NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions, except per share data)
These condensed consolidated financial statements have been prepared by Church & Dwight Co., Inc. (the “Company”). In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows for all periods presented have been made. Results of operations for interim periods may not be representative of results to be expected for the full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”). Certain prior period amounts previously included in Deferred and Other Long-term Liabilities have been reclassified to Business Acquisition Liabilities in the condensed consolidated balance sheet to conform to the presentation for the current period.
The Company incurred research and development expenses in the third quarter of 2019 and 2018 of $24.5 and $23.1, respectively. The Company incurred research and development expenses in the first nine months of 2019 and 2018 of $67.6 and $64.4, respectively. These expenses are included in selling, general and administrative (“SG&A”) expenses.
2.
|
New Accounting Pronouncements
|
Recently Adopted Accounting Pronouncements
In August 2017 and October 2018, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, which is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These amendments also make targeted improvements to simplify the application of hedge accounting. The guidance was effective for annual and interim periods beginning after December 15, 2018, and was adopted by the Company in the first quarter of 2019. The standard’s adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In February 2016 and July 2018, the FASB issued new lease accounting guidance, requiring lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases, with a term greater than a year. The new guidance also expands the required quantitative and qualitative disclosures surrounding leases. The guidance was effective for annual and interim periods beginning after December 15, 2018, and allowed companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption. The Company adopted the new standard on January 1, 2019 using the optional transition method of adoption which permits the entity to continue presenting all periods prior to January 1, 2019 under the previous lease accounting guidance. The Company has implemented the appropriate internal controls and applications to monitor and record historical and future lease arrangements and required disclosures.
For all existing operating leases as of December 31, 2018, the Company recorded Right of Use Assets of approximately $55.0 and corresponding lease liabilities of approximately $57.0 with an offset to Deferred and Other Long-term Liabilities of approximately $2.0 to eliminate deferred rent on the consolidated balance sheet.
In addition, based on the transition guidance surrounding failed sale-and-leaseback transactions, the Company re-evaluated the lease for its corporate headquarters in Ewing, New Jersey. This lease was previously considered a failed sale-and-leaseback transaction under Accounting Standards Codification (“ASC”) 840 because of continuing involvement. The re-evaluation resulted in a change in classification from a finance transaction to an operating lease. The corporate headquarters building, which had a net book value of approximately $35.0 recorded in Property, Plant and Equipment as of December 31, 2018, was derecognized on January 1, 2019 and a Right of Use Asset of approximately $52.0 was recorded with an offset to Deferred Income Taxes of $4.0 and Retained Earnings of $13.0. The Lease Liability pertaining to this asset of $52.0 remained unchanged.
In total, at the adoption of the new accounting guidance there were Right of Use Assets of approximately $107.0 and a corresponding Lease Liabilities of $109.0. This did not include an existing cease-use liability of approximately $7.0 pertaining to one
9
of the Company’s previous corporate offices that remained unchanged as a result of the transition. Refer to Note 12 for the Company’s lease disclosures.
The effects of the recently adopted lease accounting standard to the Company’s consolidated balance sheet as of January 1, 2019 is as follows:
|
Balance at
|
|
|
New Lease
|
|
|
Balance at
|
|
|
December 31,
|
|
|
Standard
|
|
|
January 1,
|
|
|
2018
|
|
|
Adjustment
|
|
|
2019
|
|
Property, plant and equipment, net
|
$
|
598.2
|
|
|
$
|
(35.2
|
)
|
|
$
|
563.0
|
|
Other assets
|
|
117.4
|
|
|
|
107.5
|
|
|
|
224.9
|
|
Accounts payable and accrued expenses
|
|
725.1
|
|
|
|
13.6
|
|
|
|
738.7
|
|
Deferred and other long-term liabilities
|
|
180.9
|
|
|
|
41.3
|
|
|
|
222.2
|
|
Deferred income taxes
|
|
576.4
|
|
|
|
4.4
|
|
|
|
580.8
|
|
Retained earnings
|
|
3,832.6
|
|
|
|
13.0
|
|
|
|
3,845.6
|
|
The adoption of the new lease accounting standard did not have a material impact on the Company’s results of operations or cash flows.
There have been no accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Inventories consist of the following:
|
September 30,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Raw materials and supplies
|
$
|
82.5
|
|
|
$
|
84.4
|
|
Work in process
|
|
31.1
|
|
|
|
34.1
|
|
Finished goods
|
|
275.2
|
|
|
|
264.3
|
|
Total
|
$
|
388.8
|
|
|
$
|
382.8
|
|
4.
|
Property, Plant and Equipment, Net (“PP&E”)
|
PP&E consists of the following:
|
September 30,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Land
|
$
|
27.8
|
|
|
$
|
27.8
|
|
Buildings and improvements
|
|
253.7
|
|
|
|
301.3
|
|
Machinery and equipment
|
|
735.1
|
|
|
|
716.7
|
|
Software
|
|
98.0
|
|
|
|
97.9
|
|
Office equipment and other assets
|
|
78.1
|
|
|
|
73.8
|
|
Construction in progress
|
|
49.1
|
|
|
|
49.7
|
|
Gross PP&E
|
|
1,241.8
|
|
|
|
1,267.2
|
|
Less accumulated depreciation and amortization
|
|
688.7
|
|
|
|
669.0
|
|
Net PP&E
|
$
|
553.1
|
|
|
$
|
598.2
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Depreciation and amortization on PP&E
|
$
|
16.0
|
|
|
$
|
16.2
|
|
|
$
|
47.9
|
|
|
$
|
47.6
|
|
10
5.
|
Earnings Per Share (“EPS”)
|
Basic EPS is calculated based on income available to holders of the Company’s common stock (“Common Stock”) and the weighted average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential Common Stock issuable pursuant to the exercise of outstanding stock options.
The following table sets forth a reconciliation of the weighted average number of shares of Common Stock outstanding to the weighted average number of shares outstanding on a diluted basis:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average common shares outstanding - basic
|
|
246.8
|
|
|
|
245.7
|
|
|
|
246.4
|
|
|
|
245.2
|
|
Dilutive effect of stock options
|
|
6.1
|
|
|
|
5.4
|
|
|
|
6.1
|
|
|
|
4.9
|
|
Weighted average common shares outstanding - diluted
|
|
252.9
|
|
|
|
251.1
|
|
|
|
252.5
|
|
|
|
250.1
|
|
Antidilutive stock options outstanding
|
|
1.4
|
|
|
|
2.6
|
|
|
|
1.4
|
|
|
|
3.3
|
|
6.
|
Stock Based Compensation Plans
|
The following table provides a summary of option activity:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
Value
|
|
Outstanding at December 31, 2018
|
|
14.7
|
|
|
$
|
37.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1.4
|
|
|
|
77.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(1.9
|
)
|
|
|
26.50
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(0.1
|
)
|
|
|
54.06
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
14.1
|
|
|
$
|
43.02
|
|
|
|
5.6
|
|
|
$
|
456.7
|
|
Exercisable at September 30, 2019
|
|
8.7
|
|
|
$
|
34.09
|
|
|
|
4.0
|
|
|
$
|
359.1
|
|
The following table provides information regarding the intrinsic value of stock options exercised and stock compensation expense related to stock option awards:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Intrinsic Value of Stock Options Exercised
|
$
|
15.7
|
|
|
$
|
26.8
|
|
|
$
|
87.6
|
|
|
$
|
72.0
|
|
Stock Compensation Expense Related to Stock Option Awards
|
$
|
2.7
|
|
|
$
|
3.7
|
|
|
$
|
17.2
|
|
|
$
|
18.7
|
|
Issued Stock Options
|
|
0.0
|
|
|
0.0
|
|
|
|
1.4
|
|
|
|
1.9
|
|
Weighted Average Fair Value of Stock Options issued (per share)
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
14.94
|
|
|
$
|
9.63
|
|
Fair Value of Stock Options Issued
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
21.3
|
|
|
$
|
18.1
|
|
The following table provides a summary of the assumptions used in the valuation of issued stock options:
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
-
|
|
-
|
|
|
2.1
|
%
|
|
|
2.9
|
%
|
Expected life in years
|
-
|
|
-
|
|
|
7.3
|
|
|
|
7.3
|
|
Expected volatility
|
-
|
|
-
|
|
|
17.2
|
%
|
|
|
17.1
|
%
|
Dividend yield
|
-
|
|
-
|
|
|
1.2
|
%
|
|
|
1.7
|
%
|
11
7. Share Repurchases
On November 1, 2017, the Company’s Board of Directors (the “Board”) authorized a share repurchase program, under which the Company may repurchase up to $500.0 in shares of Common Stock (the “2017 Share Repurchase Program”). The 2017 Share Repurchase Program does not have an expiration. The Company also continued its evergreen share repurchase program, authorized by the Board on January 29, 2014, under which the Company may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under the Company’s incentive plans.
In connection with the evergreen share repurchase program, in January 2019, the Company executed open market purchases of $100.0 of its Common Stock.
In September 2019, the Company executed open market purchases of $150.0 of its Common Stock of which $50.0 was purchased under the evergreen share repurchase program and $100.0 was purchased under the 2017 Share Repurchase Program. As a result of these stock repurchases, there remained $210.0 of share repurchase availability under the 2017 Share Repurchase Program as of September 30, 2019.
8.Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments at September 30, 2019 and December 31, 2018:
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Input
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Level
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Level 1
|
|
$
|
43.4
|
|
|
$
|
43.4
|
|
|
$
|
234.6
|
|
|
$
|
234.6
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
Level 2
|
|
|
74.0
|
|
|
|
74.0
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Floating Rate Senior notes due January 25, 2019
|
Level 2
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
300.0
|
|
|
|
299.9
|
|
2.45% Senior notes due December 15, 2019
|
Level 2
|
|
|
300.0
|
|
|
|
299.7
|
|
|
|
300.0
|
|
|
|
297.4
|
|
Term loan due May 1, 2022
|
Level 2
|
|
|
300.0
|
|
|
|
300.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
2.45% Senior notes due August 1, 2022
|
Level 2
|
|
|
299.8
|
|
|
|
303.0
|
|
|
|
299.7
|
|
|
|
289.7
|
|
2.875% Senior notes due October 1, 2022
|
Level 2
|
|
|
399.9
|
|
|
|
409.1
|
|
|
|
399.9
|
|
|
|
393.0
|
|
3.15% Senior notes due August 1, 2027
|
Level 2
|
|
|
424.6
|
|
|
|
441.8
|
|
|
|
424.6
|
|
|
|
400.0
|
|
3.95% Senior notes due August 1, 2047
|
Level 2
|
|
|
397.3
|
|
|
|
434.4
|
|
|
|
397.2
|
|
|
|
363.7
|
|
Business Acquisition Liabilities
|
Level 3
|
|
|
214.7
|
|
|
|
214.7
|
|
|
|
23.0
|
|
|
|
23.0
|
|
Fair value adjustment asset (liability) related to hedged fixed rate
debt instrument
|
Level 2
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
Interest Rate Swap Lock Agreement asset (liability)
|
Level 2
|
|
|
(40.6
|
)
|
|
|
(40.6
|
)
|
|
|
(7.0
|
)
|
|
|
(7.0
|
)
|
The Company recognizes transfers between input levels as of the actual date of the event. There were no transfers between input levels during the nine months ended September 30, 2019.
Refer to Note 2 in the Form 10-K for a description of the methods and assumptions used to estimate the fair value of each class of financial instruments reflected in the condensed consolidated balance sheets.
The business acquisition liabilities represent the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions which are considered Level 3 inputs. Subsequent to the date of the Flawless Acquisition, the Company increased the estimate of the contingent consideration liability by $17.0 from $182.0 to $199.0 based on the revised valuation due to updated sales forecasts as well as the passage of time. The charge was recorded to SG&A expense in both the Consumer Domestic and Consumer International Segments. During the second quarter of 2019, the Company reversed the full $7.3 contingent liability associated with the Passport Acquisition based on the revised valuation due to updated sales forecasts. The reduction was recorded in SG&A in the SPD segment. A portion of the business acquisition liabilities are included in accounts payable and accrued expenses.
12
The carrying amounts of accounts receivable, and accounts payable and accrued expenses, approximated estimated fair values as of September 30, 2019 and December 31, 2018.
9.
|
Derivative Instruments and Risk Management
|
Changes in interest rates, foreign exchange rates, the price of the Common Stock and commodity prices expose the Company to market risk. The Company manages these risks by the use of derivative instruments, such as cash flow and fair value hedges, diesel and commodity hedge contracts, equity derivatives and foreign exchange forward contracts. The Company does not use derivatives for trading or speculative purposes. Refer to Note 3 in the Form 10-K for a discussion of each of the Company’s derivative instruments in effect as of December 31, 2018.
The notional amount of a derivative instrument is the nominal or face amount used to calculate payments made on that instrument. Notional amounts are presented in the following table:
|
|
Notional
|
|
|
Notional
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
208.9
|
|
|
$
|
146.6
|
|
Interest rate swap
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
Interest rate swap lock
|
|
$
|
300.0
|
|
|
$
|
250.0
|
|
Diesel fuel contracts
|
|
6.1 gallons
|
|
|
8.2 gallons
|
|
Commodities contracts
|
|
77.2 pounds
|
|
|
94.7 pounds
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Equity derivatives
|
|
$
|
26.0
|
|
|
$
|
21.0
|
|
Excluding the Interest Rate Swap Lock Agreement disclosed in Note 8, the fair values and amount of gain (loss) recognized in income and Other Comprehensive Income (“OCI”) associated with the derivative instruments disclosed above did not have a material impact on the Company’s condensed consolidated financial statements.
On May 1, 2019, the Company closed on its previously announced acquisition of the FLAWLESS™ and FINISHING TOUCH™ hair removal business (the “Flawless Acquisition”) from Ideavillage Products Corporation (“Ideavillage”). The Company paid $475.0 at closing and will make an additional earn-out payment up to a maximum of $425.0 in cash, based on a trailing twelve-month net sales target ending no later than December 31, 2021. The transaction was funded with a three-year term loan and commercial paper borrowings. The Company anticipates there will be a six-month integration transition period in which the net cash received from Ideavillage will be accounted for as other revenue as a component of net sales. The Company will purchase the inventory following the transition period, at such time, the Company will be the principal party to the transaction. FLAWLESS is managed in the Consumer Domestic and Consumer International segments and represents an addition to our specialty haircare portfolio which includes BATISTE dry shampoo, VIVISCAL hair thinning supplements, and TOPPIK hair fibers.
The preliminary fair values of the net assets acquired are set forth as follows:
|
Flawless
|
|
|
Acquisition Date
|
|
|
Preliminary
|
|
|
Fair Value
|
|
Trade name
|
$
|
447.3
|
|
Other intangible assets
|
|
121.8
|
|
Goodwill
|
|
87.9
|
|
Contingent consideration
|
|
(182.0
|
)
|
Cash purchase price
|
$
|
475.0
|
|
The goodwill and other intangible assets associated with the Flawless Acquisition are deductible for U.S. tax purposes. The life of the amortizable intangible assets recognized from the Flawless Acquisition ranges from 15 - 20 years. The goodwill is a result of expected synergies from combined operations of the acquisition and the Company. Pro forma results are not presented because the impact of the acquisition is not material to the Company’s consolidated financial results. The liability will be reassessed at each balance sheet date until the completion of the earn-out period. Ideavillage will help support the business through a separate long-term transition services agreement.
13
On March 8, 2018, the Company purchased Passport Food Safety Solutions, Inc. (“Passport,” and the acquisition, the “Passport Acquisition”). Passport sells products for pre- and post-harvest treatment in the poultry, swine, and beef production markets. The total purchase price was approximately $50.0, which is subject to an additional payment of up to $25.0 based on sales performance through 2020. Passport’s annual sales were approximately $21.0 in 2017. The Passport Acquisition was funded with short-term borrowings and is managed in the Specialty Products (“SPD”) segment.
The fair values of the net assets acquired are set forth as follows:
|
Passport
|
|
|
Acquisition Date
|
|
|
Fair Value
|
|
Inventory and other working capital
|
$
|
3.3
|
|
Long-term assets
|
|
1.0
|
|
Trade names and other intangibles
|
|
28.5
|
|
Goodwill
|
|
32.5
|
|
Current liabilities
|
|
(1.1
|
)
|
Long-term liabilities
|
|
(7.1
|
)
|
Contingent consideration
|
|
(7.3
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
49.8
|
|
The life of the amortizable intangible assets recognized from the Passport Acquisition ranges from 10 - 15 years. The goodwill is a result of expected synergies from combined operations of the acquisition and the Company. Pro forma results are not presented because the impact is not material to the Company’s consolidated financial results. The contingent liability will be reassessed at each balance sheet date leading up to December 31, 2020.
The goodwill and other intangible assets associated with the Passport Acquisition are not deductible for U.S. tax purposes.
11.
|
Goodwill and Other Intangibles, Net
|
The following table provides information related to the carrying value of all intangible assets, other than goodwill:
|
September 30, 2019
|
|
|
|
|
December 31, 2018
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names
|
$
|
1,025.4
|
|
|
$
|
(206.6
|
)
|
|
$
|
818.8
|
|
|
3-20
|
|
$
|
578.6
|
|
|
$
|
(175.2
|
)
|
|
$
|
403.4
|
|
Customer Relationships
|
|
584.8
|
|
|
|
(246.1
|
)
|
|
|
338.7
|
|
|
15-20
|
|
|
506.3
|
|
|
|
(220.8
|
)
|
|
|
285.5
|
|
Patents/Formulas
|
|
211.4
|
|
|
|
(69.9
|
)
|
|
|
141.5
|
|
|
4-20
|
|
|
165.4
|
|
|
|
(61.5
|
)
|
|
|
103.9
|
|
Non-Compete Agreement
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
|
5-10
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
Total
|
$
|
1,822.0
|
|
|
$
|
(523.0
|
)
|
|
$
|
1,299.0
|
|
|
|
|
$
|
1,250.7
|
|
|
$
|
(457.8
|
)
|
|
$
|
792.9
|
|
Indefinite Lived Intangible Assets - Gross Carrying Amount
|
September 30,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
Trade Names
|
$
|
1,478.3
|
|
|
|
|
|
|
|
|
$
|
1,481.1
|
|
|
|
|
|
Intangible amortization expense was $25.2 and $17.6 for the third quarter of 2019 and 2018, respectively. Intangible amortization expense amounted to $65.5 and $53.4 for the first nine months of 2019 and 2018, respectively. The Company estimates that intangible amortization expense will be approximately $90.0 in 2019 and approximately $98.0 to $89.0 annually over the next five years.
The Company determined that the carrying value of its trade names as of December 31, 2018 and 2017, was recoverable based upon the forecasted cash flows and profitability of the brands. In 2017 there was a personal care trade name that, based on performance, had experienced sales and profit declines that had eroded a significant portion of the excess between fair and carrying value, which could potentially result in an impairment of the asset. The performance of the tradename improved since 2017, thereby
14
increasing the excess between fair value and carrying value. The Company continues to monitor performance and should there be any significant change in forecasted assumptions or estimates, including sales, profitability and discount rate, the Company may be required to recognize an impairment charge.
The carrying amount of goodwill is as follows:
|
Consumer
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
1,633.2
|
|
|
$
|
223.7
|
|
|
$
|
136.0
|
|
|
$
|
1,992.9
|
|
Flawless acquired goodwill
|
|
74.7
|
|
|
|
13.2
|
|
|
|
0.0
|
|
|
|
87.9
|
|
Other
|
|
0.0
|
|
|
|
(1.3
|
)
|
|
|
0.0
|
|
|
|
(1.3
|
)
|
Balance at September 30, 2019
|
$
|
1,707.9
|
|
|
$
|
235.6
|
|
|
$
|
136.0
|
|
|
$
|
2,079.5
|
|
In connection with its annual goodwill impairment test performed in the beginning of the second quarter of 2019, the Company determined that the estimated fair value substantially exceeded the carrying values of all reporting units.
15
The Company leases certain manufacturing facilities, warehouses, office space, railcars and equipment. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. All recorded leases are classified as operating leases and lease expense is recognized on a straight-line basis over the lease term. For leases beginning in 2019, lease components (base rental costs) are accounted for separately from the nonlease components (e.g., common-area maintenance costs). For leases that do not provide an implicit rate, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
A summary of the Company’s lease information is as follows:
|
|
September 30,
|
|
|
Classification
|
2019
|
|
Assets
|
|
|
|
|
Right of use assets
|
Other Assets
|
$
|
152.8
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current lease liabilities
|
Accounts Payable and Accrued Expenses
|
$
|
16.1
|
|
Long-term lease liabilities
|
Deferred and Other Long-term Liabilities
|
|
145.9
|
|
Total lease liabilities
|
|
$
|
162.0
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
11.5
|
|
Weighted-average discount rate
|
|
|
4.9
|
%
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30, 2019
|
|
September 30, 2019
|
|
Statement of Income
|
|
|
|
|
|
|
Lease cost(1)
|
$
|
6.5
|
|
$
|
18.1
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
Leased assets obtained in exchange for new lease liabilities(2)
|
$
|
2.0
|
|
$
|
59.1
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
6.1
|
|
$
|
18.2
|
|
|
(1)
|
Lease expense is included in cost of sales or SG&A expenses based on the nature of the lease. Short-term lease expense is excluded from this amount and is not material. The Company also has certain variable leases which are not material. The noncash component of lease expense for the nine months ended September 30, 2019 was $13.2 and is included in the Amortization caption in the condensed consolidated statement of cash flows.
|
|
(2)
|
In June 2019, the Company amended an operating lease for one of its manufacturing facilities to extend the lease an additional ten years through 2033. The amendment resulted in an increase to the Company’s right of use assets and corresponding lease liabilities of approximately $53.0 recorded in the second quarter of 2019.
|
16
The Company’s minimum annual rentals including reasonably assured renewal options under lease agreements are as follows:
|
|
Operating
|
|
|
|
Leases
|
|
2019
|
|
$
|
6.0
|
|
2020
|
|
|
22.6
|
|
2021
|
|
|
22.7
|
|
2022
|
|
|
20.5
|
|
2023
|
|
|
16.2
|
|
2024 and thereafter
|
|
|
126.0
|
|
Total future minimum lease commitments
|
|
|
214.0
|
|
Less: Imputed Interest
|
|
|
(52.0
|
)
|
Present value of lease liabilities
|
|
$
|
162.0
|
|
13.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following:
|
September 30,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Trade accounts payable
|
$
|
449.0
|
|
|
$
|
430.2
|
|
Accrued marketing and promotion costs
|
|
116.2
|
|
|
|
116.2
|
|
Accrued wages and related benefit costs
|
|
73.5
|
|
|
|
84.2
|
|
Other accrued current liabilities
|
|
115.7
|
|
|
|
94.5
|
|
Total
|
$
|
754.4
|
|
|
$
|
725.1
|
|
14.
|
Short-Term Borrowings and Long-Term Debt
|
Short-term borrowings and long-term debt consist of the following:
|
September 30,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
Commercial paper issuances
|
$
|
69.9
|
|
|
$
|
0.0
|
|
Various debt due to international banks
|
|
4.1
|
|
|
|
1.8
|
|
Total short-term borrowings
|
$
|
74.0
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
Floating Rate Senior notes due January 25, 2019
|
$
|
0.0
|
|
|
$
|
300.0
|
|
2.45% Senior notes due December 15, 2019
|
|
300.0
|
|
|
|
300.0
|
|
Term loan due May 1, 2022
|
|
300.0
|
|
|
|
0.0
|
|
2.45% Senior notes due August 1, 2022
|
|
300.0
|
|
|
|
300.0
|
|
Less: Discount
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
2.875% Senior notes due October 1, 2022
|
|
400.0
|
|
|
|
400.0
|
|
Less: Discount
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
3.15% Senior notes due August 1, 2027
|
|
425.0
|
|
|
|
425.0
|
|
Less: Discount
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
3.95% Senior notes due August 1, 2047
|
|
400.0
|
|
|
|
400.0
|
|
Less: Discount
|
|
(2.7
|
)
|
|
|
(2.8
|
)
|
Debt issuance costs, net
|
|
(12.1
|
)
|
|
|
(13.1
|
)
|
Fair value adjustment asset (liability) related to hedged fixed rate debt instrument
|
|
(0.3
|
)
|
|
|
(3.0
|
)
|
Total long-term debt
|
|
2,109.2
|
|
|
|
2,105.3
|
|
Less: current maturities
|
|
(299.6
|
)
|
|
|
(596.5
|
)
|
Net long-term debt
|
$
|
1,809.6
|
|
|
$
|
1,508.8
|
|
17
Amended Credit Agreement
On May 1, 2019, the Company amended its $1,000.0 unsecured revolving credit facility (the “Credit Agreement”) to extend the term of the Credit Agreement from March 29, 2023 to March 29, 2024. Under the Credit Agreement, the Company continues to have the ability to increase its borrowing up to an additional $600.0, subject to lender commitments and certain conditions as described in the Credit Agreement. Borrowings under the Credit Agreement are available for general corporate purposes and are used to support the Company’s $1,000.0 commercial paper program.
Term Loan
On May 1, 2019, the Company entered into a $300.0 unsecured term loan credit facility with various banks, the proceeds of which were used to partially fund the Flawless Acquisition. Unless prepaid, the loan is due on May 1, 2022. The interest rate is LIBOR plus an applicable margin based on the Company’s credit rating, which can range from 60 basis points (“bps”) to 113 bps.
15.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of changes in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
Defined
|
|
|
|
|
|
|
Other
|
|
|
Currency
|
|
|
Benefit
|
|
|
Derivative
|
|
|
Comprehensive
|
|
|
Adjustments
|
|
|
Plans
|
|
|
Agreements
|
|
|
Income (Loss)
|
|
Balance at December 31, 2017
|
$
|
(31.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(36.4
|
)
|
Adoption of new accounting pronouncements
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(6.6
|
)
|
|
|
0.0
|
|
|
|
0.5
|
|
|
|
(6.1
|
)
|
Amounts reclassified to consolidated statement of
income (a) (b)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Other comprehensive income (loss)
|
|
(6.6
|
)
|
|
|
0.0
|
|
|
|
0.7
|
|
|
|
(5.9
|
)
|
Balance at September 30, 2018
|
$
|
(38.5
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
(42.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(42.5
|
)
|
|
$
|
0.9
|
|
|
$
|
(12.0
|
)
|
|
$
|
(53.6
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(4.1
|
)
|
|
|
0.0
|
|
|
|
(37.1
|
)
|
|
|
(41.2
|
)
|
Amounts reclassified to consolidated statement of
income (a) (b)
|
|
1.9
|
|
|
|
0.0
|
|
|
|
3.8
|
|
|
|
5.7
|
|
Tax benefit (expense)
|
|
0.0
|
|
|
|
0.0
|
|
|
|
8.4
|
|
|
|
8.4
|
|
Other comprehensive income (loss)
|
|
(2.2
|
)
|
|
|
0.0
|
|
|
|
(24.9
|
)
|
|
|
(27.1
|
)
|
Balance at September 30, 2019
|
$
|
(44.7
|
)
|
|
$
|
0.9
|
|
|
$
|
(36.9
|
)
|
|
$
|
(80.7
|
)
|
(a)
|
Amounts reclassified to cost of sales, selling, general and administrative expenses or interest expense.
|
(b)
|
The Company reclassified a loss of $2.8 and a loss of $0.6 to the condensed consolidated statement of income during the three months ended September 30, 2019 and 2018, respectively.
|
16.
|
Commitments, Contingencies and Guarantees
|
Commitments
a. The Company has a partnership with a supplier of raw materials that mines and processes sodium-based mineral deposits. The Company purchases the majority of its sodium-based raw material requirements from the partnership. The partnership agreement terminates upon two years’ written notice by either partner. Under the partnership agreement, the Company has an annual commitment to purchase 240,000 tons of sodium-based raw materials at the prevailing market price. The Company is not engaged in any other material transactions with the partnership or the partner supplier.
b. As of September 30, 2019, the Company had commitments of approximately $227.3. These commitments include the purchase of raw materials, packaging supplies and services from its vendors at market prices to enable the Company to respond quickly to changes in customer orders or requirements, as well as costs associated with licensing and promotion agreements.
18
c. As of September 30, 2019, the Company had various guarantees and letters of credit totaling $4.9.
d. In connection with the Company’s acquisition of Agro BioSciences, Inc. (the “Agro Acquisition”) on January 17, 2017, the Company is obligated to pay an additional amount of up to $25.0 based on sales performance in 2019. The initial fair value of this contingent liability was $17.8, which was established in the purchase price allocation. Subsequent to the Agro Acquisition, the Company decreased the estimate of the contingent consideration liability by $2.1 to $15.7 based on updated sales forecasts. The reduction was recorded in SG&A in the SPD segment. There were no changes to the liability during the third quarter of 2019 and the final liability will be determined at December 31, 2019.
In connection with the Passport Acquisition, the Company is obligated to pay an additional amount of up to $25.0 based on sales performance through 2020. The initial fair value of this contingent liability was $7.3, which was established in the purchase price allocation. During the second quarter of 2019, the Company reversed the full $7.3 ($5.5 after tax or $0.02 diluted per share) contingent liability based on the revised valuation due to updated sales forecasts. The reduction was recorded in SG&A in the SPD segment. The contingent liability will be reassessed at each balance sheet date leading up to December 31, 2020.
In connection with the Flawless Acquisition, the Company is obligated to pay an additional amount of up to $425.0 based on sales performance through 2021. The initial fair value of this contingent liability was $182.0, which was established in the preliminary purchase price allocation. Subsequent to the date of the Flawless Acquisition, the Company increased the estimate of the contingent consideration liability by $17.0 ($12.7 after tax or $0.05 diluted per share) from $182.0 to $199.0 based on the revised valuation due to updated sales forecasts as well as the passage of time. The charge was recorded to SG&A expense in both the Consumer Domestic and Consumer International Segments. The liability will be reassessed at each balance sheet date until the completion of the earn-out period. Ideavillage will help support the business through a separate long-term transition services agreement.
Legal proceedings
e. The Company has been named as a defendant in a breach of contract action filed by Scantibodies Laboratory, Inc. (the “Plaintiff”) on April 1, 2014, in the U.S. District Court for the Southern District of New York.
The complaint alleges, among other things, that the Company (i) breached two agreements for the manufacture and supply of pregnancy and ovulation test kits by switching suppliers, (ii) failed to give Plaintiff the proper notice, (iii) failed to reimburse Plaintiff for costs and expenses under the agreements and (iv) misrepresented its future requirements. The complaint seeks compensatory and punitive damages in an amount in excess of $20.0, as well as declaratory relief, statutory prejudgment interest and attorneys’ fees and costs.
The Company is vigorously defending itself in this matter. On September 19, 2018, the court granted the Company’s motion for summary judgment, dismissing all claims brought by the Plaintiff. The Plaintiff has filed an appeal.
In connection with this matter, the Company has reserved an amount that is immaterial. However, it is reasonably possible that the Company may ultimately be required to pay all or substantially all of the damages and other amounts sought by Plaintiff in the event the summary judgment entered in favor of the Company is reversed.
f. In addition, in conjunction with the Company’s acquisition and divestiture activities, the Company entered into select guarantees and indemnifications of performance with respect to the fulfillment of the Company’s commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable contract. Representations and warranties that survive the closing date generally survive for periods up to five years or the expiration of the applicable statutes of limitations. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for select provisions. With respect to sale transactions, the Company also routinely enters into non-competition agreements for varying periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materially adverse impact on the Company’s financial condition, results of operations and cash flows.
g. In addition to the matters described above, from time to time in the ordinary course of its business the Company is the subject of, or party to, various pending or threatened legal, regulatory or governmental actions or other proceedings, including, without limitation, those relating to, intellectual property, commercial transactions, product liability, purported consumer class actions, employment matters, antitrust, environmental, health, safety and other compliance related matters. Such proceedings are generally subject to considerable uncertainty and their outcomes, and any related damages, may not be reasonably predictable or estimable.
19
While any such proceedings could result in an adverse outcome for the Company, any such adverse outcome is not expected to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
17.
|
Related Party Transactions
|
The following summarizes the balances and transactions between the Company and Armand Products Company (“Armand”) and The ArmaKleen Company (“ArmaKleen”), in each of which the Company holds a 50% ownership interest:
|
Armand
|
|
|
ArmaKleen
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Purchases by Company
|
$
|
10.5
|
|
|
$
|
11.9
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Sales by Company
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
Outstanding Accounts Receivable
|
$
|
0.3
|
|
|
$
|
0.4
|
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
Outstanding Accounts Payable
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
Administration & Management Oversight Services (1)
|
$
|
1.9
|
|
|
$
|
1.9
|
|
|
$
|
1.6
|
|
|
$
|
1.6
|
|
(1)
|
Billed by the Company and recorded as a reduction of SG&A expenses.
|
Segment Information
The Company operates three reportable segments: Consumer Domestic, Consumer International and SPD. These segments are determined based on differences in the nature of products and organizational and ownership structures. The Company also has a Corporate segment.
Segment revenues are derived from the sale of the following products:
Segment
|
|
|
Products
|
|
Consumer Domestic
|
|
Household and personal care products
|
Consumer International
|
|
Primarily personal care products
|
SPD
|
|
Specialty chemical products
|
The Corporate segment income consists of equity in earnings of affiliates. As of September 30, 2019, the Company held 50% ownership interests in each of Armand and ArmaKleen, respectively. The Company’s equity in earnings of Armand and ArmaKleen for the three and nine months ended September 30, 2019 and 2018 are included in the Corporate segment.
20
Certain subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results set forth in the table below.
Segment net sales and income before income taxes are as follows:
|
Consumer
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
SPD
|
|
|
Corporate
|
|
|
Total
|
|
Net Sales(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2019
|
$
|
827.6
|
|
|
$
|
186.4
|
|
|
$
|
75.4
|
|
|
$
|
0.0
|
|
|
$
|
1,089.4
|
|
Third Quarter 2018
|
|
784.9
|
|
|
|
174.1
|
|
|
|
78.6
|
|
|
|
0.0
|
|
|
|
1,037.6
|
|
First Nine Months of 2019
|
$
|
2,431.8
|
|
|
$
|
559.7
|
|
|
$
|
222.0
|
|
|
$
|
0.0
|
|
|
$
|
3,213.5
|
|
First Nine Months of 2018
|
|
2,310.4
|
|
|
|
530.9
|
|
|
|
230.2
|
|
|
|
0.0
|
|
|
|
3,071.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2019
|
$
|
165.9
|
|
|
$
|
22.1
|
|
|
$
|
10.5
|
|
|
$
|
2.1
|
|
|
$
|
200.6
|
|
Third Quarter 2018
|
|
149.6
|
|
|
|
21.9
|
|
|
|
13.3
|
|
|
|
2.5
|
|
|
|
187.3
|
|
First Nine Months of 2019
|
$
|
484.8
|
|
|
$
|
67.4
|
|
|
$
|
38.3
|
|
|
$
|
5.5
|
|
|
$
|
596.0
|
|
First Nine Months of 2018
|
|
428.3
|
|
|
|
67.6
|
|
|
|
40.5
|
|
|
|
7.0
|
|
|
|
543.4
|
|
(1)
|
Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $2.8 and $1.9 for the three months ended September 30, 2019 and September 30, 2018, respectively, and were $7.5 and $4.5 for the nine months ended September 30, 2019 and September 30, 2018, respectively.
|
(2)
|
In determining income before income taxes, interest expense, investment earnings and certain aspects of other income and expense were allocated among segments based upon each segment’s relative income from operations.
|
Product line revenues from external customers are as follows:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Household Products
|
$
|
463.5
|
|
|
$
|
448.9
|
|
|
$
|
1,371.1
|
|
|
$
|
1,291.8
|
|
Personal Care Products
|
|
364.1
|
|
|
|
336.0
|
|
|
|
1,060.7
|
|
|
|
1,018.6
|
|
Total Consumer Domestic
|
|
827.6
|
|
|
|
784.9
|
|
|
|
2,431.8
|
|
|
|
2,310.4
|
|
Total Consumer International
|
|
186.4
|
|
|
|
174.1
|
|
|
|
559.7
|
|
|
|
530.9
|
|
Total SPD
|
|
75.4
|
|
|
|
78.6
|
|
|
|
222.0
|
|
|
|
230.2
|
|
Total Consolidated Net Sales
|
$
|
1,089.4
|
|
|
$
|
1,037.6
|
|
|
$
|
3,213.5
|
|
|
$
|
3,071.5
|
|
Household Products include laundry, deodorizing and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care and hair care products and gummy dietary supplements.
19.
|
Brazilian Consumer Business
|
During the second quarter of 2019, we decided to sell and subsequently sold our Brazilian consumer business, resulting in a $7.6 ($0.03 diluted per share) charge recorded in SG&A expense for severance, asset write-offs, and other charges. Net sales for the Brazilian consumer business in 2018 were approximately $15.0 in the Consumer International segment.
21
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
(In millions, except per share data)