryogenic wart removal product, has achieved high trade acceptance, as it allows consumers to use a wart freezing treatment similar to that used by doctors.
Wartner is the number three brand in the wart removal category with a 12.1% share of the cryogenic segment and an ACV rating of 67%. Launched in 2003, Wartner is recognized by consumers and the trade as the first ever over-the-counter wart freezing (cryogenic therapy) treatment in the U. S and Canada. The brand was acquired from Lil â€™ Drug Store Products, Inc. in September 2006.
The Doctorâ€™s is a line of products designed to help consumers who are highly engaged in oral care wellness to maintain good oral hygiene in between dental office visits. The product line was purchased in November 2005 with the acquisition of Dental Concepts. The business is driven primarily by two niche segments, bruxism (nighttime teeth grinding) and interdental cleaning. The Doctorâ€™s NightGuard brand was the first FDA-approved OTC treatment for bruxism and The Doctorâ€™s BrushPicks are disposable interdental toothpicks. The Doctorâ€™s OraPik is a permanent, interdental pick and mirror. The entire line is supported by national advertising, is distributed in leading food, drug and mass merchandiser retailers and continues to experience sales growth in excess of the dental accessories category.
Little Remedies markets a full line of pediatric over-the-counter products that contain no alcohol, saccharin, artificial flavors or coloring dyes including: (i) Little Noses, a product line consisting of saline nasal spray/drops, decongestant nose drops, a nasal aspirator for the removal of mucous from nasal passages and moisturizing nasal gel, (ii) Little Colds, a product line consisting of a multi-symptom cold relief formula, sore throat relief Saf-T-PopsÂ® , a cough relief formula, and a combined decongestant plus cough relief formula, and (iii) Little Tummys , a product line consisting of gas relief drops, laxative drops, a nausea relief aid, as well as the recently introduced gripe water, an herbal supplement used to ease discomfort often associated with colic and hiccups.
The brand has a long heritage, with the core product believed by management to be over 100 years old. New-Skin products consist of liquid bandages for small cuts and scrapes that are designed to replace traditional bandages in an effective and easy to use form. Each New-Skin product works by forming a thin, clear, protective covering after it is applied to the skin. New-Skin competes in the liquid bandage segment of the first aid bandage category where it has a 37.1% market share and an 80% ACV.
We acquired Dermoplast from American Home Products in 1996. Dermoplast is an aerosol spray anesthetic for minor topical pain that was traditionally a â€śhospital-onlyâ€ť brand dispensed to mothers after giving birth. The primary use in hospitals is for post episiotomy pain, post-partum hemorrhoid pain, and for the relief of female genital itching.
Mark Pettie , Chairman of the Board and Chief Executive Officer , has served as Chairman of the Board and Chief Executive Officer since January 2007. Mr. Pettie served as the President, Dairy Foods Group for Conagra Foods from 2005 to 2006 where he was directly responsible for marketing and indirectly responsible for finance, sales, operations, research and development and human resources. From 1981 to 2004, Mr. Pettie held various positions of increasing responsibility at Kraft Foods and was appointed Executive Vice President/General Manager of Kraft Foodsâ€™ Coffee Division in 2002. As the Executive Vice President/General Manager of Kraft Foodsâ€™ Coffee Division, Mr. Pettie was directly responsible for marketing, strategy, finance and green coffee procurement and indirectly responsible for sales, operations and human resources. Mr. Pettie received a B.S. from the State University of New York at Binghamton and a M.B.A. from Cornell University.
L. Dick Buell , Director , has served as a director since November 2004. Mr. Buell is currently Chief Executive Officer and director of Catalina Marketing Corporation, which he joined in March 2004. From January 2002 to January 2004, Mr. Buell was Chief Executive Officer of WS Brands, a portfolio company of Willis Stein & Partners. From February 2000 to December 2001, Mr. Buell was President and Chief Operating Officer of Foodbrands America, Inc., a unit of Tyson Foods. Prior to that time, Mr. Buell spent 10 years at Griffith Laboratories, Inc. and served as Chief Executive Officer from 1992 to 1999. From 1983 to 1990, Mr. Buell served as Vice President of Marketing for Kraft Grocery Products and from 1979 to 1983 as a consultant at McKinsey & Company. Mr. Buell earned his B.S. in Engineering from Purdue University and his M.B.A. from the University of Chicago.
John E. Byom , Director, was appointed as director in January 2006. Mr. Byom is the former Chief Financial Officer of International Multifoods Corporation. He left the company in March 2005 after 26 years including four years as Vice President Finance and Chief Financial Officer, from March 2000 to June 2004. Most recently, after the sale of Multifoods to The J.M. Smucker Company in June 2004, Mr. Byom was President of Multifoods Foodservice and Bakery Products. Prior to his time as Chief Financial Officer, Mr. Byom was President US Manufacturing from July 1999 to March 2000, and Vice President Finance and IT for the North American Foods Division from 1993 to 1999. Prior to 1993 he held various positions in finance and was an internal auditor for International Multifoods Corporation from 1979 to 1981. Mr. Byom earned his B.A. in Accounting from Luther College. Mr. Byom is currently a director of MGP Ingredients Inc.
Gary E. Costley, Ph.D. , Director , has served as a director since November 2004. Dr. Costley is currently a managing partner at C&G Capital and Management, a private investment company, which he joined in July 2004. He previously served from 2001 to June 2004 as Chairman and Chief Executive Officer of International Multifoods Corporation and from 1997 to 2001 as its Chairman, President and Chief Executive Officer. From 1995 to 1996, Dr. Costley served as Dean of the Graduate School of Marketing at Wake Forest University. Prior to that time, Dr. Costley spent 24 years with the Kellogg Company where he held various positions of increasing responsibility, including his most recent role as President of Kellogg North America. Dr. Costley earned a B.S. in Animal Science and both an M.S. and Ph.D. in Nutrition from Oregon State University. Dr. Costley is currently a director of Principal Financial Group Inc., Accelrys, Inc. and Tiffany & Co.
David A. Donnini , Director , has served as a director since the Companyâ€™s incorporation in June 2004. Mr. Donnini is currently a Principal of GTCR Golder Rauner, LLC, which he joined in 1991. He previously worked as an associate consultant with Bain & Company. Mr. Donnini earned a B.A. in Economics summa cum laude, Phi Beta Kappa with distinction, from Yale University and a M.B.A. from Stanford University where he was the Robichek Finance Award recipient and an Arjay Miller Scholar. Mr. Donnini is a director of various companies, including American Sanitary, Inc., Cardinal Logistics Management, InfoHighway Communications Corporation, Coinmach Service Corporation, Synagro Technologies Inc., Fairmount Food Group, LLC and Syniverse Holdings Inc.
Ronald Gordon , Director , was appointed as director in May 2005. Mr. Gordon was most recently President and Chief Operating Officer of Nice-Pak Products, Inc. from 2002 until his retirement in 2005. Prior to serving at Nice-Pak, Mr. Gordon was Chief Executive Officer for the North American operations of Beiersdorf, Inc. from 1997 through 2001. He also founded Gordon Investment Group in 1994 to finance and oversee a variety of start-up businesses. Earlier in his career, Mr. Gordon was the President and Chief Executive Officer of Goody Products Inc. and held senior positions at Playtex Family Products Corporation and Procter & Gamble. Mr. Gordon earned a B.S. in Finance at The Wharton School of the University of Pennysylvania and a M.B.A. from Columbia University. Mr. Gordon is a director of Playtex Products, Inc.
Vincent J. Hemmer , Director , has served as a director since its incorporation in June 2004. Mr. Hemmer is currently a Principal with GTCR Golder Rauner, LLC and has been with GTCR since 1996. Mr. Hemmer previously worked as a consultant with the Monitor Company and an investment banker with Credit Suisse First Boston. He earned a B.S. in Economics, magna cum laude, and was a Benjamin Franklin Scholar at The Wharton School of the University of Pennsylvania. Mr. Hemmer received his M.B.A. from Harvard University. Mr. Hemmer is currently a director of Fairmount Food Group, LLC and Synagro Technologies Inc.
Patrick Lonergan , Director , was appointed as a director in May 2005. Mr. Lonergan is the co-founder of Numark Laboratories, Inc. and has served as its President since January 1989. Prior to Numark, Mr. Lonergan was employed from 1959 to 1989 in various senior capacities by Johnson & Johnson, including Vice President & General Manager. Mr. Lonergan also served on the Board of Directors of Johnson & Johnson Products Inc., and was Chairman of the Health Care Division Management Committee. Mr. Lonergan earned a B.S. in Business from Northern Illinois University. Mr. Lonergan is also a director of several private companies.
Peter C. Mann , Director , has served as Chairman of the Board of the Company since its incorporation in June 2004 through January 19, 2007, and is currently a member of the Board of Directors. From June 2004 through August 2005, Mr. Mann was the Chief Executive Officer and President of the Company. From August 2005 through March 31, 2006, Mr. Mann served as Chief Executive Officer of the Company. On June 23, 2006, Mr. Mann was re-appointed Acting Chief Executive Officer and President of the Company and resigned from such positions on January 19, 2007. Mr. Mann previously served as President and Chief Executive Officer of Medtech Holdings, Inc. (our predecessor company) (â€śMedtechâ€ť) since June 2001. From 1973 to 2001, Mr. Mann was employed by Block Drug Company, Inc. where he served in positions of increasing responsibility and became President of the Americas Division. Prior to his joining Block Drug Company, he held senior management positions for such leading consumer products companies as The Mennen Company, Swift & Co. and Chemway, Inc. Mr. Mann is a graduate of Brown University.
Raymond P. Silcock , Director , was appointed as a director in January 2006. Since 2006, Mr. Silcock has been employed by Swift & Company as its Executive Vice President and Chief Financial Officer. From 1998 to 2005, Mr. Silcock served as Executive Vice President and Chief Financial Officer of Cott Corporation. From 1997 to 1998, Mr. Silcock served as Chief Financial Officer of Delimex Holdings, Inc. From 1979 to 1997, Mr. Silcock was employed by Campbell Soup Company where he served in positions of increasing responsibility and became Vice President - Finance of Campbell Soup Companyâ€™s Bakery and Confectionary Division. Mr. Silcock earned a M.B.A. from the Wharton School of the University of Pennsylvania and is a Fellow of the Chartered Institute of Management Accountants (UK). Mr. Silcock is currently a director of Bacardi Limited and American Italian Pasta Company.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are engaged in the marketing, sales and distribution of brand name over-the-counter healthcare, household cleaning and personal care products to mass merchandisers, drug stores, supermarkets and club stores primarily in the United States and Canada. We operate in niche segments of these categories where we can use the strength of our brands, our established retail distribution network, a low-cost operating model and our experienced management team as a competitive advantage to grow our presence in these categories and, as a result, grow our sales and profits.
We have grown our brand portfolio by acquiring strong and well-recognized brands from larger consumer products and pharmaceutical companies, as well as other brands from smaller private companies. While the brands we have purchased from larger consumer products and pharmaceutical companies have long histories of support and brand development, we believe that at the time we acquired them they were considered â€śnon-coreâ€ť by their previous owners and did not benefit from the focus of senior level management or strong marketing support. We believe that the brands we have purchased from smaller private companies have been constrained by the limited resources of their prior owners. After acquiring a brand, we seek to increase its sales, market share and distribution in both existing and new channels. We pursue this growth through increased spending on advertising and promotion, new marketing strategies, improved packaging and formulations and innovative new products.
In February 2005, we raised $448.0 million through an initial public offering (â€śIPOâ€ť) of 28.0 million shares of common stock. The net proceeds of the offering were $416.8 million after deducting $28.0 million of underwritersâ€™ fees and $3.2 million of offering expenses. The net proceeds of $416.8 million plus $3.0 million from our revolving credit facility and $8.8 million of cash on hand went to repay $100.0 million of our existing senior indebtedness (plus a repayment premium of $3.0 million and accrued interest of $0.5 million), to redeem $84.0 million in aggregate principal amount of our existing 9 1 / 4 % senior subordinated notes (plus a redemption premium of $7.8 million and accrued interest of $3.3 million), to repurchase an aggregate of 4.7 million shares of our common stock held by the GTCR funds and the TCW/Crescent funds for $30.2 million, and to contribute $199.8 million to our subsidiary, Prestige International Holdings, LLC, which was used to redeem all of its outstanding senior preferred units and class B preferred units. We did not receive any of the proceeds from the sale of 4.2 million shares by the selling stockholders as a result of underwriters exercising their over-allotment options.
In October 2005, we completed the acquisition of the â€śChore Boyâ€ť brand of cleaning pads and sponges. The purchase price of this acquisition was $22.6 million, including direct costs of $400,000. We purchased the Chore Boy brand with funds generated from operations.
In November 2005, we completed the acquisition of Dental Concepts LLC, a marketer of therapeutic oral care products sold under â€śThe Doctorâ€™sâ€ť brand. The adjusted purchase price of the ownership interests was approximately $30.2 million, including fees and expenses of the acquisition of $1.3 million. We financed the acquisition price through the utilization of our Revolving Credit Facility in the amount of $30.0 million and cash on hand.
In September 2006, we completed the acquisition of Wartner USA B.V., a privately held Netherlands limited liability company, which owned the intellectual property associated with the â€śWartner â€ť brand of over-the-counter wart treatment products. The purchase price of this acquisition was $31.2 million, inclusive of direct c osts of the acquisition of $216,000. We purchased the Wartner brand with funds generated from operations and the assumption of approximately $5.0 million of contingent payments to the former owner of the Wartner brand.
Impact of Purchase Accounting
The acquisitions of Medtech, Spic and Span, Bonita Bay, Vetco, Dental Concepts and Wartner USA have been accounted for using the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141, â€śBusiness Combinationsâ€ť (â€śStatement No. 141â€ť). As a result, these acquisitions will affect our future results of operations in significant respects. The aggregate acquisition consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed by us based upon their respective fair values as of the acquisition date. A significant portion of the acquisition consideration was allocated to amortizable intangible assets which results in amortization expense in the periods following the acquisitions. In addition, our borrowing to finance these acquisitions has resulted, and will continue to result in significant interest costs until such time that the debt obligations are repaid. For additional information, see â€śLiquidity and Capital Resourcesâ€ť contained in this Item 7, â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
Critical Accounting Policies and Estimates
The Companyâ€™s significant accounting policies are described in the notes to the audited financial statements included elsewhere in this Annual Report on Form 10-K. While all significant accounting policies are important to our consolidated financial statements, certain of these policies may be viewed as being critical. Such policies are those that are both most important to the portrayal of our financial condition and results from operations and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses or the related disclosure of contingent assets and liabilities. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different conditions. The most critical accounting policies are as follows:
We comply with the provisions of SEC Staff Accounting Bulletin No. 104 â€śRevenue Recognition,â€ť which states that revenue should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We have determined that the transfer of risk of loss generally occurs when product is received by the customer, and, accordingly recognize revenue at that time. Provision is made for estimated discounts related to customer payment terms and estimated product returns at the time of sale based on our historical experience.
As is customary in the consumer products industry, we participate in the promotional programs of our customers to enhance the sale of our products. The cost of these promotional programs is recorded in accordance with Emerging Issues Task Force 01-09, â€śAccounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendorâ€™s Products)â€ť as either advertising and promotional expenses or as a reduction of sales. Such costs vary from period-to-period based on the actual number of units sold during a finite period of time. We estimate the cost of such promotional programs at their inception based on historical experience and current market conditions and reduce sales by such estimates. These promotional programs consist of direct to consumer incentives such as coupons and temporary price reductions, as well as incentives to our customers, such as slotting fees and cooperative advertising. We do not provide incentives to customers for the acquisition of product in excess of normal inventory quantities since such incentives increase the potential for future returns, as well as reduce sales in the subsequent fiscal periods.
Estimates of costs of promotional programs are based on (i) historical sales experience, (ii) the current offering, (iii) forecasted data, (iv) current market conditions, and (v) communication with customer purchasing/marketing personnel. At the completion of the promotional program, the estimated amounts are adjusted to actual results. While our promotional expense for the year ended March 31, 2007 was $16.5 million, we participated in 5,900 promotional campaigns, resulting in an average cost of $2,800 per campaign. Of such amount, only 582 payments were in excess of $5,000. We believe that the estimation methodologies employed, combined with the nature of the promotional campaigns, makes the likelihood remote that our obligation would be misstated by a material amount. However, for illustrative purposes, had we underestimated the promotional program rate by 10% for the year ended March 31, 2007, our sales and operating income would have been adversely affected by approximately $1.6 million. Net income would have been adversely affected by approximately $1.0 million.
We also periodically run coupon programs in Sunday newspaper inserts or as on-package instant redeemable coupons. We utilize a national clearing house to process coupons redeemed by customers. At the time a coupon is distributed, a provision is made based upon historical redemption rates for that particular product, information provided as a result of the clearing houseâ€™s experience with coupons of similar dollar value, the length of time the coupon is valid, and the seasonality of the coupon drop, among other factors. During the year ended March 31, 2007, we had 17 coupon events. The amount recorded against revenues and accrued for these events during the year was $2.7 million, of which $2.3 million was redeemed during the year.
Allowances for Product Returns
Due to the nature of the consumer products industry, we are required to estimate future product returns. Accordingly, we record an estimate of product returns concurrent with the recording of sales. Such estimates are made after analyzing (i) historical return rates, (ii) current economic trends, (iii) changes in customer demand, (iv) product acceptance, (v) seasonality of our product offerings, and (vi) the impact of changes in product formulation, packaging and advertising.
We construct our returns analysis by looking at the previous yearâ€™s return history for each brand. Subsequently, each month, we estimate our current return rate based upon an average of the previous six monthsâ€™ return rate and review that calculated rate for reasonableness giving consideration to the other factors described above. Our historical return rate has been relatively stable; for example, for the years ended March 31, 2007, 2006 and 2005, returns represented 3.7%, 3.5%, and 3.6%, respectively, of gross sales. At March 31, 2007 and 2006, the allowance for sales returns was $1.8 million and $1.9 million, respectively.
While we utilize the methodology described above to estimate product returns, actual results may differ materially from our estimates, causing our future financial results to be adversely affected. Among the factors that could cause a material change in the estimated return rate would be significant unexpected returns with respect to a product or products that comprise a significant portion of our revenues. Based upon the methodology described above and our actual returnsâ€™ experience, management believes the likelihood of such an event is remote. As noted, over the last three years, our actual product return rate has stayed within a range of 3.7% to 3.5% of gross sales. An increase of 0.1% in our estimated return rate as a percentage of gross sales would have adversely affected our reported sales and operating income for the year ended March 31, 2007 by approximately $371,000. Net income would have been adversely affected by approximately $228,000.
Allowances for Obsolete and Damaged Inventory
We value our inventory at the lower of cost or market value. Accordingly, we reduce our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.
Many of our products are subject to expiration dating. As a general rule our customers will not accept goods with expiration dating of less than 12 months from the date of delivery. To monitor this risk, management utilizes a detailed compilation of inventory with expiration dating between zero and 15 months and reserves for 100% of the cost of any item with expiration dating of 12 months or less. At March 31, 2007 and 2006, the allowance for obsolete and slow moving inventory represented 5.8% and 2.9%, respectively, of total inventory. The year-over-year increase resulted primarily from obsolescence reserves related to products in the cough and cold category facing expiration dating. Inventory obsolescence costs charged to operations for the years ended March 31, 2007, 2006, and 2005 were 1.0%, 0.2%, and 0.3% of net sales, respectively. A 1.0% increase in our allowance for obsolescence at March 31, 2007 would have adversely affected our reported operating income and net income for the year ended March 31, 2007 by approximately $320,000 and $196,000, respectively. Allowance for Doubtful Accounts
In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. We maintain an allowance for doubtful accounts receivable which is based upon our historical collection experience and expected collectibility of the accounts receivable. In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customersâ€™ financial condition, (iii) monitor the payment history and aging of our customersâ€™ receivables, and (iv) monitor open orders against an individual customerâ€™s outstanding receivable balance.
We establish specific reserves for those accounts which file for bankruptcy, have no payment activity for 180 days or have reported major negative changes to their financial condition. The allowance for bad debts at March 31, 2007 and 2006 amounted to 0.1% and 0.3%, respectively, of accounts receivable. Bad debt expense (recoveries) for 2007, 2006 and 2005 were $(100,000), $(53,000) and $31,700, respectively, each representing 0.0% of net sales in each of the years.
While management believes that it is diligent in its evaluation of the adequacy of the allowance for doubtful accounts, an unexpected event, such as the bankruptcy filing of a major customer, could have an adverse effect on our future financial results. A 0.1% increase in our bad debt expense as a percentage of sales in 2007 would have resulted in a decrease in reported operating income of approximately $317,000, and a decrease in our reported net income of approximately $195,000.
Valuation of Intangible Assets and Goodwill
Goodwill and intangible assets amounted to $968.1 million and $935.1 million at March 31, 2007 and 2006, respectively.
Our Clear Eyes , New-Skin , Chloraseptic , Compound W and Wartner brands comprise the majority of the value of the intangible assets within the Over-The-Counter Healthcare segment. Denorex , Cutex and Prell comprised substantially all of the intangible asset value within the Personal Care segment. The Comet , Spic and Span and Chore Boy brands comprise substantially all of the intangible asset value within the Household Cleaning segment.
Goodwill and intangible assets comprise substantially all of our assets. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a purchase business combination. Intangible assets generally represent our trademarks, brand names and patents. When we acquire a brand, we are required to make judgments regarding the value assigned to the associated intangible assets, as well as their respective useful lives. Management considers many factors, both prior to and after, the acquisition of an intangible asset in determining the value, as well as the useful life, assigned to each intangible asset that the Company acquires or continues to own and promote. The most significant factors are:
A brand that has been in existence for a long period of time ( e.g., 25, 50 or 100 years) generally warrants a higher valuation and longer life (sometimes indefinite) than a brand that has been in existence for a very short period of time. A brand that has been in existence for an extended period of time generally has been the subject of considerable investment by its previous owner(s) to support product innovation and advertising and promotion.
Consumer products that rank number one or two in their respective market generally have greater name recognition and are known as quality product offerings, which warrant a higher valuation and longer life than products that lag in the marketplace.
Recent and Projected Sales Growth
Recent sales results present a snapshot as to how the brand has performed in the most recent time periods and represent another factor in the determination of brand value. In addition, projected sales growth provides information about the strength and potential longevity of the brand. A brand that has both strong current and projected sales generally warrants a higher valuation and a longer life than a brand that has weak or declining sales. Similarly, consideration is given to the potential investment, in the form of advertising and promotion, which is required to reinvigorate a brand that has fallen from favor.
History of and Potential for Product Extensions
Consideration also is given to the product innovation that has occurred during the brandâ€™s history and the potential for continued product innovation that will determine the brandâ€™s future. Brands that can be continually enhanced by new product offerings generally warrant a higher valuation and longer life than a brand that has always â€śfollowed the leaderâ€ť.
After consideration of the factors described above, as well as current economic conditions and changing consumer behavior, management prepares a determination of the intangibleâ€™s value and useful life based on its analysis of the requirements of Statements No. 141 and No. 142. Under Statement No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but must be tested for impairment at least annually. Intangible assets with finite lives are amortized over their respective estimated useful lives and must also be tested for impairment.
On an annual basis, or more frequently if conditions indicate that the carrying value of the asset may not be recovered, management performs a review of both the values and useful lives assigned to goodwill and intangible assets and tests for impairment.
Finite-Lived Intangible Assets
As mentioned above, management performs a review annually, or more frequently if necessary, to ascertain the impact of events and circumstances on the estimated useful lives and carrying values of our trademarks and trade names. In connection with this analysis, management:
Reviews period-to-period sales and profitability by brand,
Analyzes industry trends and projects brand growth rates,
Prepares annual sales forecasts,
Evaluates advertising effectiveness,
Analyzes gross margins,
Reviews contractual benefits or limitations,
Monitors competitorsâ€™ advertising spend and product innovation,
Prepares projections to measure brand viability over the estimated useful life of the intangible asset, and
Considers the regulatory environment, as well as industry litigation.
Should analysis of any of the aforementioned factors warrant a change in the estimated useful life of the intangible asset, management will reduce the estimated useful life and amortize the carrying value prospectively over the shorter remaining useful life. Managementâ€™s projections are utilized to assimilate all of the facts, circumstances and expectations related to the trademark or trade name and estimate the cash flows over its useful life. In the event that the long-term projections indicate that the carrying value is in excess of the undiscounted cash flows expected to result from the use of the intangible assets, management is required to record an impairment charge. Once that analysis is completed, a discount rate is applied to the cash flows to estimate fair value. The impairment charge is measured as the excess of the carrying amount of the intangible asset over fair value as calculated using the discounted cash flow analysis. Future events, such as competition, technological advances and reductions in advertising support for our trademarks and trade names could cause subsequent evaluations to utilize different assumptions.
Indefinite-Lived Intangible Assets
In a manner similar to finite-lived intangible assets, on an annual basis, or more frequently if necessary, management analyzes current events and circumstances to determine whether the indefinite life classification for a trademark or trade name continues to be valid. Should circumstance warrant a finite life, the carrying value of the intangible asset would then be amortized prospectively over the estimated remaining useful life.
In connection with this analysis, management also tests the indefinite-lived intangible assets for impairment by comparing the carrying value of the intangible asset to its estimated fair value. Since quoted market prices are seldom available for trademarks and trade names such as ours, we utilize present value techniques to estimate fair value. Accordingly, managementâ€™s projections are utilized to assimilate all of the facts, circumstances and expectations related to the trademark or trade name and estimate the cash flows over its useful life. In performing this analysis, management considers the same types of information as listed above in regards to finite-lived intangible assets. Once that analysis is completed, a discount rate is applied to the cash flows to estimate fair value. Future events, such as competition, technological advances and reductions in advertising support for our trademarks and trade names could cause subsequent evaluations to utilize different assumptions.
As part of its annual test for impairment of goodwill, management estimates the discounted cash flows of each reporting unit, which is at the brand level, and one level below the operating segment level, to estimate their respective fair values. In performing this analysis, management considers the same types of information as listed above in regards to finite-lived intangible assets. In the event that the carrying amount of the reporting unit exceeds the fair value, management would then be required to allocate the estimated fair value of the assets and liabilities of the reporting unit as if the unit was acquired in a business combination, thereby revaluing the carrying amount of goodwill. In a manner similar to indefinite-lived assets, future events, such as competition, technological advances and reductions in advertising support for our trademarks and trade names could cause subsequent evaluations to utilize different assumptions.
In estimating the value of trademarks and trade names, as well as goodwill, at March 31, 2007, management applied a discount rate of 9.5%, the Companyâ€™s then current weighted-average cost of funds, to the estimated cash flows; however that rate, as well as future cash flows may be influenced by such factors, including (i) changes in interest rates, (ii) rates of inflation, or (iii) sales or contribution margin reductions. In the event that the carrying value exceeded the estimated fair value of either intangible assets or goodwill, we would be required to recognize an impairment charge. Additionally, continued decline of the fair value ascribed to an intangible asset or a reporting unit caused by external factors may require future impairment charges.
During the three month period ended March 31, 2006, we recorded non-cash charges related to the impairment of intangible assets and goodwill of the Personal Care segment of $7.4 million and $1.9 million, respectively, because the carrying amounts of these â€śbrandedâ€ť assets exceeded their fair market values primarily as a result of declining sales caused by product competition. Should the related fair values of goodwill and intangible assets continue to be adversely affected as a result of declining sales or margins caused by competition, technological advances or reductions in advertising and promotional expenses, the Company may be required to record additional impairment charges. We were not required to record any asset impairment charges during the year ended March 31, 2007.
Fiscal 2007 compared to Fiscal 2006
he 7.4% increase in revenues for 2007 versus 2006 was primarily a result of the acquisitions of the Wartner brand, acquired in September of 2006, and the Chore Boy and The Doctorâ€™s brands acquired in October and November 2005, respectively. Excluding the impact of the acquisitions, revenues were up 0.6%. Revenue increases in Over-the-Counter Healthcare and Household Cleaning segments were partially offset by a decrease in the Personal Care segment.
Over-the-Counter Healthcare Segment
Revenues for the Over-the-Counter Healthcare segment increased $13.8 million, or 8.6% for 2007 versus 2006. The increase was primarily attributable to the acquisition of the Wartner and The Doctorâ€™s brands. Excluding the impact of these acquisitions, revenues increased 1.2%. Revenue increases for Clear Eyes , Little Remedies , Murine and Dermoplast were partially offset by revenue declines on Compound W, Chloraseptic and New Skin . The Clear Eyes revenue growth was a result of continued strong consumer consumption trends, the launch of Clear Eyes Triple Action and Maximum Redness Relief, and increased shipments to international customers. The Little Remedies revenue increase was a result of improved consumer consumption. Dermoplastâ€™s revenue increase was due to increased shipments to institutional customers and the launch of Dermoplast Poison Ivy. The Murine revenue increase was primarily the result of improved consumer consumption of the ear product. The revenue decrease for Compound W was primarily a result of weaker consumer consumption primarily in the cryogenic segment of the wart remover category. Chlorasepticâ€™s revenue decrease was primarily due to lower consumer consumption as a result of a weak cough and cold flu season. New Skinâ€™s revenue decrease was the result of softness in the liquid bandage category.
Household Cleaning Segment
Revenues for the Household Cleaning segment increased $11.2 million, or 10.4%, for 2007 versus 2006. Excluding the acquisition of Chore Boy , revenues for this segment increased 2.8% for the period. Comet revenue increased during the period due to strong consumer consumption, expanded distribution and royalty revenues earned from licensing agreements in Eastern Europe and for institutional sales in North America. Revenues for the Spic and Span brand decreased during the period as a result of lower sales to the dollar store channel.
Personal Care Segment
Revenues of the Personal Care segment declined $3.0 million, or 10.9%, for 2007 versus 2006. The revenue decrease was the result of continued declines in consumer consumption trends for the Cutex, Denorex and Prell brands and was in accordance with managementâ€™s expectations.
Gross profit for 2007 increased $8.2 million, or 5.2%, versus 2006. As a percent of total revenue, gross profit decreased from 53.0% for 2006 to 51.9% during 2007. The decrease in gross profit percentage was a result of inventory obsolescence, higher product costs and increased shipments to non-North American distributors which have a lower margin than our domestic markets, partially offset by lower distribution expense. Shipments to markets outside of North America represented 4.6% of total revenues in 2007 versus 3.4% for 2006.
Over-the-Counter Healthcare Segment
Gross profit for 2007 increased $6.6 million, or 6.5%, versus 2006. As a percent of OTC revenue, gross profit decreased from 63.7% for 2006 to 62.5% during 2007. The decrease in gross profit percentage was primarily a result of obsolescence reserves of $2.6 million related to products in the cough and cold category facing expiration dating.
Household Cleaning Segment
Gross profit for 2007 increased $3.3 million, or 7.8%, versus 2006. As a percent of household cleaning revenue, gross profit decreased from 39.6% for 2006 to 38.7% during 2007. The decrease in gross profit percentage is primarily a result of increased product costs partially offset by royalties earned, with no associated costs, from our international and institutional licensing arrangements with Procter & Gamble.
Personal Care Segment
Gross profit for 2007 decreased $1.7 million, or 14.3%, versus 2006. As a percent of personal care revenue, gross profit decreased from 43.2% for 2006 to 41.6% during 2007. The decrease in gross profit percentage is a result of increased promotional pricing allowances and product costs.
Contribution margin, defined as gross profit less advertising and promotional expenses, increased $8.3 million, or 6.7% for 2007 versus 2006. The contribution margin increase was a result of the increase in sales and gross profit as previously discussed, and a $77,000, or 0.2% reduction in advertising and promotional spending. The reduction in advertising and promotional spending is primarily a result of a $2.0 million reduction in the Personal Care segment mostly offset by an increase of $1.7 million in the Over-the-Counter Healthcare segment and $200,000 in the Household Cleaning segment.
Over-the-Counter Healthcare Segment
Contribution margin in the Over-the-Counter Healthcare segment increased by $4.9 million, or 6.1%, for 2007 versus 2006. The contribution margin increase was a result of the increase in sales and gross profit as previously discussed, partially offset by a $1.7 million, or an 8.0%, increase in advertising and promotional spending. The increase in advertising and promotional spending was primarily a result of increased media behind The Doctorâ€™s Nightguard , Little Remedies print media and Chloraseptic promotional spending, partially offset by a reduction in Clear Eyes and New Skin media.
Household Cleaning Segment
Contribution margin in the Household Cleaning segment increased by $3.1 million, or 8.7%, for 2007 versus 2006. The contribution margin increase was a result of the sales and gross profit increase previously discussed, slightly offset with a $184,000, or a 2.8% increase in advertising and promotional spending. The increase is a result of a modest reduction of Comet media and promotional spending offset by increased spending resulting from the Chore Boy acquisition.
Personal Care Segment
Contribution margin in the personal care segment was up $314,000, or 3.5% for 2007 versus 2006. The contribution margin increase was primarily the result of a $2.0 million, or 64.4%, reduction in advertising and promotion spending versus 2006, partially offset by the gross profit decline as previously discussed. The reduction in advertising and promotion was due to the Companyâ€™s strategic decision to redeploy advertising and promotional funds in support of its growth brands in the other segments.
General and Administrative
General and administrative expenses were $28.4 million for 2007 versus $21.1 million for 2006. The increase was primarily related to additional staff added during the second half of 2006 and employee incentive plan compensation that was not earned in 2006, as well as severance compensation related to the departure of a member of management in 2007, increased stock-based compensation costs in 2007 and increased legal and professional fees in 2007.
Depreciation and Amortization
Depreciation and amortization expense was $10.4 million for 2007 versus $10.8 million for 2006. An increase in amortization related to intangible assets purchased in the Wartner and Dental Concepts acquisitions was partially offset by a reduction of the carrying value of certain trademarks in our Personal Care segment. During the three month period ended March 31, 2006, the Company recognized an asset impairment charge of approximately $7.4 million related to this segment. Depreciation expense decreased by $1.0 million for 2007 versus 2006 due to the absence of depreciation charges for manufacturing equipment that was fully depreciated as of January 31, 2006.
Impairment of Intangible Assets and Goodwill
We performed our impairment analyses of intangible assets and goodwill and determined, in accordance with FASB Statements No. 142 and 144, that no impairment existed in 2007. During the three month period ended March 31, 2006, we recorded non-cash charges related to the impairment of certain intangible assets and goodwill of the Personal Care segment of $7.4 million and $1.9 million, respectively. The impairment charges related to the intangible assets and goodwill were the result of their carrying amounts exceeding their fair market values as a result of declining sales.
Net interest expense was $39.5 million for 2007 versus $36.3 million for the comparable period of 2006. This represented an increase of $3.2 million, or 8.7%, from 2006. The increase in interest expense was due to the increase in interest rates associated with our variable rate indebtedness. The average cost of funds increased from 6.3% for 2006 to 7.4% for 2007.
The income tax provision for 2007 was $19.1 million, with an effective rate of 34.6%, compared to $21.3 million, with an effective rate of 44.7% for 2006. During 2006, the Company increased the effective tax rate to 39.1% and adjusted the deferred tax liabilities as a result of the completion of a state nexus study. Fiscal 2007 includes a $2.2 million tax benefit resulting from a reduction in the deferred income tax rate to 38.4% from 39.1% as a result of the implementation of initiatives to obtain operational, as well as tax, efficiencies.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Three Month Period Ended December 31, 2007 compared to the
Three Month Period Ended December 31, 2006
Revenues for the three month period ended December 31, 2007 were essentially flat, increasing by $98,000, or 0.1%, versus the comparable period in 2006, primarily as a result of revenue growth in the Household Cleaning segment, offset by declines in the Over-the-Counter Healthcare and Personal Care segments. Revenues from customers outside of North America, which represent 3.2% of total revenues, decreased 23% in 2007 versus the comparable period in 2006.
Over-the-Counter Healthcare Segment
Revenues of the Over-the-Counter Healthcare segment decreased by $508,000, or 1.1%, for 2007 versus the comparable period in 2006. Revenue increases for Murine, Clear eyes, New Skin and Compound W were offset by revenue decreases from Chloraseptic, Little Remedies and The Doctorâ€™s brands. Murineâ€™s revenue increase is primarily the result of the Murine TM Earigate TM launch; a new product that helps prevent earwax build-up with its patented reverse spray technology. Clear eyes and New Skin revenue increased as a result of increased retail consumption. Compound W revenue increased as a result of improving consumption trends behind late wart season promotions. The decline in Chloraseptic is primarily the result of a weak cough/cold flu season with the number of sore throat incidences down 9% season to-date versus the prior year. Little Remediesâ€™ revenues were adversely impacted by the voluntary withdrawal of two medicated pediatric cough and cold products in October 2007. Increased competition in the bruxism category resulted in lower sales of The Doctorâ€™sÂ® NightGuard TM dental protector.
Household Cleaning Segment
Revenues of the Household Cleaning segment increased $1.4 million, or 4.8%, during the period versus the comparable period in 2006. Revenues of the Comet Â® brand increased during the period as a result of Comet Mildew SpayGel, which was launched in the last quarter of fiscal 2007, and increased shipments of Comet Powder to the dollar and club trade class of stores. The decline in Spic and Spanâ€™s revenue reflected a decline in consumer consumption. Chore Boy sales declined as a result of weaker consumption and lower shipments to small grocer wholesale accounts.
Personal Care Segment
Revenues of the Personal Care segment declined $774,000, or 13.3%, for the period versus the comparable period in 2006. All major brands in this segment experienced revenue declines during the period. The decrease in revenue of Cutex Â®, Prell and Denorex Â® was in line with consumption.
Gross profit for the three month period ended December 31, 2007 decreased by $1.9 million, or 4.4%, versus the comparable period in 2006. As a percent of total revenue, gross profit decreased from 54.1% in 2006 to 51.7% in 2007. The decrease in gross profit as a percent of revenues is primarily the result of unfavorable segment and product sales mix toward lower margin brands, an increase in promotional allowances and higher product costs in the Personal Care segment. The sales increase in the Household Cleaning segment, which has a lower gross profit percentage than the overall Company, represented a higher proportion of the overall sales versus the same period in 2006.
Over-the-Counter Healthcare Segment
Gross profit for the Over-the-Counter Healthcare segment decreased $1.7 million, or 5.7%, for 2007 versus the comparable period in 2006. As a percent of OTC revenue, gross profit decreased from 65.3% for 2006 to 62.3% during 2007. The decrease in gross profit as a percent of revenues is the result of unfavorable product mix, higher promotional allowances and an increase in the returns reserve related to the Little Remedies medicated product withdrawal in October 2007. The unfavorable product mix is related to an increase in revenue from Murine Earigate which has a lower gross profit margin than the segmentâ€™s average.
Household Cleaning Segment
Gross profit for the Household Cleaning segment increased by $835,000, or 7.6%, for 2007 versus the comparable period in 2006. As a percent of household cleaning revenue, gross profit increased from 38.1% for 2006 to 39.1% during 2007. The increase in gross profit percentage is primarily a result of lower distribution costs.
Personal Care Segment
Gross profit for the Personal Care segment decreased $1.1 million, or 39.6%, for 2007 versus the comparable period in 2006. As a percent of personal care revenue, gross profit decreased from 45.5% for 2006 to 31.7% during 2007. The decrease in gross profit percentage was the result of higher product costs in the shampoo brands and increased inventory obsolescence costs related to Cutex.
Contribution margin, defined as gross profit less advertising and promotional expenses, for the three month period ended December 31, 2007 decreased by $2.5 million, or 7.4%, versus the comparable period in 2006. The contribution margin decrease was the result of the changes in sales and gross profit as previously discussed, and a $600,000, or a 6.9%, increase in advertising and promotional spending. The increased advertising and promotional spending was primarily attributable to support behind the launches of Murine Earigate and Comet Mildew SprayGel.
Over-the-Counter Healthcare Segment
Contribution margin for the Over-the-Counter Healthcare segment decreased by $1.7 million, or 7.3%, for 2007 versus the comparable period in 2006. The contribution margin decrease was the result of the decrease in sales and gross profit as previously discussed, while advertising and promotional spending remained essentially flat. An increase in television media support behind the launch of Murine Earigate was mostly offset with a decrease in support behind The Doctorâ€™s NightGuard and Chloraseptic.
Household Cleaning Segment
Contribution margin for the Household Cleaning segment increased by $159,000, or 1.7%, for 2007 versus the comparable period in 2006. The contribution margin increase was the result of an increase in gross profit as previously discussed, partially offset by a $700,000 increase in advertising and promotional spending. The A&P increase was principally the result of increased television media support behind Comet Mildew SprayGel.
Personal Care Segment
Contribution margin for the Personal Care segment decreased $1.0 million, or 43.6%, for 2007 versus the comparable period in 2006. The contribution margin decrease was primarily the result of the sales and gross profit decrease previously discussed.
General and Administrative
General and administrative expenses were $6.2 million for 2007 versus $7.1 million for 2006. Higher legal costs associated with intellectual property protective actions initiated by the Company in connection with The Doctorâ€™sÂ® NightGuard TM dental protector were offset by a reduction in management incentive and long-term stock based compensation costs. At December 31, 2007, the Company reversed previously recorded stock-based compensation of $932,000 upon managementâ€™s determination that it would not meet stated performance goals associated with grants of restricted stock to management and employees.
Depreciation and Amortization
Depreciation and amortization expense was essentially flat at $2.8 million for 2007 and 2006.
Net interest expense was $9.3 million for 2007 versus $10.2 million for 2006. The reduction in interest expense was the result of a lower level of indebtedness, partially offset by higher interest rates on our variable rate indebtedness. The average cost of funds increased from 8.4% for 2006 to 8.6% for 2007 while the average indebtedness decreased from $480.5 million for 2006 to $431.7 million for 2007.
The income tax provision for 2007 was $5.2 million, with an effective rate of 38.0%, compared to $3.7 million, with an effective rate of 26% for 2006. The 2006 period includes a $1.7 million tax benefit resulting from the reduction of the deferred income tax rate to 38.6% from 39.1% in connection with the implementation of initiatives to obtain operational, as well as tax, efficiencies.