Management of Church & Dwight Co., Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that as of December 31, 2017, the Company’s internal control over financial reporting was effective.
Management has excluded Waterpik from its assessment of internal control over financial reporting as of December 31, 2017, because Waterpik was acquired by the Company on August 7, 2017. The acquired business’ internal control over financial reporting and related processes have not been integrated into the Company’s existing systems and internal control over financial reporting, and have been excluded from management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. The total assets and total revenues of Waterpik represent approximately 22% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has audited the Company’s internal control over financial reporting. Their opinions on the effectiveness of the Company’s internal control over financial reporting and on the Company’s consolidated financial statements and financial statement schedule appear on pages 45 and 46 of this Annual Report on Form 10-K.
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data)
1.
|
Significant Accounting Policies
|
Business
The Company, founded in 1846, develops, manufactures and markets a broad range of household, personal care and specialty products focused on animal productivity, chemicals and cleaners. The Company sells its consumer products under a variety of brands through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, dollar, pet and other specialty stores and websites and other e-commerce channels, all of which sell the products to consumers. The Company also sells specialty products to industrial customers, livestock producers and through distributors.
Basis of Presentation
The accompanying Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the U.S. and include the accounts of the Company and its majority‑owned subsidiaries. For equity investments in which the Company does not control or have the ability to exert significant influence over the investee, which generally is when the Company has less than a 20% ownership interest, the investments are accounted for under the cost method. In circumstances where the Company has greater than a 20% ownership interest and has the ability to exercise significant influence over, but does not control, the investee, the investment is accounted for under the equity method. As a result, the Company accounts for its 50% interest in its Armand Products Company (“Armand”) joint venture and its 50% interest in The ArmaKleen Company (“ArmaKleen”) joint venture under the equity method. The Company’s one-third interest in its Natronx Technologies, LLC (“Natronx”) joint venture was accounted for under the equity method until the remaining investment in it was fully impaired in 2015. Armand, ArmaKleen and Natronx are specialty chemical businesses. The Company’s equity in earnings (losses) of Armand and ArmaKleen for the years ended December 31, 2017 and 2016 and Armand, ArmaKleen and Natronx for the year ended December 31, 2015 are included in the Corporate segment, as described in Note 16.
On May 8, 2017, the Company amended its Restated Certificate of Incorporation to increase its authorized shares of common stock to 600,000,000 from 300,000,000 as of December 31, 2016.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that makes modifications to how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the classification of excess tax benefits in the statement of cash flows. The Company prospectively adopted the standard in the first quarter of 2017. The adoption resulted in excess tax benefits of $15.1 or approximately $0.05 per share recorded in the provision for income taxes rather than in the Company’s Stockholders’ Equity section of the Balance Sheet and an increase to both net cash provided by operating activities and net cash provided by financing activities of $15.1 for the twelve months ended December 31, 2017. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share, which did not have a material impact on the Company’s diluted earnings per share for the three and twelve months ended December 31, 2017. The Company has also elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
On August 4, 2016, the Company announced a two-for-one stock split of the Company’s common stock (“Common Stock”). The stock split was structured in the form of a 100% stock dividend, payable on September 1, 2016 to stockholders of record as of August 15, 2016. All applicable amounts in the consolidated financial statements and related disclosures have been retroactively adjusted to reflect the stock split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Management makes estimates regarding inventory valuation, promotional and sales returns reserves, the carrying amount of goodwill and other intangible assets, the realization of deferred tax assets, tax reserves, liabilities related to pensions and other postretirement benefit obligations and other matters that affect the reported amounts and other disclosures in the financial statements. These estimates are based on judgment and available information. Actual results could differ materially from those estimates, and it is possible that changes in such estimates could occur in the near term.
52
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
R
ev
enue Recognition
Revenue is recognized when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier.
Promotional and Sales Returns Reserves
The Company conducts extensive promotional activities, primarily through the use of off-list discounts, slotting, coupons, cooperative advertising, periodic price reduction arrangements, and end-aisle and other in-store displays. The costs of such activities are netted against sales. Slotting costs are recorded when the product is delivered to the customer. Costs associated with coupon redemption are recorded when coupons are circulated. Cooperative advertising costs are recorded when the customer places the advertisement for the Company’s products. Discounts relating to price reduction arrangements are recorded when the related sale takes place. Costs associated with end-aisle or other in-store displays are recorded when the revenue from the product that is subject to the promotion is recognized. The reserves for sales returns and consumer and trade promotion liabilities are established based on the Company’s best estimate of the amounts necessary to settle future and existing obligations for products sold as of the balance sheet date. The Company uses historical trend experience and coupon redemption provider input in arriving at coupon reserve requirements, and uses forecasted appropriations, customer and sales organization inputs, and historical trend analysis in determining the reserves for other promotional activities and sales returns.
Sales of Accounts Receivable
The Company entered into a factoring agreement with a financial institution to sell certain customer receivables at discounted rates in 2015. Transactions under this agreement are accounted for as sales of accounts receivable and were removed from the Consolidated Balance Sheet at the time of the sales transaction. The Company factored an additional $45.3 in 2017, resulting in a total of $105.4 and $60.1 as of December 31, 2017 and 2016, respectively.
Cost of Sales, Marketing and Selling, General and Administrative Expenses
Cost of sales include costs related to the manufacture of the Company’s products, including raw material, inbound freight, direct labor (including employee compensation benefits) and indirect plant costs such as plant supervision, receiving, inspection, maintenance labor and materials, depreciation, taxes and insurance, purchasing, production planning, operations management, logistics, freight to customers, warehousing costs, internal transfer freight costs and plant impairment charges.
Marketing expenses include costs for advertising (excluding the costs of cooperative advertising programs, which are reflected in net sales), costs for coupon insertion (mainly the cost of printing and distribution), consumer promotion costs (such as on-shelf advertisements and floor ads), public relations, package design expense and market research costs.
Selling, general and administrative expenses (“SG&A”) expenses include, among others, costs related to functions such as sales, corporate management, research and development, marketing administration, information technology and legal. Such costs include salary compensation related costs (such as benefits, incentive compensation and profit sharing), stock option costs, depreciation, travel and entertainment related expenses, professional and other consulting fees and amortization of intangible assets.
Foreign Currency Translation
Unrealized
gains and losses related to currency translation are recorded in Accumulated Other Comprehensive Income (Loss). Gains and losses on foreign currency transactions are recorded in the Consolidated Statements of Income.
Cash Equivalents
Cash equivalents consist of highly liquid short-term investments and term bank deposits, which mature within three months of their original maturity date.
53
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Inventories
Inventories are valued at the lower of cost or market (net realizable value, which reflects any costs to sell or dispose). Approximately 17% and 20% of the inventory at December 31, 2017 and 2016, respectively, including substantially all inventory in the Company’s Specialty Products Division (“SPD”) segment as well as domestic inventory sold primarily under the ARM & HAMMER trademark in the Consumer Domestic segment, was determined utilizing the last-in, first-out (“LIFO”) method. The cost of the remaining inventory was determined using the first-in, first-out (“FIFO”) method. The Company identifies any slow moving, obsolete or excess inventory to determine whether an adjustment is required to establish a new carrying value. The determination of whether inventory items are slow moving, obsolete or in excess of needs requires estimates and assumptions about the future demand for the Company’s products, technological changes, and new product introductions. Estimates as to the future demand used in the valuation of inventory involve judgments regarding the ongoing success of the Company’s products. The Company evaluates its inventory levels and expected usage on a periodic basis and records adjustments as required. Adjustments to reflect inventory at net realizable value were $12.8 at December 31, 2017, and $10.5 at December 31, 2016.
Property, Plant and Equipment
Property, Plant and Equipment (“PP&E”) are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Estimated useful lives for building and improvements, machinery and equipment, and office equipment range from 9-40, 3-20 and 3-10 years, respectively. Routine repairs and maintenance are expensed when incurred. Leasehold improvements are depreciated over a period no longer than the respective lease term, except where a lease renewal has been determined to be reasonably assured and failure to renew the lease results in a significant penalty to the Company.
PP&E are reviewed annually and whenever events or changes in circumstances indicate that possible impairment exists. The Company’s impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of Company assets and liabilities. The analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. The Company conducts annual reviews to identify idle and underutilized equipment, and reviews business plans for possible impairment. Impairment occurs when the carrying value of the asset exceeds the future undiscounted cash flows. When an impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset and an impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows.
Software
The Company capitalizes certain costs of developing computer software. Amortization is recorded using the straight‑line method over the estimated useful life of the software, which is estimated to be no longer than 10 years.
Fair Value of Financial Instruments
Certain financial instruments are required to be recorded at fair value. The estimated fair values of such financial instruments (including investment securities and other derivatives) have been determined using market information and valuation methodologies. Changes in assumptions or estimation methods could affect the fair value estimates. Other financial instruments, including cash equivalents and short-term debt, are recorded at cost, which approximates fair value. Additional information regarding the Company’s risk management activities, including derivative instruments and hedging activities, are separately disclosed. See Notes 2 and 3.
Goodwill and Other Intangible Assets
Carrying values of goodwill, trade names and other indefinite lived intangible assets are reviewed periodically for possible impairment. The Company’s impairment analysis is based on a discounted cash flow approach that requires significant judgment with respect to unit volume, revenue and expense growth rates, and the selection of an appropriate discount rate. Management uses estimates based on expected trends in making these assumptions. With respect to goodwill, impairment occurs when the carrying value of the reporting unit exceeds the discounted present value of cash flows for that reporting unit. For trade names and other intangible assets, an impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the asset. Judgment is required in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological change, distribution losses, or competitive activities and acts by governments and courts may indicate that an asset has become impaired. Intangible assets with finite lives are amortized over their estimated useful lives, which range from 3-20 years, using the straight-line method, and reviewed for impairment when changes in market circumstances occur.
54
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
It is possible that the Company’s conclusions regarding impairment or recoverability of goodwill or other intangible assets could change
in future periods if, for example, (i) the businesses or brands do not perform as projected, (ii) overall economic conditions in 201
8
or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strateg
ies change from current assumptions, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decl
ine, resulting in lower multiples of revenues and EBITDA.
Research and Development
The Company incurred research and development expenses in the amount of $70.8, $63.2 and $64.7 in 2017, 2016 and 2015, respectively. These expenses are included in SG&A expenses and are expensed as incurred.
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:
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding - basic
|
|
250.6
|
|
|
|
257.6
|
|
|
|
262.2
|
|
Dilutive effect of stock options
|
|
5.5
|
|
|
|
4.5
|
|
|
|
5.0
|
|
Weighted average common shares outstanding - diluted
|
|
256.1
|
|
|
|
262.1
|
|
|
|
267.2
|
|
Antidilutive stock options outstanding
|
|
3.2
|
|
|
|
1.4
|
|
|
|
2.2
|
|
Employee and Director Stock Option Based Compensation
The fair value of share-based compensation is determined at the grant date and the related expense is recognized over the required employee service period in which the share-based compensation vests. The following table presents the pre-tax expense associated with the fair value of unvested stock options and restricted stock awards included in SG&A expenses and in cost of sales:
|
For the Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of sales
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
$
|
1.6
|
|
Selling, general and administrative expenses
|
|
16.3
|
|
|
|
14.1
|
|
|
|
14.5
|
|
Total
|
$
|
18.1
|
|
|
$
|
16.0
|
|
|
$
|
16.1
|
|
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized to reflect the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. Management provides a valuation allowance against deferred tax assets for amounts which are not considered “more likely than not” to be realized. The Company records liabilities for potential assessments in various tax jurisdictions in accordance with accounting principles generally accepted in the U.S. (GAAP). The liabilities relate to tax return positions that, although supportable by the Company, may be challenged by the tax authorities and do not meet the minimum recognition threshold required under applicable accounting guidance for the related tax benefit to be recognized in the income statement. The Company adjusts this liability as a result of changes in tax legislation, interpretations of laws by courts, rulings by tax authorities, changes in estimates and the expiration of the statute of limitations. Many of the judgments involved in adjusting the liability involve assumptions and estimates that are highly uncertain and subject to change. In this regard, settlement of any issue with, or an adverse determination in litigation against, a taxing authority could require the use of cash and result in an increase in the Company’s annual tax rate. Conversely, favorable resolution of an issue with a taxing authority would be recognized as a reduction to the Company’s annual tax rate.
55
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
New Accounting Pronouncements Issued
In August 2017, the 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 the hedge accounting. The guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that adoption of the guidance will have on the Company’s consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued new accounting guidance that requires employers to report the service cost component separate from the other components of net benefit pension and postretirement costs. Under the new guidance, the employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations. Only the service cost component is eligible for capitalization. The guidance is effective for annual and interim periods beginning after December 15, 2017, and requires retrospective adoption, with early adoption permitted. The guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued new accounting guidance eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on a prospective basis beginning in the first quarter of 2020, with early adoption permitted. The impact of the new standard will be dependent on the specific facts and circumstances of future individual impairments, if any.
In March, April, and May of 2016, the FASB issued amended guidance that clarifies the principles for recognizing revenue. The amendments clarify the guidance for identifying performance obligations, licensing arrangements and principal versus agent considerations. The amendments additionally provide clarification on how to assess collectability, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition. The guidance is effective for annual periods, including interim reporting periods within those periods, beginning after December 15, 2017, and allows companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption. The new standard will be effective for the Company at the beginning of its first quarter of fiscal year 2018. The new pronouncement will require the Company to recognize certain costs earlier. As a result, the Company anticipates recording a cumulative adjustment to its December 31, 2017 retained earnings of approximately $2.0 (net of tax) in its 2018 first quarter form 10-Q. The guidance is not expected to have a material impact on the Company’s disclosures.
In February 2016, 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 is effective for annual and interim periods beginning after December 15, 2018, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact that adoption of the guidance, which will consist primarily of a balance sheet gross up of the Company’s operating leases to show equal and offsetting lease assets and lease liabilities.
There have been no other 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.
2.
|
Fair Value Measurements
|
Fair Value Hierarchy
Accounting guidance on fair value measurements and disclosures establishes a hierarchy that prioritizes the inputs used to measure fair value (generally, assumptions that market participants would use in pricing an asset or liability) based on the quality and reliability of the information provided by the inputs, as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
56
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Fair Values of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments at December 31, 2017 and December 31, 2016:
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
Input
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Level
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Level 1
|
|
$
|
95.8
|
|
|
$
|
95.8
|
|
|
$
|
72.4
|
|
|
$
|
72.4
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
Level 2
|
|
|
270.9
|
|
|
|
270.9
|
|
|
|
426.8
|
|
|
|
426.8
|
|
Floating Rate Senior notes due January 25, 2019
|
Level 2
|
|
|
300.0
|
|
|
|
299.9
|
|
|
|
0.0
|
|
|
|
0.0
|
|
2.45% Senior notes due December 15, 2019
|
Level 2
|
|
|
299.9
|
|
|
|
300.9
|
|
|
|
299.9
|
|
|
|
302.0
|
|
2.45% Senior notes due August 1, 2022
|
Level 2
|
|
|
299.7
|
|
|
|
296.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
2.875% Senior notes due October 1, 2022
|
Level 2
|
|
|
399.8
|
|
|
|
400.2
|
|
|
|
399.8
|
|
|
|
396.9
|
|
3.15% Senior notes due August 1, 2027
|
Level 2
|
|
|
424.6
|
|
|
|
417.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
3.95% Senior notes due August 1, 2047
|
Level 2
|
|
|
397.1
|
|
|
|
397.4
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Contingent Consideration
|
Level 3
|
|
|
23.2
|
|
|
|
23.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Fair value adjustment asset (liability) related to hedged fixed rate debt instrument
|
Level 2
|
|
|
(2.2
|
)
|
|
|
(2.2
|
)
|
|
|
0.2
|
|
|
|
0.2
|
|
The Company recognizes transfers between input levels as of the actual date of the event. There were no transfers between input levels during the twelve months ended December 31, 2017.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments reflected in the Consolidated Balance Sheets:
Cash Equivalents:
Cash equivalents consist of highly liquid short-term investments and term bank deposits, which mature within three months. The estimated fair value of the Company’s cash equivalents approximates their carrying value.
Short-Term Borrowings:
The carrying amounts of the Company’s unsecured lines of credit and commercial paper issuances approximates fair value because of their short maturities and variable interest rates.
Senior Notes:
The Company determines the fair value of its senior notes based on their quoted market value or broker quotes, when possible. In the absence of observable market quotes, the notes are valued using non-binding market consensus prices that the Company seeks to corroborate with observable market data.
Hedged Fixed Rated Debt:
The interest rate swap agreements convert the fixed interest rate to a variable rate based on LIBOR. These agreements are designated as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and are accounted for as fair value hedges. The fair value of these interest rate swap agreements is reflected in the Consolidated Balance Sheet within Other Assets or Deferred and Other Long-term Liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.
Other
: The carrying amounts of accounts receivable, and accounts payable and accrued expenses, approximated estimated fair values as of December 31, 2017 and 2016.
3.
|
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.
The Company formally designates and documents qualifying instruments as hedges of underlying exposures when it enters into derivative arrangements. Changes in the fair value of derivatives designated as hedges and qualifying for hedge accounting are recorded in other comprehensive income and reclassified into earnings during the period in which the hedged exposure affects
57
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
earnings. The Company reviews the effectiveness of its hedging instruments on a quarterly basis. If the Company determines that a derivative instrument is no longer highly effective in offsetting changes in fair values or cas
h flows, it recognizes the hedge ineffectiveness in current period earnings and discontinues hedge accounting with respect to the derivative instrument. Changes in the fair value of derivatives not designated as hedges or those not qualifying for hedge ac
counting are recognized in current period earnings. Upon termination of cash flow hedges, the Company reclassifies gains and losses from other comprehensive income based on the timing of the underlying cash flows, unless the termination results from the f
ailure of the intended transaction to occur in the expected timeframe. Such untimely transactions require immediate recognition in earnings of gains and losses previously recorded in other comprehensive income.
During 2017 and 2016, the Company used derivative instruments to mitigate risk, some of which were designated as hedging instruments. The tables following the discussion of the derivative instruments below summarize the fair value of the Company’s derivative instruments and the effect of derivative instruments on the Company’s consolidated statements of income and on other comprehensive income.
Derivatives Designated as Hedging Instruments
Diesel Fuel Hedges
The Company uses independent freight carriers to deliver its products. These carriers currently charge the Company a basic rate per mile for diesel fuel price increases. During 2017 and 2016, the Company entered into hedge agreements with counterparties to mitigate the volatility of diesel fuel prices, and not to speculate in the future price of diesel fuel. Under the hedge agreements, the Company agreed to pay a fixed price per gallon of diesel fuel determined at the time the agreements were executed and to receive a floating rate payment that is determined on a monthly basis based on the average price of the Department of Energy’s Diesel Fuel Index during the applicable month and is designed to offset any increase or decrease in fuel costs that the Company pays to it common carriers. The agreements covered approximately 64% of the Company’s 2017 diesel fuel requirements and are expected to cover approximately 48% of the Company’s estimated diesel fuel requirements for 2018. These diesel fuel hedge agreements qualify for hedge accounting. Therefore, changes in the fair value of such agreements are recorded under Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet.
Foreign Currency
The Company is subject to exposure from fluctuations in foreign currency exchange rates, primarily U.S. Dollar/Euro, U.S. Dollar/ Pound, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, U.S. Dollar/Australian Dollar, U.S. Dollar/Brazilian Real and U.S. Dollar/Chinese Yuan.
The Company enters into forward exchange contracts to reduce the impact of foreign exchange rate fluctuations related to anticipated but not yet committed sales or purchases denominated in U.S. Dollar, Canadian Dollar, Pound and Euro. The Company entered into forward exchange contracts to hedge itself from the risk that, due to fluctuations in currency exchange rates, it would be adversely affected by net cash outflows. The face value of the unexpired contracts as of December 31, 2017 totaled $91.6 in U.S. Dollars, of which
all qualifies as foreign currency cash flow hedges and, therefore, changes in the fair value of the contracts are recorded in Other Comprehensive Income (Loss) and reclassified to earnings when the hedged transaction affected earnings.
Interest Rate Swaps
On December 9, 2014, the Company entered into interest rate swap agreements that effectively convert the interest rate on the $300.0 aggregate principal amount of 2.45% senior notes, due December 15, 2019, to a floating rate of three-month LIBOR plus a fixed spread of 0.756%. These interest rate swap agreements have been designated as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and are accounted as fair value hedges. The fair value of these interest rate swap agreements is reflected in the Consolidated Balance Sheet within Other Assets or Deferred and Other Long-term Liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.
Commodity Hedges
The Company is subject to exposure due to changes in prices of commodities used in production. To limit the effects of fluctuations in the future market price paid and related volatility in cash flows, the Company enters into Over-the-Counter commodity forward swap contracts. These hedges are designated as cash flow hedges for accounting purposes and, therefore, changes in the fair
58
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
value of the contracts are recorded in Other Comprehensive Income (Loss) and reclassified to earnings when the hedged transaction affected earnings.
The fair value of these
commo
dity hedge
agreements is reflected in the Consolidated Balance Sheet within
Other Current Assets and
Accounts Payable and
Accrued Expenses
.
Derivatives not Designated as Hedging Instruments
Equity Derivatives
The Company has entered into equity derivative contracts covering the Common Stock in order to minimize its liability under its Executive Deferred Compensation Plan resulting from changes in the quoted fair values of the Common Stock to participants who have investments under the Plan in a notional Common Stock fund. The contracts are settled in cash. Since the equity derivatives contracts do not qualify for hedge accounting,
the Company is required to mark such contracts to market throughout the contract term and record changes in fair value in the consolidated statement of income.
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
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
91.6
|
|
$
|
94.1
|
|
Interest rate swap
|
|
$
|
300.0
|
|
$
|
300.0
|
|
Diesel fuel contracts
|
|
3.0 gallons
|
|
2.0 gallons
|
|
Commodities contracts
|
|
28.3 pounds
|
|
0.0 pounds
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
0.0
|
|
$
|
1.8
|
|
Equity derivatives
|
|
$
|
22.2
|
|
$
|
34.4
|
|
The fair values and amount of gain (loss) recognized in income and other comprehensive income associated with the derivative instruments disclosed above do not have a material impact on the Company’s consolidated financial statements.
Inventories consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Raw materials and supplies
|
$
|
85.6
|
|
|
$
|
69.8
|
|
Work in process
|
|
30.8
|
|
|
|
28.8
|
|
Finished goods
|
|
214.3
|
|
|
|
159.6
|
|
Total
|
$
|
330.7
|
|
|
$
|
258.2
|
|
Inventories valued using the LIFO method totaled $54.8 and $51.8 at December 31, 2017 and 2016, respectively, and would have been approximately $4.0 and $4.2 higher, respectively, had they been valued using the FIFO method. The amount of LIFO liquidations in 2017 and 2016 were immaterial.
59
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
5.
|
Property, Plant and Equipment, Net (“PP&E”)
|
PP&E consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Land
|
$
|
27.9
|
|
|
$
|
25.1
|
|
Buildings and improvements
|
|
300.3
|
|
|
|
284.7
|
|
Machinery and equipment
|
|
699.3
|
|
|
|
680.1
|
|
Software
|
|
95.8
|
|
|
|
90.4
|
|
Office equipment and other assets
|
|
66.7
|
|
|
|
60.8
|
|
Construction in progress
|
|
36.4
|
|
|
|
24.2
|
|
Gross PP&E
|
|
1,226.4
|
|
|
|
1,165.3
|
|
Less accumulated depreciation and amortization
|
|
618.7
|
|
|
|
576.7
|
|
Net PP&E
|
$
|
607.7
|
|
|
$
|
588.6
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Depreciation and amortization on PP&E
|
$
|
60.9
|
|
|
$
|
59.7
|
|
|
$
|
58.3
|
|
60
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
On August 7, 2017, the Company acquired Pik Holdings, Inc. (“Waterpik”), a water-jet technology company that designs and sells both oral water flossers and replacement shower heads (the “Waterpik Acquisition”). The total purchase price was $1,024.6 (net of cash acquired), which is subject to a working capital adjustment. Waterpik’s annual sales were approximately $265.0 for the trailing twelve months through June 30, 2017. The Company financed the Waterpik Acquisition with proceeds from its underwritten public offering of $1,425.0 aggregate principal amount of Senior Notes (as defined in Note 9) completed on July 25, 2017. Subsequent to the Waterpik Acquisition, Waterpik is managed by the Consumer Domestic and Consumer International segments.
The preliminary fair values of the net assets acquired are set forth as follows:
|
2017
|
|
|
Waterpik
|
|
Current assets
|
$
|
95.4
|
|
Property, plant and equipment
|
|
28.4
|
|
Trade name (indefinite lived)
|
|
644.7
|
|
Other intangible assets
|
|
146.1
|
|
Goodwill
|
|
424.3
|
|
Current liabilities
|
|
(31.8
|
)
|
Long-term liabilities
|
|
(282.5
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
1,024.6
|
|
The life of the amortizable intangible assets recognized from the Waterpik Acquisition will be amortized over
15 years. The goodwill is a result of expected synergies from combined operations of the acquisition and the Company. The fair values of the assets and liabilities of the Waterpik Acquisition above is considered preliminary as the purchase price allocation is not finalized.
The following unaudited pro forma information is based on the Company’s historical data and assumptions for consolidated results of operations, and gives effect to the Waterpik Acquisition as if the acquisition occurred on January 1, 2016. These unaudited pro forma results include adjustments having a continuing impact on the Company’s consolidated statements of income. These adjustments primarily consist of adjustments to depreciation for the fair value and depreciable lives of property and equipment, amortization of intangible assets, stock compensation expense, interest expense and adjustments to tax expense based on condensed consolidated pro forma results. These results have been prepared using assumptions the Company’s management believes are reasonable, are not necessarily indicative of the actual results that would have occurred if the acquisition had occurred on January 1, 2016, and are not necessarily indicative of the results that may be achieved in the future, including but not limited to the realization of operating synergies that the Company may realize as a result of the acquisition.
Unaudited condensed consolidated pro forma results
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
|
Reported
|
|
|
Pro forma
|
|
|
Reported
|
|
|
Pro forma
|
|
Net Sales
|
$
|
3,776.2
|
|
|
$
|
3,936.2
|
|
|
$
|
3,493.1
|
|
|
$
|
3,739.3
|
|
Net Income
|
$
|
743.4
|
|
|
$
|
753.4
|
|
|
$
|
459.0
|
|
|
$
|
467.2
|
|
Net income per share - Basic
|
$
|
2.97
|
|
|
$
|
3.01
|
|
|
$
|
1.78
|
|
|
$
|
1.81
|
|
Net income per share - Diluted
|
$
|
2.90
|
|
|
$
|
2.94
|
|
|
$
|
1.75
|
|
|
$
|
1.78
|
|
On May 1, 2017, the Company acquired Agro BioSciences, Inc. (the “Agro Acquisition”), an innovator and leader in developing custom probiotic products for poultry, cattle and swine. The total purchase price was approximately $75.0, which is subject to a working capital adjustment, and an additional payment of up to $25.0 after 3 years based on sales performance. Agro BioSciences, Inc.’s annual sales were approximately $11.0 in 2016. The acquisition was funded with short-term borrowings and is managed by the Specialty Products Division (“SPD”) segment.
61
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The fair values of the net assets acquired are set forth as follows:
|
2017
|
|
|
Agro
|
|
Inventory and other assets
|
$
|
2.5
|
|
Trade names and other intangibles
|
|
37.0
|
|
Goodwill
|
|
53.4
|
|
Contingent consideration
|
|
(17.8
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
75.1
|
|
The life of the amortizable intangible assets recognized from the Agro Acquisition ranges from
5 - 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 of the acquisition is not material to the Company’s consolidated financial results. Subsequent to the acquisition, the Company increased the estimate of the contingent consideration liability $5.4 from $17.8 to $23.2 based on updated financial performance forecasts. The charge was recorded in SG&A in the SPD segment.
On January 17, 2017, the Company acquired the Viviscal business (“VIVISCAL”) from Lifes2Good Holdings Limited for $160.3 (the “Viviscal Acquisition”). VIVISCAL is a leading hair care supplement brand both in the U.S. and the U.K. with global annual sales of $44.0 in 2016. The VIVISCAL brand is complementary to the Company’s global BATISTE dry shampoo and TOPPIK hair care business. The Viviscal Acquisition was funded with short-term borrowings and is managed by the Consumer Domestic and Consumer International segments.
The fair values of the net assets acquired are set forth as follows:
|
|
|
|
|
2017
|
|
|
Viviscal
|
|
Inventory and other working capital
|
$
|
10.3
|
|
Trade names and other intangibles
|
|
119.6
|
|
Goodwill
|
|
36.9
|
|
Current liabilities
|
|
(6.5
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
160.3
|
|
The life of the amortizable intangible assets recognized from the Viviscal 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.
On December 22, 2016, the Company acquired the ANUSOL and RECTINOL (the “Anusol Acquisition”) business from Johnson & Johnson, Inc. for $130. These are the leading hemorrhoid care brands in each market in which they operate, primarily in the U.K., Canada, Australia and South Africa with total annual sales of $24 in 2016. The acquisition was funded with additional short-term borrowings and will be managed in the Consumer International segment.
The fair values of the net assets acquired are set forth as follows:
|
2016
|
|
|
Anusol
|
|
Inventory and other working capital
|
$
|
0.5
|
|
Trade names and other intangibles
|
|
91.7
|
|
Goodwill
|
|
37.8
|
|
Cash purchase price
|
$
|
130.0
|
|
The life of the amortizable intangible assets recognized from the Anusol 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 is not material to the Company’s consolidated financial results.
On January 4, 2016, the Company acquired
Spencer Forrest, Inc., the maker of TOPPIK, (the “
Toppik Acquisition”), the leading brand of hair building fibers for people with thinning hair. The total purchase price was $175.3. The Company financed the acquisition with short-term borrowings. This brand is managed within the Consumer Domestic and Consumer International segments.
62
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
The fair values of the net assets
acquired are set forth as follows:
|
2016
|
|
|
Toppik
|
|
Inventory and other working capital
|
$
|
9.3
|
|
Property, plant and equipment and other long-term assets
|
|
0.2
|
|
Trade names and other intangibles
|
|
115.8
|
|
Goodwill
|
|
52.3
|
|
Current liabilities
|
|
(2.3
|
)
|
Cash purchase price (net of cash acquired)
|
$
|
175.3
|
|
The life of the amortizable intangible assets recognized from the Toppik Acquisition ranges from 10 - 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 is not material to the Company’s consolidated financial results.
On January 2, 2015, the Company acquired VI-COR, a manufacturer and seller of feed ingredients for cows, beef cattle, poultry and other livestock for cash consideration of $74.9, and made an additional $4.6 contingent payment based on 2015 operating results.
The Company financed the acquisition with available cash. These brands are managed within the SPD segment.
The fair values of the net assets acquired are set forth as follows:
|
2015
|
|
|
VI-COR
|
|
Inventory and other working capital
|
$
|
1.1
|
|
Property, plant and equipment
|
|
6.4
|
|
Trade names and other intangibles
|
|
42.1
|
|
Goodwill
|
|
29.9
|
|
Purchase Price
|
$
|
79.5
|
|
Fair value of contingent payment due in one year
|
|
(4.6
|
)
|
Cash purchase price
|
$
|
74.9
|
|
The life of the amortizable intangible assets recognized from the VI-COR Acquisition ranges from 5 - 15 years. The goodwill is a result of expected synergies from combined operations of the acquired assets and the Company. Pro forma results are not presented because the impact is not material to the Company’s consolidated financial results.
The goodwill and other intangible assets associated with the Waterpik Acquisition are not deductible for U.S. tax purposes. The goodwill and other intangible assets associated with the Agro, Viviscal, Anusol, Toppik, and VI-COR Acquisitions are deductible for U.S. tax purposes.
7.
|
Goodwill and Other Intangibles, Net
|
The following table provides information related to the carrying value of all intangible assets, other than goodwill:
|
December 31, 2017
|
|
|
|
|
December 31, 2016
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
$
|
576.7
|
|
|
$
|
(145.2
|
)
|
|
$
|
431.5
|
|
|
3-20
|
|
$
|
442.6
|
|
|
$
|
(115.0
|
)
|
|
$
|
327.6
|
|
Customer Relationships
|
|
480.5
|
|
|
|
(190.2
|
)
|
|
|
290.3
|
|
|
15-20
|
|
|
384.4
|
|
|
|
(164.2
|
)
|
|
|
220.2
|
|
Patents/Formulas
|
|
165.4
|
|
|
|
(51.7
|
)
|
|
|
113.7
|
|
|
4-20
|
|
|
68.7
|
|
|
|
(45.4
|
)
|
|
|
23.3
|
|
Non Compete Agreement
|
|
0.4
|
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
5-10
|
|
|
1.8
|
|
|
|
(1.6
|
)
|
|
|
0.2
|
|
Total
|
$
|
1,223.0
|
|
|
$
|
(387.3
|
)
|
|
$
|
835.7
|
|
|
|
|
$
|
897.5
|
|
|
$
|
(326.2
|
)
|
|
$
|
571.3
|
|
63
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Indefinite lived intangible assets - Carrying value
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
Trade names
|
$
|
1,484.8
|
|
|
|
|
|
|
|
|
$
|
860.5
|
|
|
|
|
|
The increase in indefinite lived intangible assets is due to the Waterpik Acquisition.
The Company determined that the carrying value of all trade names as of December 31, 2017 and 2016, was recoverable based upon the forecasted cash flows and profitability of the brands. There is a personal care trade name that, based on recent performance, has experienced sales and profit declines that have eroded a significant portion of the excess between fair and carrying value which could potentially result in an impairment of the asset. In 2017, this excess has been reduced to approximately $34.0 or 12% in large part to an increased competitive market environment therefore resulting in reduced cash flow projections. 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.
Intangible amortization expense amounted to approximately $61.0 for 2017, $46.0 for 2016 and $39.9 for 2015, respectively. The Company estimates that intangible amortization expense will be approximately $69.0 in 2018 and approximately $58.0 to $68.0 annually over the next five years.
During the fourth quarter of 2017, the Company determined that a Consumer Domestic tradename should be re-characterized from indefinite lived to finite lived assets. This conclusion was based upon lower forecasted sales and profitability and competitive pressures. This change was made after the annual impairment test was performed in which an impairment was not indicated. The carrying value of this tradename as of December 31, 2017 was approximately $22.0 million and is being amortized over 20 years based upon the estimated cash flows.
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as follows:
|
Consumer
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2015
|
$
|
1,242.2
|
|
|
$
|
62.6
|
|
|
$
|
50.1
|
|
|
$
|
1,354.9
|
|
Toppik acquired goodwill
|
|
38.7
|
|
|
|
13.6
|
|
|
|
0.0
|
|
|
$
|
52.3
|
|
Anusol acquired goodwill
|
|
0.0
|
|
|
|
37.8
|
|
|
|
0.0
|
|
|
$
|
37.8
|
|
Other
|
|
(0.8
|
)
|
|
|
(0.1
|
)
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
Balance at December 31, 2016
|
$
|
1,280.1
|
|
|
$
|
113.9
|
|
|
$
|
50.1
|
|
|
$
|
1,444.1
|
|
VIVISCAL acquired goodwill
|
|
29.5
|
|
|
|
7.4
|
|
|
|
0.0
|
|
|
|
36.9
|
|
Agro acquired goodwill
|
|
0.0
|
|
|
|
0.0
|
|
|
|
53.4
|
|
|
|
53.4
|
|
Waterpik acquired goodwill
|
|
322.5
|
|
|
|
101.8
|
|
|
|
0.0
|
|
|
|
424.3
|
|
Other
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.2
|
|
Balance at December 31, 2017
|
$
|
1,632.1
|
|
|
$
|
223.3
|
|
|
$
|
103.5
|
|
|
$
|
1,958.9
|
|
The result of the Company’s annual goodwill impairment test, performed in the beginning of the second quarter of 2017, determined that the estimated fair value substantially exceeded the carrying values of all reporting units. The determination of fair value contains numerous variables that are subject to change as business conditions change and therefore could impact fair value in the future. The Company has never incurred a goodwill impairment charge.
64
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
8.
|
Accounts
Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Trade accounts payable
|
$
|
398.9
|
|
|
$
|
331.6
|
|
Accrued marketing and promotion costs
|
|
108.4
|
|
|
|
82.0
|
|
Accrued wages and related benefit costs
|
|
61.8
|
|
|
|
73.2
|
|
Other accrued current liabilities
|
|
90.0
|
|
|
|
82.1
|
|
Total
|
$
|
659.1
|
|
|
$
|
568.9
|
|
9.
Short
-Term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt consist of the following:
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
Commercial paper issuances
|
$
|
268.7
|
|
|
$
|
420.0
|
|
Various debt due to international banks
|
|
2.2
|
|
|
|
6.8
|
|
Total short-term borrowings
|
$
|
270.9
|
|
|
$
|
426.8
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
Floating Rate Senior notes due January 25, 2019
|
$
|
300.0
|
|
|
$
|
0.0
|
|
2.45% Senior notes due December 15, 2019
|
|
300.0
|
|
|
|
300.0
|
|
Less: Discount
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
2.45% Senior notes due August 1, 2022
|
|
300.0
|
|
|
|
0.0
|
|
Less: Discount
|
|
(0.3
|
)
|
|
|
0.0
|
|
2.875% Senior notes due October 1, 2022
|
|
400.0
|
|
|
|
400.0
|
|
Less: Discount
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
3.15% Senior notes due August 1, 2027
|
|
425.0
|
|
|
|
0.0
|
|
Less: Discount
|
|
(0.4
|
)
|
|
|
0.0
|
|
3.95% Senior notes due August 1, 2047
|
|
400.0
|
|
|
|
0.0
|
|
Less: Discount
|
|
(2.9
|
)
|
|
|
0.0
|
|
Debt issuance costs, net
|
|
(15.5
|
)
|
|
|
(6.5
|
)
|
Fair value adjustment related to hedged fixed rate debt instrument
|
|
(2.2
|
)
|
|
|
0.2
|
|
Net long-term debt
|
$
|
2,103.4
|
|
|
$
|
693.4
|
|
Revolving Credit Facility
On December 4, 2015, the Company replaced its former $600.0 unsecured revolving credit facility with a $1,000.0 unsecured revolving credit facility (as amended, the “Credit Agreement”). Under the Credit Agreement, the Company has 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 (the “Program”), which was increased from $500.0 on February 23, 2017. Unless extended, the Credit Agreement will terminate and all amounts outstanding thereunder will be due and payable on December 4, 2020.
Interest on the Company’s borrowings under the Credit Agreement will accrue at a per annum rate equal to the sum of (x) either (at the Company’s option) (i) the adjusted LIBOR rate (generally, the LIBOR rate for an interest period selected by the Company and adjusted for statutory reserves) or (ii) the Base Rate (generally the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America’s “prime rate” and (c) the LIBOR rate for an interest period of one month plus 1.00%) plus (y) the applicable margin. The applicable margin is determined based upon the corporate credit rating of the Company and ranges from 0.875% to 1.75% per annum,
65
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
in the case of any borrowing bearing interest by reference to the adjusted LIBOR rate, and 0% to 0.75%, in the case of any borrowing bearing interest by reference to the Base Rate.
The Credit Agreement contains customary affirmative and negative covenants, including without limitation, restrictions on the indebtedness, liens, investments, asset dispositions, fundamental changes, changes in the nature of the business conducted, affiliate transactions, burdensome agreements and use of proceeds.
Under the Credit Agreement, the Company is required to maintain its leverage ratio, defined as the ratio of Consolidated Funded Indebtedness (as defined in the Credit Agreement) to Consolidated EBITDA, at a level no greater than 3.50 to 1.00. However, if the Company consummates a material acquisition, the maximum leverage ratio increases to a level of 3.75 to 1.00 during the twelve-month period commencing on the date of such acquisition. The Company was in compliance with the financial covenant in the Credit Agreement as of December 31, 2017.
The Credit Agreement also contains customary events of default, including without limitation, failure to make certain payments when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default on other indebtedness, changes in control with respect to the Company, material adverse judgments, certain events relating to pension plans and the failure of any of the loan documents relating to the Credit Agreement to remain in full force and effect. Certain parties to the Credit Agreement, and affiliates of those parties, provide banking, investment banking and other financial services to the Company from time to time.
$1.425M Senior Notes
The Company financed the Waterpik Acquisition with a portion of the proceeds from an underwritten public offering of $1,425.0 aggregate principal amount of Senior Notes completed on July 25, 2017, consisting of $300.0 aggregate principal amount of Floating Rate Senior Notes due 2019, $300.0 aggregate principal amount of 2.45% Senior Notes due 2022, $425.0 aggregate principal amount of 3.15% Senior Notes due 2027 and $400.0 aggregate principal amount of 3.95% Senior Notes due 2047 (collectively, the “Senior Notes”). The Floating Rate Senior Notes will bear interest at a rate, reset quarterly, equal to three-month U.S. dollar London Interbank Offered Rate (“LIBOR”) plus 0.15%. The remaining proceeds of the offering of the Senior Notes were used to pay down in its entirety and terminate the Company’s $200.0 term loan borrowed in the second quarter of 2017 and to repay a portion of the Company’s outstanding commercial paper borrowings.
2.45% Senior Notes
On December 9, 2014, the Company issued $300.0 aggregate principal amount of 2.45% Senior Notes due 2019 (the “2019 Notes”). The 2019 Notes were issued under the first supplemental indenture (the “First Supplemental Indenture”), dated December 9, 2014, to the indenture dated December 9, 2014 (the “Base Indenture”), between the Company and Wells Fargo Bank, N.A., as trustee. Interest on the 2019 Notes is payable semi-annually, on each June 15 and December 1. The 2019 Notes will mature on December 15, 2019, unless earlier retired or redeemed.
2.875% Senior Notes
On September 26, 2012, the Company issued $400.0 aggregate principal amount of 2.875% Senior Notes due 2022 (the “2022 Notes”). The 2022 Notes were issued under the second supplemental indenture dated September 26, 2012 (the “BNY Mellon Second Supplemental Indenture”) to the indenture dated December 15, 2010 (the “BNY Mellon Base Indenture”) between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), as trustee. Interest on the 2022 Notes is payable semi-annually, on each April 1 and October 1. The 2022 Notes will mature on October 1, 2022, unless earlier retired or redeemed.
Commercial Paper
The Company has an agreement with three banks to establish a commercial paper program (the “Program”). Under the Program, the Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $1,000.0. The Program was amended on February 23, 2017 to increase the amount from $500.0 to $1,000.0. The maturities of the notes will vary but may not exceed 397 days. The notes will be sold under customary terms in the commercial paper market and will be issued at a discount to par or, alternatively, will be sold at par and will bear varying interest rates based on a fixed or floating rate basis. The interest rates will vary based on market conditions and the ratings assigned to the notes by the rating agencies designated in the agreement at the time of issuance. Subject to market conditions, the Company intends to utilize the Program as its primary short-term borrowing facility and does not intend to sell unsecured commercial paper notes in excess of the available amount under the revolving credit agreement. If, for any reason, the Company is unable to access the commercial paper market, the revolving credit facility would be utilized to meet the Company’s short-term liquidity needs. The Company had $268.7 of commercial paper outstanding as of
66
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
December 31, 201
7
with a weighted-average interest rate of approximately
1.6
% and $
420.0
as of December 31, 201
6
with a weight
ed-average interest rate
of approximately
1.0
%.
Interest Rate Swaps
Concurrent with the 2019 Notes offering, the Company entered into interest rate swaps to hedge changes in the fair value of the 2019 Notes. Under the terms of the swaps, the counterparties will pay the Company a fixed rate of 2.45% and the Company will pay interest at a floating rate of three-month LIBOR plus a fixed spread of 0.756%. The fair value of these interest rate swap agreements is reflected in the Consolidated Balance Sheet within Other Assets or Deferred and Other Long-term Liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.
The components of income before taxes are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
683.2
|
|
|
$
|
665.0
|
|
|
$
|
595.6
|
|
Foreign
|
|
|
9.5
|
|
|
|
40.9
|
|
|
|
39.8
|
|
Total
|
|
$
|
692.7
|
|
|
$
|
705.9
|
|
|
$
|
635.4
|
|
The following table summarizes the provision for U.S. federal, state and foreign income taxes:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
146.7
|
|
|
$
|
183.4
|
|
|
$
|
161.4
|
|
State
|
|
|
29.0
|
|
|
|
27.2
|
|
|
|
25.5
|
|
Foreign
|
|
|
11.2
|
|
|
|
11.4
|
|
|
|
14.1
|
|
|
|
|
186.9
|
|
|
|
222.0
|
|
|
|
201.0
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(235.0
|
)
|
|
|
19.2
|
|
|
|
22.8
|
|
State
|
|
|
3.8
|
|
|
|
4.1
|
|
|
|
3.3
|
|
Foreign
|
|
|
(6.4
|
)
|
|
|
1.6
|
|
|
|
(2.1
|
)
|
|
|
|
(237.6
|
)
|
|
|
24.9
|
|
|
|
24.0
|
|
Total provision
|
|
$
|
(50.7
|
)
|
|
$
|
246.9
|
|
|
$
|
225.0
|
|
67
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
Deferred tax assets (liabilities) consist of the following at December 31:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3.7
|
|
|
$
|
4.8
|
|
Deferred compensation
|
|
|
45.5
|
|
|
|
69.7
|
|
Pension, postretirement and postemployment benefits
|
|
|
7.5
|
|
|
|
7.7
|
|
Investment in Natronx
|
|
|
0.0
|
|
|
|
7.7
|
|
Other
|
|
|
23.4
|
|
|
|
30.8
|
|
Tax credit carryforwards/other tax attributes
|
|
|
3.9
|
|
|
|
12.8
|
|
International operating loss carryforwards
|
|
|
11.6
|
|
|
|
8.0
|
|
Total gross deferred tax assets
|
|
|
95.6
|
|
|
|
141.5
|
|
Valuation allowances
|
|
|
(23.5
|
)
|
|
|
(20.2
|
)
|
Total deferred tax assets
|
|
|
72.1
|
|
|
|
121.3
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(153.6
|
)
|
|
|
(212.3
|
)
|
Trade names and other intangibles
|
|
|
(411.8
|
)
|
|
|
(322.9
|
)
|
Property, plant and equipment
|
|
|
(65.8
|
)
|
|
|
(97.1
|
)
|
Total deferred tax liabilities
|
|
|
(631.2
|
)
|
|
|
(632.3
|
)
|
Net deferred tax liability
|
|
$
|
(559.1
|
)
|
|
$
|
(511.0
|
)
|
Long term net deferred tax asset
|
|
|
2.1
|
|
|
|
1.2
|
|
Long term net deferred tax liability
|
|
|
(561.2
|
)
|
|
|
(512.2
|
)
|
Net deferred tax liability
|
|
$
|
(559.1
|
)
|
|
$
|
(511.0
|
)
|
The difference between tax expense and the tax that would result from the application of the federal statutory rate is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Tax that would result from use of the federal statutory rate
|
|
$
|
242.4
|
|
|
$
|
247.1
|
|
|
$
|
222.4
|
|
State and local income tax, net of federal effect
|
|
|
21.4
|
|
|
|
20.3
|
|
|
|
18.7
|
|
Varying tax rates of foreign affiliates
|
|
|
(0.1
|
)
|
|
|
(4.1
|
)
|
|
|
(2.6
|
)
|
Benefit from domestic manufacturing deduction
|
|
|
(15.2
|
)
|
|
|
(14.2
|
)
|
|
|
(14.4
|
)
|
Valuation Allowances
|
|
|
(6.2
|
)
|
|
|
2.9
|
|
|
|
8.5
|
|
Stock Options Exercised
|
|
|
(15.1
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
US Tax Reform
|
|
|
(272.9
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Other
|
|
|
(5.0
|
)
|
|
|
(5.1
|
)
|
|
|
(7.6
|
)
|
Recorded tax expense
|
|
$
|
(50.7
|
)
|
|
$
|
246.9
|
|
|
$
|
225.0
|
|
Effective tax rate
|
|
|
-7.3
|
%
|
|
|
35.0
|
%
|
|
|
35.4
|
%
|
On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revises the U.S. corporate income tax regime by, among other things, lowering U. S. corporate income tax rates to 21%. However, the Tax Act eliminates the domestic manufacturing deduction and moves towards a territorial system, which also eliminates the ability to credit certain foreign taxes that existed prior to enactment of the Tax Act. There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on a deemed repatriation of historical earnings of foreign subsidiaries. The Company intends to repatriate some of its non-U.S. earnings and elect to pay the associated repatriation tax. In addition, the reduction of the U.S. corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net credit of approximately $273 for the quarter and year ended December 31, 2017. The credit is primarily due to the adjustment to the U.S. deferred tax asset and liabilities.
The changes included in the Tax Act are broad and complex. The final transitional impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in
68
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)
response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition
al
impacts. The Commission has issued
guidance
that allow
s
for a measurement perio
d of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipate
s
finalizing and recording any resulting adjustments
by the end of the measurement period
.
At December 31, 2017, certain foreign subsidiaries of the Company had net operating loss carryforwards of approximately $36.5. Approximately $0.5 of such net operating loss carryforwards expire on various dates through December 31, 2022. The remaining net operating loss carryforwards are not subject to expiration.
The Company believes that it is more likely than not that the benefit from most of these net operating loss carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $11.2 and $8.0 at December 31, 2017 and 2016, respectively, on the deferred tax asset relating to these net operating loss carryforwards.
The Company also believes that it is more likely than not that the benefit from certain additional deferred tax assets of a foreign subsidiary will not be realized. In recognition of this risk, the Company maintains a valuation allowance of $2.4 and $4.5 at December 31, 2017 and 2016, respectively, on these deferred tax assets.
Due to a change in the ability to credit certain foreign taxes that existed prior to enactment of the Tax Act, the Company has determined that it is more likely than not that the benefit from certain foreign tax credit carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $9.9 at December 31, 2017 on the deferred tax asset relating to these foreign tax credit carryforwards. The expense relating to the provision of this valuation allowance is included in the provisional net credit of approximately $273 that the Company recorded in connection with the enactment of the Tax Act.
In 2015, the Company reported an impairment charge relating to its investment in Natronx. At the time, the Company believed that it was more likely than not that a tax benefit relating to the impairment would not be realized. In recognition of this risk, the Company established a valuation allowance of $7.7 in 2015, and maintained a valuation allowance of $7.7 at December 31, 2016. Based on new facts, the Company determined that it was more likely than not that the tax benefit relating to the impairment would be realized and reversed the valuation allowance in 2017.
In 2015, the Company liquidated its subsidiary in the Netherlands and decided that the earnings of its subsidiary in France would no longer be permanently reinvested outside of the U.S. As a result, the Company repatriated cash of $93.0. The funds repatriated were used to reduce outstanding commercial paper. As a result of liquidating its subsidiary in the Netherlands, the Company recorded a tax benefit of $2.7 in the 2015 Consolidated Statement of Income and a deferred tax benefit of $11.6 through Accumulated Other Comprehensive Income
.
The
Tax Act imposes a one-time repatriation tax of $10.0 on deemed repatriation of historical earnings of foreign subsidiaries. As a result of the Tax Act, the Company will no longer have undistributed earnings of foreign subsidiaries that are considered to be permanently reinvested outside of the U.S.
In prior years, the Company has recorded liabilities in connection with uncertain tax positions, which, although supportable by the Company, may be challenged by tax authorities. Under applicable accounting guidance, these tax positions do not meet the minimum threshold required for the related tax benefit to be recognized in the income statement. The Company has no uncertain tax positions or unrecognized tax benefits at December 31, 2017.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Unrecognized tax benefits at January 1
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
4.0
|
|
Gross decreases - tax positions in prior period
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.7
|
)
|
Lapse of statute of limitations
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
Unrecognized tax benefits at December 31
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to U.S. federal income tax as well as income tax in multiple state and international jurisdictions. The IRS has completed its audit of tax years through 2014. The Company is currently under audit by several state and international taxing authorities for the years 2013 through 2016.
69
CHURCH & DWIGHT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In millions, except share and per share data)